PRSI rise of around €1,800 a year needed to fund pensions
The number of people aged over 65, compared to those aged 15 to 64, is set to more than double from 22 per cent in 2020 to 47 per cent in 2050 – and we need to prepare for that now, says a financial and pensions expert
Ireland’s population will age rapidly in the coming decades as people live longer and ‘Irish baby boomers’, people born in the 1970s, reach retirement, said Sebastian Barnes, chairperson of the Irish Fiscal Advisory Council.
Although an ageing population is obviously a major achievement of modern science and healthcare, understandably the rise in Ireland’s ageing population is raising concerns about retirement and the sustainability of pensions. The number of people aged over 65, compared to those aged 15 to 64, is set to more than double from 22 per cent in 2020 to 47 per cent in 2050.
“This will put pressure on the pay-as-you-go state pension, where the current generation of workers makes PRSI contributions to pay for those in retirement,” said Barnes.
The government made a decision not to increase the state pension age for now. But this decision not to raise pension age means higher PRSI rates will be needed to ensure the system is sustainable. Employers would also face higher payments.
Barnes said that Pensions Commission analysis shows that the combined employer and employee PRSI rate would need to rise by more than 6 percentage points over the next 25 years under current policies, equivalent in today’s terms to around €1,800 a year for a typical worker.
As an alternative to the current system, the IFAC recommended switching to a more long-term approach, similar to Canada’s, to avoid the need for large increases to PRSI rates in the future.
This system would see PRSI contributions set at a constant rate to fund pensions over a longer term.
“Recent work at the Irish Fiscal Advisory Council looks at best practices from other countries,” he said. “It suggests creating a separate state pension fund to manage the pension system on a very long-term basis. The government should be required to set out how it will fund the pension system 50 to 75 years ahead, what pensions would be, the retirement age and the required PRSI rates.
“Drawing on Canadian experience, a good approach is to set the PRSI rate at a constant level that could be maintained for future generations. This would imply increasing PRSI contributions by around 3 percentage points over the next few years, but avoiding having to raise them to higher levels in the future. Irish baby boomers would contribute more to the system, reducing the extra burden on younger generations.”
Barnes said that the state pension fund would build up substantial assets in the coming decades, perhaps as high as 40 per cent of national income, that should earn a return and then be drawn down.
“This should be boosted by saving excess corporation tax receipts from the multinational sector: spending them now would risk overheating the economy and making the public finances fragile, while saving these windfalls for pensions would ensure they are locked away and eventually help to manage future needs.”
Planning ahead is absolutely crucial, said Jerry Moriarty, chief executive of the Irish Association of Pension Funds (IAPF).
“As the government has now decided that the state pension age is not going to increase from 66, it is important that we plan to ensure the state pension is sustainable and can deal with the continuing impact of an increasing number of pensioners and people living longer.”
Moriarty agrees that this is likely to involve an increase in PRSI and the Fiscal Council’s suggestion of setting up a fund and investing that increase should be put in place.
Ireland is the only OECD country that doesn’t yet operate a mandatory pension auto-enrolment scheme or similar system for funding pensions.
“Introducing automatic enrolment for people who currently are not in an employer’s pension scheme must also happen as quickly as possible,” said Moriarty.
The government’s proposal for an auto-enrolment pension scheme will be voluntary, and workers will have the ability to opt out if they want. The scheme includes matching employer contributions and a state top-up. It is scheduled to be introduced next year.
There are several ‘levers’ that policymakers can pull including reform of the state pension, efforts to increase private pension provision, and the introduction of auto-enrolment, said Ian Slattery, president of the Irish Institute of Pensions Management (IIPM).
“The IIPM welcomes the introduction of auto-enrolment and believes that it will drive a cultural change within Ireland, enabling improved pension coverage, adequacy, and retirement outcomes for all,” he said.
“However, recent feedback from trustees and employers at an IIPM Auto-Enrolment Summit makes it very clear that concrete details are needed now to ensure that employers can implement the proposals within what is now an ambitious timeline. We’ll only get one chance to get this right and get buy-in from the wider population.”
Slattery said that it's likely a combination of the above will materialise, but overall, a focus on strong communication, increased education and enhanced awareness will increase pensions coverage and lead to greater pensions adequacy.
Just 35 per cent of private sector workers are currently included in a pension scheme. Slattery’s advice to people who don't currently have a private pension? Start one.
Employers are required to offer you access and if you’re your own boss, talk to your accountant or business advisor, said Slattery.
“People need to educate themselves and take control of their own finances as much as they can. And let’s not forget the attractiveness of a pension: tax relief on the way in, tax-free growth while invested, and a tax-free lump sum when you retire.”
Moriarty said that if you work for an employer that has a pension scheme, you should join it. “This means that, as well as you saving for retirement, your employer will also be saving for your retirement as they contribute to the scheme. If your employer does not have a scheme, you will likely be automatically added to a new scheme that is planned for 2024.
“You, your employer and the government will contribute to that. If you are self-employed, you should consider starting a personal pension or Personal Retirement Savings Account (PRSA). You should contact an independent financial adviser who will talk you through the best options for you,” he said.