FORGET about the billions that Irish taxpayers paid to bondholders and the banks. Forget — at least for an instant — the billions needed to clear our national debt. The real billions should be spent on bridging Ireland’s pension gap, the second largest in Europe, according to a new survey.
A study by consultancy firm Deloitte for Aviva Insurance has found we need to save an additional €27.8bn a year in order to provide an adequate standard of living in our old age, compared to just over €20bn in 2010.
Where is all this money going to come from?
It is unlikely to come from government or the banks. In fact, it was the Government that raided our national pension pot to recapitalise AIB and Bank of Ireland, which is one of the reasons why there is such a shortfall now.
The National Pensions Reserve Fund was created in 2001 by the then finance minister Charlie McCreevy to pay public service pensions in the future. He was finance minister from 1997 to 2004 in joint Fianna Fáil/Progressive Democrat governments.
As a result of raiding the NPRF, funding for such pensions continues to be taken directly out of the exchequer every year, a situation that should not be allowed to continue.
A number of factors have caused the increase in the pensions gap, including longer life expectancy and lower returns on investments, but the role of government in creating this timebomb cannot be ignored.
Along with the Aviva study, the latest figures from the CSO show that the number of workers with pensions now stands at 46.7% compared to 51.2% in 2009. Again, successive governments are largely to blame by putting up barriers to pension saving.
In 2011 the Fine Gael/Labour government introduced a tax of 0.6% on pension fund values over the lifetime of a private pension. Introduced to fund the Action Plan for Jobs, including a lower Vat rate for the tourism sector, those affected were promised that it would only last for four years. However, in 2014 Finance Minister Michael Noonan added a further tax of 0.15%, bringing the so-called levy to 0.75%. While he then reduced it last year and finally abolished it this year, a lot of damage to private pension funds has already been done. The pensions timebomb is set to go off sooner than we might think. At present, there are six people working for every pensioner. By 2055, there will be only 2.3 people working for every pensioner. How will these 2.3 people be able to fund the growing number of pensioners who are living longer than the previous generation?
While raising the retirement age and increasing the State pension would help reduce the €27.8b gap, these efforts will be fruitless unless the decline in the numbers saving into a private pension is reversed.
One way of doing that would be to introduce a universal system under which all workers would automatically be enrolled in a pension scheme by their employers.
This was done in the UK in 2012 with great success, managing to reduce their pensions gap considerably.
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