Inadequate pension system favours rich
Fianna Fail's election promises for the state pension overlook the real pensions issues. By Jim Stewart
The main political parties have committed themselves to a state old age pension of €300 per week by 2012 (€335 in the case of the Green Party), from about €209.00 at present. But the harsh reality is that even if it were granted now, this amount would fall short of the statutory minimum wage for an average working week. By 2012, five years of inflation will have eroded its value even further.
More importantly, setting apparently enticing targets for weekly payments only obscures the real pensions issues facing this country – that Irish pensioners are at a greater risk of poverty than most of their European counterparts (only Poland and Lithuania fare worse in this regard); and that our system of pension funding is inadequate, inefficient, and inequitable.
A far reaching and comprehensive analysis of Ireland's pension system, ‘For Richer, For Poorer', conducted for TASC in 2005, found that 80 per cent of Irish pensioners depend on the flat rate state pension for the bulk of their income. Yet Irish state spending on social security-based pensions – at 3.8 per cent of GDP – is the lowest in the EU15.
To put all this in perspective, the Pensions Board has set a benchmark target of 50 per cent of pre-retirement income. The state (contributory) old age pension falls well short of this ideal, which means the difference must be made up with private pension arrangements, savings and investments. For most people that can afford it, the solution is based on a combination of state and private pension schemes, and the evidence is clear: the present system fails many of those depending on it for a comfortable and dignified old age, while at the same time favouring the better off and generating healthy profits for the pensions industry.
All of our main political parties put tax-led strategies at the heart of their private pension funding proposals. This is all very well for those with incomes on which to make tax savings (and the more you earn, the more valuable your pension entitlement will be). But what about those with little or no earning power – the unemployed, the disabled, and women working in the home? Seen in this context, it is little wonder that women – who are less likely to build careers and usually earn less than men – are much more likely to suffer poverty in old age.
The assumption underpinning the current pensions debate is that private pension arrangements, taken in conjunction with a flat rate state pension of €300 per week by 2012, will generate 50 per cent of pre-retirement income for the majority of retirees. But the TASC report shows that this is unachievable, due to inherent weaknesses in our private pensions set-up, including:
• Excessive reliance on tax reliefs, which largely benefit the better off
• A shift from Defined Benefit to Defined Contribution schemes, which transfers investment risk from employers to employees
• An associated fall in employer contributions to (Defined Contribution) occupational pension schemes
• High charges levied by advisors, which run at 1.5 per cent per annum on average, and in some cases even offset the benefit of the tax relief
• Low contribution rates, in particular for defined contribution schemes, and PRSAs (Personal Retirement Savings Account) and (probably) SSRAs (Special Savings Retirement Account)
• A falling coverage rate for occupational schemes
• The inability of defined contribution schemes, such as PRSAs and SSRAs, to provide a guaranteed income in retirement
Proposals for an SSRA will tackle some of the inequalities in the present system, but suffer from the same inherent inequities as tax driven schemes in that they are biased toward higher earners, ie the greater your income, the more you can afford to save.
The TASC research found that tax incentives for pension provision have had little or no material effect to date in terms of broadening pension coverage, alleviating pensioner poverty, or addressing gender inequalities in pension provision.
The bottom line, therefore, is that our present system favours the better off and serves the interests of the financial institutions and intermediaries that make up the professional pensions industry. Hence, there are powerful vested interests who would favour a continuance of tax-driven pension funding.
Yet the number of over 65s is set to grow every year over the next twenty years. The additional burden this will create, and the inequities of the present system, means the need for greater fairness is more pressing than ever. We must seize the opportunity now to put in place flexible and imaginative arrangements that will see to the needs of all retirees.
A crucial issue to be addressed is the role of the state pension system. The emphasis on private pensions and tax-driven mechanisms in recent decades seems to assume that the state system of pension funding has somehow failed.
This is patently untrue: it has not failed in the rest of the EU15, where state resources devoted to pensions average just above 10 per cent of GDP, and the incidence and threat of pensioner poverty are much lower. Indeed, it could well be argued that state funding has never really been given a chance in this country, yet could – if allied to a cost effective and equitable system of private pensions – represent our best prospect for avoiding pensioner poverty in the future.
Jim Stewart is a member of the TASC Economist Network and editor of ‘For Richer, For Poorer'. TASC is a Think Tank for Action on Social Change.