Benjamin Franklin said there were only two things certain in life, death and taxes. In Ireland, a third certainty has also prevailed for some time, namely the ability of our social insurance system to cater for the needs of its dependants. The system works on the basis that the number of those paying in to the system is enough to fund the payments to those drawing the related benefits. However, in the decades to come this delicate balance is expected to come under pressure. What then will happen if the demands on the social insurance fund can no longer be met by those making the contributions? Is this heretofore certainty about to come under threat?
This anticipated shift in balance is due to a combination of factors, including the (welcome) fact that people are living longer and the reduction in the number of our young adult population in relation to those of pension age. As a result of this change in the country’s demographic, the Department of Social Protection has reported that the ratio of those of working age compared to those of pension age (which currently stands at over 5:1) will decrease to around 2:1 in 2060.
Therefore, as the gap between the number of current contributors and past contributors begins to narrow, the strain on the social fund will begin to increase until it reaches a point when current contribution levels are no longer adequate to meet its requirements. So at some stage the funding gap will have to be addressed, be it through an increase in PRSI charges at that time or through cuts in expenditure elsewhere. What also cannot be ruled out is a reduction in the state pension to reduce the demand on the social fund.
The gradual increase of the retirement age to 68 will alleviate somewhat the burden in the future. However, this on its own will not be enough to fix the shortfall. As a result the future remains uncertain.
Those currently in and about to come in to the workplace can manage this uncertainty by making allowances for their future by contributing to a supplementary pension scheme. This will provide comfort in knowing that their retirement needs are being prepared for while also reducing reliance on the state pension. In addition, contributing to a pension represents one of the most effective and widely available forms of tax relief.
Despite the benefits of doing so, it is estimated that currently only 40% of Irish private sector workers contribute to a supplementary pension scheme. This can be put down a mixture of affordability, apathy and an understanding of what the options available are.
In recognition of this low participation rate, in April of this year the Tánaiste and Minister for Social Protection, Joan Burton, appointed the Universal Retirement Savings Group (URSG) to advise her on the most appropriate measures to widen pension coverage. The body is expected to report by the end of this year at which stage proposals will be put before the Government for their consideration.
While the Government’s intent to widen pension coverage is to be welcomed, until such stage as these proposals are enacted we do not know how successful they will be. In any event and whatever these proposals may be, it is now and will remain in the future each individual’s ultimate responsibility to manage their own pension arrangements and ensure its adequateness for their retirement. The state pension alone may not be enough.
It is never too early to plan for your future.
HC Financial Advisers…we advise