For many years, the subject of the ‘pensions’ time-bomb’ and what to do about it has been discussed in Ireland. We have had reports, new products, pension levies but the problem still seems to be as intractable as ever.
Due mainly to improvements in healthcare; better nutrition and changes to lifestyles, people are living longer, thus increasing the cost of providing income in retirement. Your pension costs more to provide because it has to last for longer. To compound the problem, we have a falling birth rate with less young people coming into the workforce. In addition, young people today are entering the workforce much later in life than what was the norm 25 years ago when many people began work at 16 or 18.
Today, it is very difficult to get a job unless you have a university degree and many people entering the workforce for the first time are significantly better qualified than that. The late start also means their working life will most likely be shorter.
The combination of less younger people working and more older people living longer leads to a change in the dependency ratio – the relationship between those at work and those who are dependent on those workers. Dependents are the young and those in education, the unemployed, the sick and infirm and the elderly. In 20 years’ time, 40% of our population will be over 65.
Ireland’s dependency ration is expected to rise from 1:3 to 1:5 over that time. Currently for every worker there are three dependents, in future years it will rise to five dependents per worker.
If nothing else changes, then benefits will have to fall by 60% or taxes will have to rise by 60% from their present levels. The current State Pension Scheme is similar to a Ponzi scheme; it depends for success on there being a continuous flow of new entrants to pay for the older members. With a reduction in new entrants and an increase in the number of pensioners, we have indeed got a pensions’ time bomb.