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Thursday 14 December 2017

Dan White: Why most of us are going to have to work up to 10 years longer

Today, Bank of Ireland will tell its staff that it is considering raising the company's retirement age from 65 to 68 in an effort to plug a €1.5bn hole in its pension fund.

Tomorrow, the Government publishes its National Pensions Framework document which is expected to examine the merits of raising the State pension age.

So why the sudden urge to raise the retirement age?

The main reason is that most of us are living longer. An Irish male born as recently as 1966 could have expected to live for 68.6 years, while an Irish female born in that year would have had a life expectancy of 72.9 years at birth.

By comparison, a male born in 2006 can expect to live for 78.6 years, while a female born in 2006 can expect to live 81.6 years. In other words, Irish male life expectancy has risen by 10 years, and female life expectancy by almost nine years in the space of just four decades.

Average life expectancy is almost certainly going to continue rising, with recent research concluding that up to half of all baby girls now being born can expect to reach their 100th birthdays.

Increased life expectancy makes the traditional retirement age of 65 almost impossible to sustain. When Britain introduced a universal, ie. non-contributory, state pension in the early 1950s, only two-thirds of all men lived to retirement to age. Those men who did reach their 65th birthdays drew their pensions for an average of seven years.

Now 90pc of British males live to retirement age and they draw their pension for an average of 17 years.

At the same time as life expectancy is soaring, birth rates are falling.

This means that the number of people of working age supporting every pensioner is going to fall rapidly. Ireland is no exception. We currently have four-and-a-half people of working age for every person over 65. By mid-century, we will have just over two people of working age for every pensioner.

The rapid increase in the number of over-65s will expose state pension schemes for what they really are -- inter-generational Ponzi schemes.

People of working age contribute the taxes necessary to pay the pensions of the current generation of pensioners in the expectation that, when their turn comes, their children will pay for their pensions.

Ain't going to happen.

Traditional pay-as-you-go state pension systems only work if a rising population ensures that the proportion of pensioners being supported by the working age population doesn't rise above intolerable levels.

Unfortunately, with the populations of many European countries now falling, something that is also likely to happen in this country as the recession deepens, the number of young people of working age will decline sharply at the same time as the number of over-65s is rising exponentially.

This looming crunch will force us to completely rethink pensions.

When the original State-supported contributory pensions were introduced a century ago, the idea was to provide an income to people who, after a lifetime's toil, were no longer physically capable of earning a living.

The notion that the State would pay huge sums to people who were still healthy enough to work would have been regarded as absurd.

We need to go back to first principles on pensions.

It is a hallmark of any civilised society that those who are no longer able to earn a living are supported by the state. However, with modern health care most of us will be physically capable of holding down a job well into our 70s.

This means that if we want decent pensions in our old age, most of us are going to have to put off retirement for at least 10 years.

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