First step on the long road to sane pension strategy
You could have heard a pin drop when the Republic’s Minister for Social Affairs Mary Hanafin announced that she was about to publish the national pensions strategy.
The surprise among the audience was all the more surprising given this was the annual dinner of the Association of Pension Funds. They may have felt that, if the Government had not produced its strategy during the boom, when Irish tax revenues were coming out of its ears and corporate safes were stuffed with cash, it would hardly do so now.
Still, never waste a good crisis. The current difficulties have shone a harsh light on the pensions problem, as formerly good private schemes with guaranteed pensions close their doors, and swelling budget deficits show the apparent impossibility of providing a decent old age for all from taxation. After the surprise, the reactions were nearly all critical and based on self-interest. Employers, trade unions and opposition parties had nothing constructive to say about this most fundamental of problems.
How fundamental is the point usually missed. It seems almost a mistake to talk about ‘pensions’. They are the instrument, not the problem. The problem is developed economies simply do not know how they are to provide a decent standard of living for older citizens in years to come.
Looked at properly, as an accountant would, this issue dwarfs the present budget difficulties. In Germany, where the population will soon begin to fall, the accumulated estimated deficit between tax revenues and age-related costs is 270% of economic output (GDP). Some calculations say the deficit in Ireland for public sector pensions alone is close to 100% of GDP. Clearly, governments will not be able to borrow that kind of money. They ought at least to prepare by having small national debts by the time the demographics start to move against them. That means large budget surpluses now. Individuals would also have to be encouraged, or even forced, to save alongside government to meet the future bills.
Instead, national debts are rocketing and pension schemes failing. In Ireland, we thought we had shared some of this ‘inter-generational’ burden with our low national debt and payments into the national pension reserve fund. But underneath, we were merrily spending the inheritance. The debt will soon be back to 1990 levels and the reserve funds face an uncertain future as bank capital. I accept this sort of thing is bad news overload; being asked to worry about what will happen around 2050. There is no point in worrying about such things. There is every point in starting to do something about them, on the basis the longest journey starts with a single step. The pensions strategy is certainly no more than a faltering first step, but the Government is to be commended for taking it. There will be many technical and political difficulties. Choices will have to be made between tax breaks now to encourage saving and higher public spending in future to cover the shortage of savings. It may help to deal with all these contradictory impulses if we think of pension provision the same way we do general redistribution in society — ‘from each according to means and to each according to need’.
Pensions are the instrument, and not the problem. The state's task is to guarantee the absence of poverty in old age. Is the proposed 35% of average industrial earnings enough? If not, should something higher be for everyone? Should anything higher come from private savings, but with a government guaranteed pension up to a certain limit?
All these kinds of thoughts are swirling around, but have yet to crystallise into a clear strategy. That can still be done. After that, posterity is on its own.