Plan now, or suffer later: Why mandatory pensions are essential

Demographic developments pose one of the most immense challenges facing the Irish economy and policymakers.

The fact is that Ireland’s population will grow and will age significantly over the coming years and the country must up the ante in terms of preparing for this immense challenge.

If it doesn’t we will be faced with a significant cohort of the population retiring without adequate post-retirement income, plunging them into income poverty, with consequent very negative implications for consumer spending and overall economic activity.

As well as the impact of this group called the ‘retiring poor’ on economic activity, the State will be increasingly relied upon to fill the income gap either through the social welfare pension or other types of social welfare intervention.

This pension burden emanating from changing demographics is just one half of the story. The other half involves healthcare expenditure.

The absolutely shameful story that emerged from University Hospital Waterford this week, along with many other examples, proves conclusively that our health service is totally and utterly unfit for purpose, so one can only imagine how bad it will get when the demographic timebomb really starts to impact.

In 2016, the Republic of Ireland had a population of 4.76 million people.

Some 629,900 people were over 65 and accounted for 13.3% of the total population.

In its population and labour force projections, the CSO seeks to model different demographic scenarios based on various net migration and fertility assumptions.

Based on various permutations and combinations, the population is projected to expand by a range of between 1.04 million and 1.95 million between 2016 and 2051.

If we consider a medium set of assumptions, the population of the State is projected to expand to 6.03 million people by 2051 and those aged over 65 will account for at least 25.9% of the total population.

This will have significant implications for pensions and for other elements of Government expenditure and the chances are that the situation could be more serious than that outlined using this medium set of assumptions.

The Central Statistics Office released data on pension coverage this week and show that while the situation is improving, there is still a totally inadequate level of coverage in the private sector in particular.

In the third quarter of 2018, just 47.1% of those in employment had occupational pensions from current employment.

When occupational pension coverage from current and previous employments and personal pensions, including deferred pensions and pensions in draw-down mode are included, the coverage rate jumps to 56.3%.

At the upper end of coverage, those working in public administration and defence have a coverage rate of 92.2%.

At the other end of the spectrum, those working in accommodation and food service activities have a coverage rate of just 15.9%.

The rest of the covered workforce is somewhere between these two extremes. For workers between 20 and 24, the coverage rate is, not surprisingly, at the abysmally low rate of 16.3%.

People in that age cohort have more on their minds than pensions.

It is one thing knowing the level of coverage, but we know a lot less about the quality of that coverage.

It is fine being able to tick a box to indicate one has a pension, but the quality of that pension is a different matter entirely.

The strong suspicion is that many who have pensions, do not have pension funds of sufficient size to maintain the required or expected standard of living after retirement.

The CSO data show that of those with an occupational pension from their current employment, 57.1% have defined contribution, or DC, pensions, and 42.9% have defined benefit, or DB, pension schemes.

With a DB scheme, one is guaranteed a certain percentage of final earnings when one retires. These are steadily becoming extinct in the private sector as it places a potentially significant financial burden on the employer.

With a DC scheme, one’s income is dependent on how much is invested and the performance of the fund. The onus is very much on the employees. This is becoming the norm now.

One way or another, Ireland’s pension coverage is worryingly inadequate and the sooner auto-enrolment or mandatory pensions are introduced, the better. Plan now, or suffer later.

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