We received quite a number of comments after the article in our last newsletter about Ireland’s future €440bn state pension issue. A number of our readers were shocked about the size of the problem facing the country.
They were also shocked that this problem is not being faced up to at all by politicians of any hue; it really is an enormous can being kicked down the road to be dealt with by future generations. And this begs one big question – are our expectations of what the state provides (or should provide) too high in comparison to other countries?
So we’ve examined this issue from two different perspectives before drawing some conclusions. First of all we look at some figures that were released at the end of 2015 by McKinsey that compared “pensioner poverty” levels in different countries. The second perspective is how much we have to pay while we’re working, to actually qualify for a state pension.
Poor pensioners or golden oldies?
How do the over 65’s in Ireland compare to other countries? A measure that is used to compare the wealth of pensioners in different countries is to look at the percentage of over 65’s who have an income that is below half of the national median household income. These people are considered to be living in pensioner poverty.
This research found that on average 12.6% of pensioners in OECD countries are living in income poverty. The graph below shows that the Netherlands is the best place to be a pensioner – only 2% of their pensioners live in income poverty. At the other end of the scale, you don’t want to be retired in South Korea, where half of all pensioners live in poverty.
Ireland fares pretty well on this measure, with less that 7% of pensioners living in income poverty, placing us as a strong performer. This is far better than the UK at over 13%, and a good number of our European partners.
But of course this begs the question; with a €440bn future liability, how can we afford to be performing so well here?
But what’s the cost?
This is maybe where reality bites a little… We also looked at OECD figures that show how many years you have to contribute towards your state pension (through PRSI in Ireland) in order to qualify for the maximum available state pension. And guess what? Ireland is top of the charts here – with workers having to contribute an average of 48 contributions per year for 43 years to qualify for the maximum state entitlement! In the UK, you have to contribute for 35 years, in Australia for 10 years only.
Now it has to be said that the pension amounts in Ireland are actually quite generous. Currently the state pension is €233.30 per week in Ireland as compared to the equivalent of €197 in the UK.
The question of course again is – can we afford these levels of old age pensions? The answer unfortunately is no.
In Ireland you also need a minimum of 10 year’s contributions to qualify for any contributory state pension at all. Of course if you don’t have this, you might qualify for a means tested old age pension.
So where does this leave us now?
Well with the huge future liability being faced by the state, we’re certainly not going to see any reduction in the number of years you need to contribute to PRSI, in order to get a full state pension. We can (or should?) also expect to see a reduction in the amount of state pension payable – Ireland just can’t afford to be near the top of the class here! But this will take lots of political courage…
What we are more likely to see is gradual, further increases in the qualifying age for the state pension and greater incentives to help people financially plan for their retirement themselves. This is likely to include an element of mandatory private pensions in the future.
We’re constantly tuned into this changing landscape on your behalf. We’ll monitor the impacts that any changes in state pensions will have on your own retirement plan, and will help you alter your plan accordingly. At the end of the day, our goal is the same as yours – to help you live the life you want to live when you retire.