"cuts to state pensions must be considered"

[noproblem]

While it's easy looking back and getting averages from what happened over a certain no of years, etc. I don't see anyone predicting what "will" happen in the future. We may have huge oil deposits, gas deposits, gold deposits, never mind all the other unpredictables. Life could be brilliant in a short time, then again it may not, there may not be a civilization at all, in which case a pension or piggy bank is a bit of a laugh anyway. Why the hell should I be worried about what happens in 25 or 30 years time if I'm getting a pension now? There's only so much each generation can do, or should be expected to do and to be quite honest, we're not a bad old nation at putting one another down. If there were degrees in begrudgery, we'd be top of the pile. We've come a long way in the last 40 or so years, we're doing ok, we'll be alright over the next few years, but it won't be ourselves who will decide what happens on our stupid planet over the next 50 years + and that's for sure. A pat on the back, a bit of praise, a look at where we've come from a short few decades ago wouldn't do a few of us any harm at all. No running water, basic electricity , a bath or a shower didn't really exist, a carpet was "what? no central heating, almost no social welfare and some of you know the rest as well. Come on people, we can bloody well look forward with happy faces. There'll be enough to go around, but of course some won't be happy with just that. God help them.

 

[The Ghoul]

So we have €200 billion of national debt.
We have €100 billion of unfunded public sector pension fund liabilities.
and
we have N billion of unfunded old age pension liabilities. These people, which includes far more than the number of public sector workers, can argue that they have paid their insurance and so their pensions should not be cut.

It would be handy if you could find a figure for N and a link to that report.

Brendan

The figure that has been reported is 324 billion
http://www.finfacts.ie/irishfinancenews/article_102491.shtml

The Irish Times reports that the GAP between the State’s future pension and social welfare liabilities and revenues to fund them stands at €324 billion, according to an unpublished report commissioned by the Government, which has been seen by The Irish Times. That figure is almost twice the size of the national debt as it currently stands.

...Not included are non-contributory benefits, such as children’s allowance and most unemployment benefits, as well as social transfers paid from sources other than the Department of Social Protection, such as health and education benefits.

 

[Sarenco]

The figure that has been reported is 324 billion
http://www.finfacts.ie/irishfinancenews/article_102491.shtml

Not quite - the €324bn figure refers to the aggregate funding shortfall up to 2066, in 2012 prices, without policy changes. That is not quite the same thing as an estimate of the net present value of the unfunded liabilities (which I suspect would be difficult, if not impossible, to estimate) although it probably represents a reasonable proxy. Also, bear in mind that benefits other than pensions are payable from the fund (as subvented by the exchequer).

In any event, the figure adequately demonstrates the need for policy changes - I'm afraid an optimistic attitude alone will not resolve this problem.

 

[Jim2007]

I hadn't heard of a PAYGO before, but it means that increases in expenditure must be balanced by cuts somewhere else. That is certainly not the law in Ireland, and not the practice either.

Well the Irish system is a PAYGO minus the balancing....

 

[Sarenco]

http://www.independent.ie/irish-new...become-the-governments-new-norm-30880158.html

Fairly hard hitting article in today's Sindo on the pensions issue.

Some of the language used in the article is somewhat emotive (I wouldn't recommend it to RainyDay!) but it does cover a number of the issues discussed in this thread in terms of changing dependency ratios, etc.

The suggestion in the article that certain public sector workers should fund their own pensions in the same way as the private sector is of course another potential solution to this problem. This is actually what happens in the US. For example, the California public sector retirement system (CALPERS) is one of the largest occupational pension funds in the world.

 

[Protocol]

Typical article with mistakes about PS pensions.

I quote:

"Most public servants didn't pay the controversial pension levy; they didn't have a fund to apply it to. "

CORRECT, as PS pensions are unfunded, typically.

But, instead of the Pension Fund Levy, PS workers pay the PRD pension levy, up to 10.5% of wages.

Second, the article suggests that PS don't / didn't pay pension conts until the PRD levy was introduced:

"Meanwhile, public servants are already discussing better pay and the end of their own pension charges."

This is a common mistake made in these anti-PS articles.

It ignores the fact that PS have always been paying 6.5% of wages for their pensions.

Add that to the 10.5% PRD makes a 17% of wages headline contribution rate.

 

[Sarenco]

Typical article with mistakes about PS pensions.

I quote:

"Most public servants didn't pay the controversial pension levy; they didn't have a fund to apply it to. "

CORRECT, as PS pensions are unfunded, typically.

But, instead of the Pension Fund Levy, PS workers pay the PRD pension levy, up to 10.5% of wages.

Second, the article suggests that PS don't / didn't pay pension conts until the PRD levy was introduced:

"Meanwhile, public servants are already discussing better pay and the end of their own pension charges."

This is a common mistake made in these anti-PS articles.

It ignores the fact that PS have always been paying 6.5% of wages for their pensions.

Add that to the 10.5% PRD makes a 17% of wages headline contribution rate.

I think it's a pity that we can't have a discussion about the sustainability of unfunded State pension liabilities without descending into a public v private sector debate. Oh well...

The reason I linked to the article was really to bring into the debate the suggestion that certain public sector workers could be switched to a funded occupational pension scheme, akin to those in the private sector, as one way of enhancing the sustainability of the overall system. I do take the point, however, that the article does read like an anti-public sector rant.

As regards the PRD "levy", I would make the point that it has only been in place for a relative short time and was introduced as an emergency measure that Minister Howlin recently described as a temporary. In other words, it is misleading to suggest that the PRD will have any material impact on the funding of public sector pensions.

It is also misleading to suggest that public sector workers pay up to 10.5 per cent of their wages under PRDs. The 10.5 per cent rate only applies to income over €60,000 and the first €15,000 of income is exempt from the PRD. In other words, no public sector worker will have anything like 10.5 per cent of their income deducted as a PRD.

 

[PMU]

In the interests of clarity, the PRD – Pension Related Deduction, aka the 'pension levy', was introduced in 2009 and had the effect of levying a deduction of between 5% and 10.5% on public sector pensions, above EUR 15,000 (although it was more complex than this). The PSPB – Public
Service Pension Reduction – came into effect in 2011 and basically reduced gross annual public sector pensions, above EUR 12,000, by between 6% and 20%. The Haddington Road Agreement has had the effect of reducing the estimated present day value of public sector pension liabilities by 16% since 2009.

 

[Sarenco]

In the interests of clarity, the PRD – Pension Related Deduction, aka the 'pension levy', was introduced in 2009 and had the effect of levying a deduction of between 5% and 10.5% on public sector pensions, above EUR 15,000 (although it was more complex than this). The PSPB – Public
Service Pension Reduction – came into effect in 2011 and basically reduced gross annual public sector pensions, above EUR 12,000, by between 6% and 20%. The Haddington Road Agreement has had the effect of reducing the estimated present day value of public sector pension liabilities by 16% since 2009.

That's not quite right PMU - the PRD is a deduction from public sector remuneration, not public sector pensions. The deduction is tiered - only remuneration above €60k is subject to a 10.5 per cent deduction and the first €15k is exempt. The PSPRs are similarly tiered - the first €12k is not subject to any reduction.

The actuarial reduction of the present day value of public sector pension liabilities (to a still massive €98bn) apparently assumes the continuation of both PRDs and PSPRs - both of which were introduced as emergency/temporary measures.

 

[PMU]

That's not quite right PMU - the PRD is a deduction from public sector remuneration, not public sector pensions. The deduction is tiered - only remuneration above €60k is subject to a 10.5 per cent deduction and the first €15k is exempt. The PSPRs are similarly tiered - the first €12k is not subject to any reduction.

You are correct, the PRD is a levy on remuneration and not pensions. And it is tiered - I did say it was complex.

The actuarial reduction of the present day value of public sector pension liabilities (to a still massive €98bn) apparently assumes the continuation of both PRDs and PSPRs - both of which were introduced as emergency/temporary measures.

Let's be clear what this EUR 98bn actually is. It's the present value, discounted at 3.3%, of the pension benefits earned by public servants serving at the time of the C&AG report, i.e. in 2008, and the amounts payable to existing public service pensioners. That is to say, it is the overall pension liability of the State in 2008 when spread over the next 50 years and appropriately discounted. It's a contingent liability and not money that is required in one lump sum.

.

 

[Sarenco]

Fair enough PMU but my point was really that it is not correct to say that the effect of the PRD is to levy a deduction on remuneration over €15k of between 5 per cent and 10.5 per cent. If you ignore the effect of the tiered structure of PRDs you significantly overstate the level of the deduction. For example, a salary of, say, €30k would only be subject to a PRD of 4 per cent.

I certainly accept that the combined impact of the PRDs and PSPRs, if these became permanent, would have a material impact on the sustainability of unfunded public sector pensions. Unfortunately, as currently structured they will not, IMO, be sufficient in the context of our changing demographic profile.

To your additional point, the key problem is not so much the large contingent liability represented by pension liabilities to existing public sector workers but the fact that these liabilities are largely unfunded (ie they are funded on a pay as you go basis). The C&AG projected that the annual gross cash flows required to discharge these liabilities would have to increase by 500 per cent, in constant 2008 price terms, by 2058. This cash flow can only come from additional taxes, cuts to other State services or increased borrowings. Spending cuts will be difficult as our ageing population will require a higher spend on health services. Extra taxes will be difficult to extract from a smaller workforce. So that leaves extra borrowings and passing the problem to future generations, assuming of course that anybody would lend us the money.

 

[Purple]

You are correct, the PRD is a levy on remuneration and not pensions. And it is tiered - I did say it was complex.
Let's be clear what this EUR 98bn actually is. It's the present value, discounted at 3.3%, of the pension benefits earned by public servants serving at the time of the C&AG report, i.e. in 2008, and the amounts payable to existing public service pensioners. That is to say, it is the overall pension liability of the State in 2008 when spread over the next 50 years and appropriately discounted. It's a contingent liability and not money that is required in one lump sum.

.

The real question is what percentage of our national budget is currently spent on state pensions and what percentage, in today's money, will we have to spend in 10 years, 20 years, 30 years etc. What does the graph look like.

Another way of looking at it is to ask by how much we would have to increase taxes to pay for the yearly cost (in today's money) over that time period.

 

[Protocol]

Purple,

exp on SP of various types:
http://www.welfare.ie/en/downloads/Social-Stats-AR-2013-SectionB.pdf

2004 = 3.5bn
2009 = 5.8bn
2013 = 6.5bn nearly

 

[Protocol]

State Pensions expenditure

Table B1: Expenditure on Pensions by Payment Type, 2012 and 2013

Payment Type 2012 2013(1) Change 2013 over 2012
€000 €000 %

Social Assistance
State Pension (Non-Contributory) 963,211 952,457 -1.1%

Social Insurance
State Pension (Contributory) 3,802,795 3,983,264 4.7%
State Pension (Transition) 146,629 137,270 -6.4%
Widow's, Widower's or Surviving Civil Partner's Pension (Contributory) 1,343,198 1,349,840 0.5%
Death Benefit 7,827 7,775 -0.7%
Bereavement Grant 19,755 20,286 2.7%

Total 6,283,415 6,450,892 2.7%

 

[Protocol]

Some DSP reports on Pensions here:

http://www.welfare.ie/en/Pages/Pension-Policy.aspx

 

[PMU]

The real question is what percentage of our national budget is currently spent on state pensions and what percentage, in today's money, will we have to spend in 10 years, 20 years, 30 years etc. What does the graph look like.

Another way of looking at it is to ask by how much we would have to increase taxes to pay for the yearly cost (in today's money) over that time period.

Concerning public service pensions the C&AG estimated that in 2008 public service pensions absorbed 0.5% of GNP and this would increase to 1.8% of GNP to meet the net cost of public sector pensions by 2058. So if you assume that taxation as a % of GNP will remain constant, it implies a movement in tax expenditures towards public sector pensions and away from other areas.

 

[Sarenco]

The real question is what percentage of our national budget is currently spent on state pensions and what percentage, in today's money, will we have to spend in 10 years, 20 years, 30 years etc. What does the graph look like.

Another way of looking at it is to ask by how much we would have to increase taxes to pay for the yearly cost (in today's money) over that time period.

Hi Purple

I don't think it's really possible to answer that question (at least in those terms) as it is extremely difficult to project the State's revenue and spending from year to year.

However, to put the extent of the problem in some context, the C&AG projected in 2009 that net public service pension payments in 2008 absorbed 0.5% of GNP and as a result of the projected increase in the number of pensioners it will be necessary to devote 1.8% of GNP to meet the net cost of pension payments by 2058. The projected increase in payments is pretty much a constant straight line over the projected fifty year period. To put that in monetary terms, annual gross cash outflows were projected to increase by over 500% from €2.4 billion in 2009 to €14.7 billion in 2058, in constant 2008 price terms. Total State revenue in 2008 was approximately €60 billion and we have obviously been running a deficit since then.

Also, it is important to understand that spending is projected to increase - and the tax take is projected to decrease - as the population ages. By way of example, the over 65s are projected to increase from 11% of the total population in 2010 to 24% in 2060. The pensioner support ratio is projected to decline from 5.3 workers for every individual over 65 in 2010 to 3.9 workers in 2020 and 2.1 workers by 2060.

To be fair, a few things have happened since the C&AG's report - both good and bad from a sustainability perspective. The NPRF has effectively been exhausted/discontinued, PRDs have been re-structured and fairly modest public service pension reductions (PSPRs) have been introduced (although PRDs and PSPRs were introduced as emergency measures and we don't know whether they will be retained). On the whole therefore, it seems reasonable to me to treat the trends projected in the C&AG report as broadly unchanged.

As regards the contributory old age pension, the trend is equally sobering. One of the key conclusions from the KPMG actuarial report in 2010 is that, in the absence of increased PRSI contributions or reductions in expenditure from the social fund (which will come to be dominated by contributory pension payments over time), exchequer subventions will have to more than treble by 2030 and will have to increase by a factor of almost eight by 2040. Non-pension benefits are projected to decrease from 43% of the total fund expenditure in 2011 to 15% in 2066.

In the absence of any action to tackle the shortfall, the excess of expenditure over income in the (notional) social fund will increase significantly over the medium to long term. In summary, the 2011 deficit of €1.5 billion will double to €3.0 billion by 2019 and will have increased to €25.7 billion by 2066. Expressed as a percentage of GNP, the shortfall is projected to increase from 1.1% of GNP in 2011 to 2.0% in 2019 and further increase to 6.4% in 2052.

Putting it all together, if we do nothing to address this issue, it is projected that it will be necessary to devote approximately 7% of GNP to meeting the net cost of all unfunded State pension liabilities by 2060 (as against roughly 1% of GNP in 2009). Bear in mind that at the same time there will inevitably be a parallel increase in State spending associated with an ageing population (healthcare, long term residential care, etc). Finally, the numbers participating in the labour force who might be in a position to fund these costs can be expected to fall.

In my opinion, it is very difficult to escape the conclusion that future tax increases alone will be insufficient to address this problem.

 

[Sarenco]

Concerning public service pensions the C&AG estimated that in 2008 public service pensions absorbed 0.5% of GNP and this would increase to 1.8% of GNP to meet the net cost of public sector pensions by 2058. So if you assume that taxation as a % of GNP will remain constant, it implies a movement in tax expenditures towards public sector pensions and away from other areas.

To expand somewhat on PMU's post above, the 2013 tax burden in Ireland, expressed as a % of GNP, was 33.5%.

If you assume that taxation as a % of GNP will remain constant, and we do nothing to address the pension issue, it implies that the % of the total tax take expended on unfunded State pension liabilities (including the projected shortfall in the social fund related to the contributory old age pension) will increase from roughly 3.5% today to roughly 23.5% by 2060.

To put this into context, the OECD estimates that public healthcare spending in 2012 accounted for approximately 7.7% of Ireland's GNP.

 

[Purple]

To expand somewhat on PMU's post above, the 2013 tax burden in Ireland, expressed as a % of GNP, was 33.5%.

If you assume that taxation as a % of GNP will remain constant, and we do nothing to address the pension issue, it implies that the % of the total tax take expended on unfunded State pension liabilities (including the projected shortfall in the social fund related to the contributory old age pension) will increase from roughly 3.5% today to roughly 23.5% by 2060.

To put this into context, the OECD estimates that public healthcare spending in 2012 accounted for approximately 7.7% of Ireland's GNP.

Thanks Sarenco, that's exactly what I was looking for.

 

[Firefly]

That's completely unsustainable! A quarter of GDP on pensions before we even try to run the country, which we can't even do currently without borrowing 15,000 euro a minute!

I'm guessing that the OAP won't increase with inflation as time goes by, so only those with defined benefit pensions will be OK at the expense of the others, creating the talked-about "pensions apartheid" situation.