Why is there no concern about the state's unfunded pension liabilities?

Cormac Lucey has a good article in today's Sunday Times

The State's Gargantuan Pension Gap

The actuarial deficit on the social insurance fund which provides old age pensions is €324 billion.
The equivalent shortfall for the public sector pensions is around €100 billion.

In other words, as a state, we have a liability of over €400 billion, twice the national debt, which we have made no provision for whatsoever.

"it is politically difficult to fix it as the only possible remedies are politically toxic

• increase pension contributions
  
• reduce pension payments
  
• delay pension age

The cynical explanation for ignoring the issue is that, while the problem will balloon in size tomorrow, it is not especially acute today"

I think that the only way to deal with this is to scrap prsi and replace it with a pension contribution of 20% on all employees.

The non-contributory pension should be greatly reduced so that those who have contributed to a pension scheme will benefit from their contributions.

At the end of each year, everyone should get a statement detailing how much is in their pension fund.

Self-employed people who declare very low earnings and who pay very little pension contribution would get a very small pension.

Self-employed people and employees who have contributed a lot over the years, would get a much higher pension.

Brendan

Brendan

Is that not there already in the form of private pensions?

Hi Brendan. Is the deficit because the money was spent on something else or because it was invested in stuff that has fallen in value since?
Maybe the state will be able to pay future pension entitlements from cash flow? Depending on how good the economy is going in the future.
Is it a bit of a fallacy tying up vast amounts of money for the future when there may be a more pressing need for the money in the here and now?

Gordon Gekko said:

Is that not there already in the form of private pensions?

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Hi Gordon

No. The state has an obligation to pay the contributory OAP to people whether they have a private pension or not.

They also have an obligation to pay the public service pension to retired state employees.

Brendan

RichInSpirit said:

Maybe the state will be able to pay future pension entitlements from cash flow?

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The full article covers this issue well. In 2010, there were 5.3 workers for every person over 65. By 2020, that will fall to 3.9. So it will simply not be possible to fund retirement pensions out of cash flow.

Is it a bit of a fallacy tying up vast amounts of money for the future when there may be a more pressing need for the money in the here and now?

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The pressing need here and now, is tax cuts, very generous social welfare, child benefit, public sector pay increases. We simply can't afford to pay these. It's not obvious now, but it will be painfully obvious in 10 or 20 years, when it will be extremely painful to do anything about it.

As well as the €400 billion in unfunded pensions, we will have to service €200 billion in national debt.

Brendan Burgess said:

Hi Gordon

No. The state has an obligation to pay the contributory OAP to people whether they have a private pension or not.

They also have an obligation to pay the public service pension to retired state employees.

Brendan

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Sorry, I meant that some people (like myself) are maxing out our AVCs and wouldn't want the State anywhere near our pensions.

Getting €12k a year doesn't form a significant part of my planning - In fact I don't expect to get the State Pension on the basis that it will be means tested in my view.

The NTMA should be investing State funds in equities to meet our future liabilities. We should in effect be saving.

Ok,

I see your point.

So there should be a compulsory 20% contribution to pension funds. If people can show adequate private pension coverage, they can pay 10% instead.

Brendan

Brendan Burgess said:

I think that the only way to deal with this is to scrap prsi and replace it with a pension contribution of 20% on all employees.

Brendan

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You're suggesting going from a 4% tax to a 20% tax (that is how it will be perceived)?

A politicians job is to get re-elected. If they bring in your suggestions, especially if in one go, they will be out on their ear. The short term view of politics has prevented any government from solving a long term problem. There has been hundreds of thousands spent on numerous reports on how to tackle the pension time bomb. Nothing has been done. I would be surprised if anything happened until it becomes an immediate problem and it will be too late at that stage.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

My concern is that there'll be a sting in the tail for those who are being prudent and saving for their retirement. Some kind of raid on their funds...even worse than the grotesque pension levy. I'm making sacrifices now with a view to being comfortable when I retire. You can bet that the same people who are flittering away their cash right now will be cribbing about people like me with big pension pots when we're all pensioners.

SBarrett said:

You're suggesting going from a 4% tax to a 20% tax (that is how it will be perceived)?

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Hi Stephen

PAYE employees pay 14.75% (4% and 10.75% from their employers) now, so it's only 5.25% extra.

Self employed would have to pay a lot extra. At the moment, they are paying very little and getting the full state contributory pension. That is wrong.

You are calling it a tax. I am calling it a pension fund. At the end of each year, the person would see this money in their fund.

SBarrett said:

If they bring in your suggestions, especially if in one go, they will be out on their ear. ... I would be surprised if anything happened until it becomes an immediate problem and it will be too late at that stage.

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I suppose that is Cormac's point and my point. It needs to be done now before it's too late.

My suggestion is very unpalatable and has lots of problems. If you are earning €100,000 a year for many years, you will have a very large pot, but it's unlikely that you will be able to get a pension based on that pot as the pot will have to be raided for those who have no pots.

But Gordon's concern is also well founded. In 2030, there will not be enough to pay the state's obligations for contributory OAPs, so they will have to be means tested. Gordon is putting away money now, so he probably won't get the OAP which he is paying for through PRSI.

Brendan

Here is a document which provides a summary of the pension systems in operation throughout the EU.

I can only speak from our experiences here in Switzerland, as we introduced corrections about 20 years ago to address this issue. And yes it was and still is very painful for many people. The objective of the change was to deliver a total pension of about 65% of a worker's final salary, but even after these changes we are still projecting a shortfall of up to 35%!

Today we operate the typical European 3 pillar system, and a quick summary would be:

- No none contributory pension
- A fully annual contributory state pension would cover about 2 months of living expenses (First Pillar), so there is no chance to live of it.
- Mandatory employer funded pensions (Second Pillar), with minimum contributions of 7% on both sides, so total of 14%.
- Personal savings, with tax relief up to about 6% of income under €106K

In the case of the 2nd pillar pension the following hold:
- Employees can buy in missing years provided they pay both the employee & employer contribution. Tax relief is available.
- The pension fund must provide a guaranteed rate of return as defined by law, shortfalls must be made good by the fund managers
- Most employers pay much higher contributions that the prescribed 7%, for older employees it is often as high as 20% for a total of 27% pa
- The pension fund investment strategy is defined by law and funds are strictly controlled with audit often carried out on a monthly or quarterly basis

In the case of the 3rd pillar savings the following hold:
- The investment strategy is regulated by law
- There are about 3 or 4 standard savings accounts available
- There is a guaranteed minimum return which must be provided

In the case of someone who has no or insufficient pension, they are considered a social case - their needs are assessed and funds are provided accordingly - there are not standard rates etc... if is very much on a case by case basis.

While it will have a positive impact in the future, the current situation has resulted in many less well off Swiss citizens having to move abroad when they reach retirement, which was most definitely not in their plan!

successive goverments have prioritised the elderly in this country above every other demographic , whats more , the elderly have several salary drawing lobby groups who earn a living potraying most elderly people as poverty stricken , this is a golden age for people over sixty and eventually those who are paying for it will wake up and realise that upon retirement , the same unconditional entitlements will be but a pipe dream

Ah that's just great.....just in time for me to be retiring. Just like the house buying fiasco I'm about to get screwed again. Am seriously thinking of moving abroad to work so that I can earn some decent money and put it aside for my old age. The problem with that plan of course is that the work is not secure and from what I hear the schools are run by bullies and sociopaths. This is seriously depressing. You'd need a crystal ball to figure out what to do.

Jim

That is really interesting.

Our system is in such trouble that it will take a long time to fix, even if we address it seriously now.

Your 35% shortfall is very interesting.

I like the idea of saying to people up front: "Look if you don't save for a pension, you are going to be in dire straits in retirement".

The Swiss system is so interesting that I have copied it to a separate thread:

The pension system in Switzerland

Brendan

Some action has been taken, the State Pension age has been increased from 65 to 68, in three stages.

The transition pension at age 65 has been abolished.

Pension rates for people with less than full contribution records have been cut.

The PS pension is less generous, for new entrants.

The 4% PRSI rate is very low compared to other countries.

The German state pension has 20% conts, split 50/50 betwen ee and er.

So workers pay 10% approx, just for a State Pension.

They also pay three other social insurances.

I best start a pension so. This is crazy. What does our State Pensions compare with the rest of the EU?

Ours is 230.30 pw.

All other European state pensions are a % of former wages, so not easy to compare.

They could remove the tax advantages for people putting heaps of money into private pensions to avoid tax.
That way they'd bring in more tax revenue.