Value of state's unfunded social welfare pensions: €359 billion

[Duke of Marmalade]

Hi Duke

At what stage do you get worried?

The state provides many subsidies to those who cannot afford it - welfare, healthcare, education. These are all PAYG. I am sure their present value combined is well over a trillion. The focus on State Pension seems to derive from the idea that somehow people have paid for it through PRSI and therefore have a legal claim on the State. It also leads to false comparison with individual pension arrangements which by their nature must be explicitly (rather than implicitly) funded.
I will get worried by the sustainability of all these State supports if and when our expectation of continued real growth in the economy shudders to a halt or declines.
I am not sure that singling out the State Pension and putting a huge present day value on it, about which the Appendix highlights enormous sensitivities on the numbers, is very helpful.

 

[Purple]

The whole system is based on an ever increasing working population but globally populations are stagnating and will decline over the next 100 years. The UN forecasts that China's population will peak at around 1.3 billion by 2050 but decline to 800 million by 2100. That's a bigger drop than Europe Experiences during the Black Death. The only continent that will be replacing itself by then in Africa.

Europe's population is already stagnant and would be declining without immigration. The dependency ratio in the developed world Given the global population collapse we are facing in most developed economies and the economic and social implosion that is almost inevitable in China is it more than prudent to reduce our exposure to our pension Ponzi scheme, which is heavily linked to the global pension Ponzi scheme.
The EU's dependency ratio is 32 (32 out of every 100 people not working). By 2100 that will be 57 not working. Pensions at current levels are not sustainable at those ratios.

 

[Brendan Burgess]

welfare, healthcare, education. These are all PAYG. I

But they are current expenditure.

A contributory pension is a payment for work done in the past.

And why should they be subsidising it at all? Why should I not provide for my retirement out of my savings?

Why should a company contribute to a pension fund on behalf of its employees but the public sector should not?

Do you see any difference in the funding between

Non contributory pensions
Contributory pensions
public sector pensions

Or should they all be PAYG?

Brendan

 

[Duke of Marmalade]

Ireland's GDP per capita has grown in real terms from $4k at independence to $70k today. That is an enormous improvement of nearly 20 fold in wealth per capita and other Western countries aren't far behind. I think we can afford to fund an increase in longevity (countered by a healthier workforce) or increased social protection. So I think arguments like "we are living longer, we can't afford the pensions" play into a fetish of the Human condition which is to wallow in Doomsday prognoses.
Of course this has been a period of quite unprecedented technological development which has even accelerated into this century. Will it last forever? Climate change. Geo political tensions. I am very cautious about letting 50 year forecasts inform current policy. We can currently afford our levels of social protection.

 

[jpd]

The State contributary, non-contributary and public sector pensions are all PAYG - they are funded from current PRSI and taxation receipts

The State currently promises to pay based on your contributions and/or pay level but this is only a promise and can easily be changed - well, not easily, but if the working population refuse to pay the PRSI/taxes required to fund the pensions in payment (by voting in a government that promises low taxes), then yes, the promise will be broken.

Of course older people will be trying to vote in parties that promise no changes - as in France.

But if something is unsustainable then it is unsustainable (well, bar the money trees) and no amount of borrowing will be able to cover the gap

There's nothing new in this report - the writing has been on the wall for the last 20 or more years and many commentators have reported it over the years. But no government can afford to face the problem, so kicking it down the road is the only current solution. The road will eventually run out, of course, but that will be many an election cycle from now

 

[Duke of Marmalade]

But they are current expenditure.

A contributory pension is a payment for work done in the past.

And why should they be subsidising it at all? Why should I not provide for my retirement out of my savings?

Why should a company contribute to a pension fund on behalf of its employees but the public sector should not?

Do you see any difference in the funding between

Non contributory pensions
Contributory pensions
public sector pensions

Or should they all be PAYG?

Brendan

Boss we have about a million kids requiring future education. A similar number of oldies requiring increasing healthcare; indeed people of working age who also expect "free" healthcare. If there was a big setback to the economy these would come into question every bit as much as the state pension.
Absolutely they should all be PAYG and certainly not funded by investing in foreign shares. But of course the sustainability of these expenditures depends on Ireland Inc continuing to prosper. This requires effective investment either by the State itself or through the private sector as incentivised by the taxation system.
As to why a company should contribute to its pension scheme but the public sector should not. An occupational pension is deferred remuneration. The punter doesn't care how it is funded just that they get it. The State does not need to fund, clearly a private company does - I don't really get your point.

 

[Brendan Burgess]

As to why a company should contribute to its pension scheme but the public sector should not. An occupational pension is deferred remuneration. The punter doesn't care how it is funded just that they get it. The State does not need to fund, clearly a private company does - I don't really get your point.

Deferred remuneration for both the company and for the public sector!

Sure we can defer taxing people to pay for services by borrowing. But I am not comfortable with putting the cost of my low taxes and high benefits on future generations.



Brendan

 

[NoRegretsCoyote]

It doesn't feature as a major political issue at all,

I mean the defining issue of the 2020 General Election was only whether to raise the pension age to 67......

 

[Duke of Marmalade]

Deferred remuneration for both the company and for the public sector!

Boss if employees had utter confidence in the covenant of their employer there would be no need for the employer to fund at all; in fact I think the earlier paternal schemes such as Guinness were not funded.
Public servants have utter confidence in the covenant of their employer.
But I think you are missing my point. The Public Service does not have a ring fenced fund like a company but that does not mean it does not have assets, explicit or implicit, to back its future obligation. The most important implicit asset is the tax paying capability of the economy itself which will have been part built up by State investment and/or State incentivised investment by the private sector.

Sure we can defer taxing people to pay for services by borrowing. But I am not comfortable with putting the cost of my low taxes and high benefits on future generations.
Brendan

Provided no major catastrophe; future generations will inherit an economy which would have been beyond the wildest dreams of our founding fathers. I don't see why they would begrudge paying a little rent for it but in any event their inheritance has been built from borrowed money so they are in the position of an Earl inheriting from his father the Duke a fine mansion with a mortgage on it.

 

[DazedInPontoon]

Provided no major catastrophe; future generations will inherit an economy which would have been beyond the wildest dreams of our founding fathers. I don't see why they would begrudge paying a little rent for it but in any event their inheritance has been built from borrowed money so they are in the position of an Earl inheriting from his father the Duke a fine mansion with a mortgage on it.

From my experiences with them the current upcoming generation would gladly settle for an economy where they can afford housing, that is as far as their wildest dreams are reaching, or y'know, being able to afford kids, which brings us back to Purple's point about demographics.

As I understand it the current state of affairs, which is perhaps an experiment that can be considered about 50 years old since the US came off the gold standard, has depended on working population increases (borrowing from tomorrow), technological improvements and globalisation including outsourcing labour to cheap Asian countries (and us from the US!) as counter-inflationary measures to counteract the inflation you would otherwise see due to the increase in the money supply. Will all of those counter-inflationary pressures continue at the rate they have?

Provided no major catastrophe

Why assume that? the world is constantly having catastrophes, if anything I expect more of them.

 

[Sophrosyne]

@Brendan Burgess I am not clear on your points.

Is it that PRSI contributions are insufficient or that pension funding is by Pay As You Go rather than a Capital Fund?

 

[Duke of Marmalade]

From my experiences with them the current upcoming generation would gladly settle for an economy where they can afford housing, that is as far as their wildest dreams are reaching, or y'know, being able to afford kids, which brings us back to Purple's point about demographics.

As I understand it the current state of affairs, which is perhaps an experiment that can be considered about 50 years old since the US came off the gold standard, has depended on working population increases (borrowing from tomorrow), technological improvements and globalisation including outsourcing labour to cheap Asian countries (and us from the US!) as counter-inflationary measures to counteract the inflation you would otherwise see due to the increase in the money supply. Will all of those counter-inflationary pressures continue at the rate they have?


Why assume that? the world is constantly having catastrophes, if anything I expect more of them.

Well, I take some of your points. It is still a vastly improved economy from 100 years ago. Maybe we have built in a complacency that we should have a car with a fab road system, an iPhone, a TV, access to international travel, all matter of kitchen appliances and other gadgets, a vast array of foods and fripperies in our supermarkets, Bono etc. I certainly do not begrudge paying my share of the 200bn debt incurred in getting us here. But yes there are disparities in distribution, most acutely in housing. I am not saying future generations will be inheriting Utopia but I don't share the Boss' guilt about what we are bequeathing them - unless of course it is a desert or a nuclear winter.

 

[joe sod]

The state hasn't "promised" anyone anything specific.

If you pay PRSI you have a legitimate expectation of a pension at the end of it.

The precise amount is always dependent on the resources available to government and political willingness to spend it on pensions and not other things.

But that is the basis on which people are willing to pay PRSI and other taxes that they at least have an entitlement to a pension at the end of it . Surely a government that would renege on this would be in a very precarious state, its never happened before except for the collapse of the communist system in Eastern Europe. The governments didn't renege on pension payments even then but the currencies collapsed instead but that is not open to Ireland due to being in the euro currency .Surely a government that would attempt to tamper with this would not be able to remain in power. If they found themselves in this precarious financial position they would have to cut all benefits and payments equally.

Then we have the commitments by the government to reduce CO2 by large amounts by 2030 and the green party espousing economic contraction as a way to achieve this so probably much higher taxes on fuel etc. It is notable that the government are about to reimpose all the fuel duties that they took off a year ago because of the Ukraine war but are still going ahead with the double welfare payments. So the people going to work everyday are getting hit with more and more taxes. Something will give if this continues and withdrawing of pension benefits from people that have worked all their lives would be a step too far into anarchy

 

[Purple]

But I am not comfortable with putting the cost of my low taxes and high benefits on future generations

We did that on steroids after the 2008 crash. We bailed ourselves out at their expense. That's why they can't afford to buy houses now, or have kids, or pay for the pensions of retirees.

 

[Purple]

Well, I take some of your points. It is still a vastly improved economy from 100 years ago. Maybe we have built in a complacency that we should have a car with a fab road system, an iPhone, a TV, access to international travel, all matter of kitchen appliances and other gadgets, a vast array of foods and fripperies in our supermarkets, Bono etc. I certainly do not begrudge paying my share of the 200bn debt incurred in getting us here. But yes there are disparities in distribution, most acutely in housing. I am not saying future generations will be inheriting Utopia but I don't share the Boss' guilt about what we are bequeathing them - unless of course it is a desert or a nuclear winter.

The population of the world has tripled since the Second World War. That's what's sustained the pensions Ponzi scheme. The population of developed world will decline in the next 80 years. We all know what happens to Ponzi schemes when new members stop joining.

The environmental impact of 100 years of industrialisation is being felt and will result in significant geopolitical unrest and massive population shifts.

The global economy will probably become more regional as tensions rise between the democratic world and the non democratic world.

I see no reason other that wishful thinking to suggest that the next 75 years will be as stable and peaceful as the last 75. The period we have lived through since the Second World war is a very rate historical anomaly but the things that have fuelled it, population growth, debt fuelled consumerism, cheap and abundant power, the mass consumption and destruction of natural resources, and the military and economic supremacy of broadly aligned democratic countries with a tribal memory of the last World War, have run out of road.

I expect historically normal service to resume. What we have now, war, famine and pandemics, is the new norm.
Then again I'm a glass half full type of guy.

 

[The Horseman]

Deferred remuneration for both the company and for the public sector!

Sure we can defer taxing people to pay for services by borrowing. But I am not comfortable with putting the cost of my low taxes and high benefits on future generations.
Brendan

We dont have low taxes certainly not income taxes. We reach the higher level on relatively modest incomes.

It appears if people accumulate wealth then others feel it should be heavily taxed.

Perhaps if we were more selective on welfare payments people would be more inclined to work and would contribute to the tax revenue of the state.

Where exactly is some form of personal responsibility?

 

[Sophrosyne]

Something will give if this continues and withdrawing of pension benefits from people that have worked all their lives would be a step too far into anarchy

I think the point being made is that regardless of the financing mechanism (PAYG or a Capital Fund) social insurance pensions depend on economic performance.

The Government is taking steps to overhaul PRSI, which must be gradual to avoid cliff edges.

The reports contain EU assumptions in an attempt at EU-wide consistency. But countries and economies differ and assumptions are typically changed and modified constantly because sometimes the principle of subsidiarity is lost. For instance, it took years to realize that GDP was not a suitable indicator for Ireland.

Economic adjustments are made constantly as the future is not immutable and no one has a crystal ball.

Having said that, I cannot listen to any policies put forward by the Greens without cringing, though they do have some excellent TDs, who should probably join other parties.

The Housing and Health crises are of the Government’s own making. It is not in charge of either.

 

[Purple]

We dont have low taxes certainly not income taxes. We reach the higher level on relatively modest incomes.

We have high income taxes on high earners and high marginal rates on modest incomes but low taxes on wealth and very low income taxes on low earners.

It appears if people accumulate wealth then others feel it should be heavily taxed.

Wealth accumulated through labour should not be taxes heavily but wealth accumulated through unearned sources should be taxed more than it is. That includes the massive appreciation on family homes as a result of government policies.

Perhaps if we were more selective on welfare payments people would be more inclined to work and would contribute to the tax revenue of the state.

Maybe, but most welfare recipients are pensioners. Most of them believe they deserve all the unearned handouts they get.

 

[FintanJ]

Contributory pension payments will either :
(A) means tested
(B) not means tested but value eroded by inflation, as In government will not increase in line with inflation.

No pension planning should assume the existing benefits increase with inflation.

 

[NoRegretsCoyote]

Contributory pension payments will either :
(A) means tested
(B) not means tested but value eroded by inflation, as In government will not increase in line with inflation.

No pension planning should assume the existing benefits increase with inflation.

(A) will not happen. This is one AAM myth that refuses to die. There will always be a contributory state pension which is more than the means-tested one.

(B) is likely - it wouldn't surprise me if in my own retirement the SPC is lower in real terms than it is today. Indeed it is lower than it was a year ago and there is barely any notice of it!