Finally, movement on pensions

One small step in one very big (and growing issue). Pensions in Ireland.

In January, the Minister for Social Protection Regina Doherty finally announced changes to the State pension system that will end some of the gross unfairness of how eligibility for the State pension is calculated. For the 50,000 women or men who worked at home prior to 1994 to care for children, parents or relatives, this is a welcome breakthrough.

A new home carers credit up to a maximum of 20 years will be made available. The changes will take effect from early 2019. The backdating of payments will only go back to March 2018.

The second and more critical element of the reform package is the move towards total contributions (as opposed to total years spent in and out of the workforce) from 2020. For those with gaps in their work history for reasons other than caring duties, this is of huge importance. Seasonal workers or those who have taken time out for sickness or other reasons and who will retire before 2020, can apply to be assessed under the new regime from 2018 on.

These changes form part of a wider package set out in 2010 for pension reform in Ireland. By far the most significant of planned changes will be the increase in the State pension age to 67 by 2021 and 10 years from now, the age will rise to 68.

By 2028, Ireland will have the highest pension age across advanced industrialised economies. Ireland is currently just one of three countries across the OECD that plans to increase the state pension age to 68. These policy changes are being introduced against a backdrop of a wider debate across advanced economies about the impact on the public finances and the labour market of an ageing society. On the face of it, Ireland has a ticking demographic time bomb.

Those of retirement age and older have been the fastest growing cohort of the population of the Republic of Ireland since 1996. Those aged 65 plus have increased by 54%, compared with a 40% increase in the so-called WAP (Working Age Population, those aged 20-64) and a 9% increase in those aged up to 19 years of age.

Dependency, as measured by age, is a very crude measure.

However, we get some idea of the scale of the medium-term challenge when we look at Ireland’s ratio of working age population (aged 20-64) relative to those older and younger. Ireland’s pensioner support ratio is expected to more than double from 4.7 workers for every retiree in 2015 to 2.1 workers to one retiree in 2050. The solution? The conventional approach adopted by many other western governments has been to increase the State pension age and reduce benefits. At its most basic, there is a limit to which we can keep increasing the State pension age.

For Ireland, the pursuit of this strategy as the only way to resolve our pension problem would be particularly short-sighted.

As a start, our below EU average employment rate must improve. Whereas 64% of men aged between 55 and 60 are in employment, this falls to 48% for females. Increasing female employment rates, technological adaptation in the workplace and introduction of a new second-pillar occupational pension scheme are critical to ensuring timely and adequate incomes in retirement.