McKinsey says State pensions unsustainable

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Sarenco

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Ireland’s State pension system is unsustainable in its current form, according to international consultants McKinsey.

In a report published today, they say current contributions to the Social Insurance Fund from which the State pension is paid – mostly PRSI – “will be insufficient to continue to pay current levels of benefits in future years.”

They raise similar concerns about public sector pension arrangements where they forecast a threefold increase in the pension bill over the next 40 years.

“The cumulative deficit is estimated to rise to approximately €133 billion by 2040,” they state. Despite concerted efforts to reduce that deficit in recent years, “structural systematic reforms are required to effectively curb it”.

Maintaining payments at current rates would require an increase in contributions of five percentage points from all workers, McKinsey states. The alternative would be to cut benefits by around 35 per cent across the board.

Personally, I would like to see this topic become a key issue in the upcoming general election.
 
It won't, housing however will be a key issue and politicans from all parties are starting to realise this.
 
Sarenco said:
Maintaining payments at current rates would require an increase in contributions of five percentage points from all workers, McKinsey states. The alternative would be to cut benefits by around 35 per cent across the board.
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Absolutely a key concern and a far more expensive one than many of the short term issues making headlines at the moment. Taking into consideration the high numbers of people with no private pensions this is only going to get worse as time progresses if not addressed.
A total review of the current pension system is needed as a matter of urgency (both public and private). The current system of tax incentives is seemingly not working in encouraging those in employment to put aside funds towards a pension. There needs to be some level of compulsory contributions at early stage of employment. The main difficulties in getting any political to put this on their manifesto is that it involves "income deductions" which will only be viewed as another tax. What we have been reliant on up to now is the increases in wages/those in employment being sufficient to meet the pension requirements ongoing. These increases obviously took a severe hit since 2008. However, a further difficulty is the increasing lifespan for us all. Our life expectation in recent years is getting longer which means that we will be drawing more per person from the communal pot. Obviously the longer this issue remains unaddressed the more difficult it will be to address it.
 
I agree, but it still won't become a key issue in the upcoming election, no politician will bring it to the fore unless they wish to committ political seppuku.
 
The pensions issue looked at from the level of society as a whole is not about saving for retirement.

If the dependancy ratio goes from 6 workers to 1 retiree now, to 2 workers to 1 retiree in 40 years time, it will make no difference what savings those retirees have. There may be a difference between retirees who have savings and those who do not, but the issue is the ratio of workers to retirees.

Only large scale capital formation and productivity increases are the only possible way 2 workers can support one retiree.
 
cremeegg said:
The pensions issue looked at from the level of society as a whole is not about saving for retirement.

If the dependancy ratio goes from 6 workers to 1 retiree now, to 2 workers to 1 retiree in 40 years time, it will make no difference what savings those retirees have. There may be a difference between retirees who have savings and those who do not, but the issue is the ratio of workers to retirees.

Only large scale capital formation and productivity increases are the only possible way 2 workers can support one retiree.
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So should we do nothing at all?

It seems to me that the most equitable way to address this impending crisis is to share the escalating cost between current and future retirees, in both the public and private sectors.

According to McKinsey, people in the bottom 40 per cent of household income do not suffer a fall in consumption power in retirement with the State pension replacing a large part of their pre-retirement spending. Is that sustainable?

It is worth bearing in mind that Ireland scores well on poverty in a relative sense, with a poverty rate in retirement of 6.9 per cent that is lower than both the poverty levels for the Irish population as a whole and for retirees in most other OECD states. As a society we are very generous to our retirees compared to most comparable countries but can we afford to continue to be this generous?
 
40 years ago when I started paying it, it was to cover retirement, what happened to my 40 years of money?
 
If you are talking about PRSI contributions, the majority of the amounts contributed by you have been spent on pensions for OAPs, past and present. We have a "pay as you go" system - the Social Insurance Fund is essentially an accounting convention.
 
I think that this government did untold damage when they stole money from Private pension funds with the introduction of the pension levy. What is to stop them doing this again when they need easy money in the future. I believe unless there is some guarantee that pension funds are not to be touched why would anyone pay into a pension when the government can at any time can put a levy on what you have saved. In my situation I stopped paying AVC's when they did this and used the extra money to pay more of my mortgage as I believe those of us who are careful and save for our futures will end up paying on the double.
 
Sarenco said:
Maintaining payments at current rates would require an increase in contributions of five percentage points from all workers, McKinsey states. The alternative would be to cut benefits by around 35 per cent across the board.

Personally, I would like to see this topic become a key issue in the upcoming general election.
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There is no way they are going to either. Politics is a short term game, do what you need to get re-elected and start again.

Pensions are a long term problem. Successive governments have simply kicked the can down the road. With the age of the current cabinet, they know they'll be well gone by the time that it becomes an unsustainable problem.

What is the solution? Increase personal PRSI? It will be labelled as a tax. Increase employer PRSI? Be labelled as introducing barriers to employment.

There are loads of reports on pensions in Ireland, which probably cost a fortune to produce. All are gathering dust.

The government are the same as it's citizens. Put off doing something about pensions until it's too late.


Steven
www.bluewaterfp.ie
 
Undoubtedly that's all true Steven but ultimately the electorate determines the agenda in a general election.

Collectively we can't continue ignoring this growing problem.
 
Sarenco said:
Undoubtedly that's all true Steven but ultimately the electorate determines the agenda in a general election.

Collectively we can't continue ignoring this growing problem.
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There was an article recently that 900,000 workers will retire without a pension. Generally, people's attitudes towards pensions are the same as the government, kick the can down the road and spend your money on other stuff. That is why I don't think it will become an election issue. People would prefer to have the cash in their pocket than fund for an OAP (which costs about €300,000 if you bought it privately).

Mandatory pensions are the way to go. If people are told they have to join a scheme, they tend to do without much grumble. It's when they have a choice of spending or saving, they usually spend.

http://www.independent.ie/business/...private-pension-warns-new-study-31566474.html


Steven
www.bluewaterfp.ie
 
SBarrett said:
Mandatory pensions are the way to go. If people are told they have to join a scheme, they tend to do without much grumble. It's when they have a choice of spending or saving, they usually spend.

Steven
www.bluewaterfp.ie
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Sorry Steven but you simply do not understand the problem.

If every retiree in 2050 had saved and saved during their working lives and owned piles of assets when they came to retire, that would have no effect whatsoever on the fact that the dependency ratio will change from 1 retiree to 6 workers today to 1 retiree to 2 workers in forty years time.

Retired people can never take one third of the income produced by the working two thirds.
 
SBarrett said:
Mandatory pensions are the way to go. If people are told they have to join a scheme, they tend to do without much grumble. It's when they have a choice of spending or saving, they usually spend.
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Steven

Mandatory private pensions (or auto-enrolment with a right to opt out) would certainly be a boon for the pension industry. However, it would have absolutely zero impact on the sustainability or otherwise of the State's current pension liabilities.

You may well be right that the State's pension liabilities will not become an issue in the forthcoming election. That would be a pity in my opinion.
 
cremeegg said:
Sorry Steven but you simply do not understand the problem.

If every retiree in 2050 had saved and saved during their working lives and owned piles of assets when they came to retire, that would have no effect whatsoever on the fact that the dependency ratio will change from 1 retiree to 6 workers today to 1 retiree to 2 workers in forty years time.

Retired people can never take one third of the income produced by the working two thirds.
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Would we have the option to what the Germans are doing, bring in thousands of young foreign workers to compensate for our aging population.
 
cremeegg said:
If every retiree in 2050 had saved and saved during their working lives and owned piles of assets when they came to retire, that would have no effect whatsoever on the fact that the dependency ratio will change from 1 retiree to 6 workers today to 1 retiree to 2 workers in forty years time.
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Gee the Swiss must be awful stupid, 'cause that is what we do and yes of course it works. A Swiss state pension at the max makes up about 20% of a pensioner's annual income the rest comes from the assets you claim will make no difference, plus savings. Mandatory pension contributions starts at age 25 (7%) and increases over the years until it reaches about 11% in your mid 50s by law this is matched 100% by employers, but most actually contribute more often as high as 200%.
 
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cremeegg said:
Sorry Steven but you simply do not understand the problem.
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As an aside, I do find it a bit odd that you have another thread on the go bemoaning the poor quality of postings on AAM these days and then you are this rude/patronising to a poster who does indeed understand pensions and the problems surrounding their provision. But I digress...
cremeegg said:
If every retiree in 2050 had saved and saved during their working lives and owned piles of assets when they came to retire, that would have no effect whatsoever on the fact that the dependency ratio will change from 1 retiree to 6 workers today to 1 retiree to 2 workers in forty years time.
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It is correct that significant personal savings won't affect the dependency ratio but they will mitigate the impact of the changing dependency ratio - which is what is important. If people have significant assets saved, they can rely less on the state. Relying on the state for 1/6 of your post-retirement income rather than 1/2 of it equalizes the impact of a dependency ratio changing from 6:1 to 2:1.
 
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Absolutely agree orka but does this not imply that that the relative value of provision from the State will simply have to fall, at least in real terms, with private savings taking up the slack?

This seems inevitable to me and the only question remaining is how we spread this escalating cost across the generations and between different sectors of the economy.

Incidentally, I don't mean to suggest that this is a uniquely Irish problem - all developed economies will have to grapple with this issue. What I find frustrating is the absence of any debate here on this issue - we won't have the excuse that nobody saw this coming. Given our relatively favourable demographics, it is pretty depressing that the sustainability of our pension system is so poor relative to others (see attached chart).
 
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