One of the statistics that emanated from the Austerity era, which seems to have been overlook by most, came from the HSE means test of over 70’s in Ireland. In the boom times, all Ireland’s over 70’s had been granted GP & other medical cards and the means test sought to identify those that did not need the State’s assistance. The results led to 95% of recipients retaining their cards, which, put another way, means that 95% of Ireland’s elderly are State dependent. While Ireland Inc can just about foot the bill for the current 637,567 people in Ireland over the age of 65 (source. CSO National Census: 2016), that number is set to rise significantly in the next few decades. The Central Statistics Office estimates there will be just over 1 Million over 65’s by 2031 and 1.3M ten years later, effectively doubling the State’s costs over the next two decades, with that trend set to continue.
I heard a well known financial commentator being interviewed on radio recently and he had estimated that the costs to the State of delivering on the promised pensions of our civil servants alone is more than the National Debt. He went on to add that if he included the promised pensions of all of us who pay PRSI, then the National Debt would be 250% higher than it is quoted at today. Ireland is already one of the most indebted nations in the world and that is without counting the cost of retirement promises. Other than there being a huge increase in the State’s wealth (North Sea type oil deposits off our Western seaboard would do it), I cannot see it ever being able to deliver on those promises.
When the current system was introduced, the society it sought to protect was very different than today’s. The relative benefits were lower (today’s full pension is €238.30 per week), average life expectancies were much lower too, which meant that, from an actuarial perspective, it could rightly be assumed that many would not make it to claim their pension at all, and most of those that did, would not be claiming for elongated periods of time. This also meant that no savings fund was ever established, meaning that all State pensions are funded out of today’s income. A paper, issued in 2014 by the Irish Government Economic & Evaluation Service, estimated that the annual bill for State pensions would rise by €195M per year up to 2026.
Since the current retirement age was introduced, average life expectancy has increased by circa 36%, while the retirement age has increased by just 5%. You do not have to be a great mathematician to work this one out, these figures cannot be sustained. There is no real political will to tackle this thorny problem, or even to admit that a problem exists at all. In one way, we cannot blame those that serve, as what is the point in highlighting a problem for which there is no (easy) solution. The only solution is to either limit the benefits payable and/or limit the citizens that qualify for such benefits and both actions could be considered as political suicide.
This year some action is promised as a new law will make enrolment in a pension mandatory for certain categories of tax payers. The forced payments will be relatively low to begin with. This may eventually solve the State’s long-term problems, over decades and with, I imagine, substantial increases in contributions being demanded. However, it offers no comfort to any of us set to retire over the next few decades, or indeed anyone who has retired quite recently.
As a rough guide, let’s take an individual wanting to retire on €40,000 per annum at age 65, the cost of that pension today would be €1M. This would buy you the €40,000 p.a., rising with inflation each year, for the rest of your life, with 50% (plus inflation-linking) going to your spouse if you died first. Doing some simple math, if €40,000 per annum is your goal, and you work for 40 years, that means you must be putting away €250,000 every ten years, or €25,000 every year, on top of paying the bills, educating the kids, having the odd holiday…etc. Very few people ever do this math, and fewer still have the discretionary income to set aside to simply save their way to financial security in retirement.
Ultimately the unsustainability of the states’ pension commitments combined with our existing sky high debt levels will mean that when we are eventually forced to take our medicine, it will be very bitter indeed for many of us.
Author Paul A. Overy QFA, FLIA, Financial Planner at Neville and Partners Ltd, www.nevilleandpartners.ie