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Longer, healthier lives are good news but how are we to fund them?

27/08/2020 Posted by IAPF | Comments(0)

'Timebomb' is a terrible phrase for something that should be celebrated. We're living longer, healthier lives. But this comes with implications for retirement age, healthcare and how to afford living longer in retirement.

The world has moved on from one where people started work straight from school, often staying with the same employer until they reached 65, and often dying within a few years of retirement. Today, most school leavers enter third-level education. Many take time to travel before their first job, and change jobs regularly. They might work part-time as they get older. They look forward to living 25 years or more after retiring.

But pensions policy hasn't adapted to this change and we are currently not anticipating how it might change in the future or how it can be financed. So why hasn't this changed?

In Ireland, we have been producing very detailed, well-researched analysis on this issue for the last 40 years. The recommendations are broadly similar and mostly haven't been implemented. That is because the solution often comes down to either increasing taxes and/or getting people to save more, and therefore live on less. Unpopular choices.

Consensus is that people find pensions complicated and boring. Yet, at the last election, it was identified as the third most-important issue to voters. Pensions are unnecessarily complicated with a plethora of jargon, rules and regulations, but the basic concept is straightforward. It is putting aside money while earning to live on when you are no longer earning.

Our pensions system is similar to many others throughout the world with a combination of a State pension, employment-related pensions and private savings. Our State pension is designed to keep people out of poverty. benchmarked at 34pc of average industrial earnings. It is paid from age 66. This was due to rise to age 67 in January, but Government deferred the increase and proposed a commission to look at retirement age.

When we pay PRSI contributions, they are not invested but are used to pay pensions and other benefits. When the economy is strong, PRSI contributions are generally more than benefits being paid out. The opposite is true in recessions. In an ageing population fewer working-age people will pay in and more people will receive pensions. That is unsustainable. The actions of governments throughout the world have generally been to reduce their state pensions by lowering benefits, lower increases in payment and raising retirement ages.

Having additional retirement savings is largely voluntary. There is no obligation on employers to provide pensions. That said, the reason most people end up with a pension is that they work for an employer who had a pension scheme in place. This is much more likely if you work in the public sector, financial services, large tech companies or larger employers in general. Employees benefit from not having to research and start a pension themselves as well having their employer pay towards their retirement. Government pitches in by not taxing the income set aside into pensions until they actually receive it.

Only about half of the workforce have private pensions and that is one of the biggest problems facing us. Government is planning to make all employers provide pensions for their employees with a combination of contributions from the employees, employers and Government.

To deal with the 'timebomb' the Government needs to ensure this happens. The most recent analysis of the Irish pensions system culminated in the publication of the Pensions Roadmap in 2018. It set out a comprehensive pathway to addressing the issues. It is important the action points set out in this are seen through and implemented. The proposed commission on retirement age should look at this is in a holistic way and in a fair way: improvements in life expectancy don't apply to all people in the same way. Not everyone will be able to keep working for longer.

We have profoundly changed the way we work in a short space of time as a result of Covid-19. We now need to consider how we can change the way we finish work and make Ireland a great place to retire.

Read the original article here

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