National Pension Reform

It has long been acknowledged that Ireland, like many of its E.U. counterparts, is struggling with a national pension crisis. 2010 has seen dramatic moves by the Irish government to address the problem of increasing projected ratios of retired to employed citizens in a ‘Pay As You Go’ system. Below, I identify the steps taken and possible alternative measures that may be implemented to solve the problem of the Irish ‘Pensions Time Bomb’. Comments, criticism and questions are extremely welcome.

This year plans were introduced to alter the national retirement age from its curent age level of 65. Under the plans, the State pension age will rise to 66 in 2014, to 67 in 2021 and finally to 68 in 18 years time. In essence this directly tackles the issue of the ratio of number of employed citizens who are contributing to the pension fund against those who are retired and are withdrawing from the fund. This solution has many benefits which include being relatively easy to implement as current pension structures can remain in place. The consequences of this action are also direct which is hugely advantageous over many of the alternatives discussed below which may only imply the possibility of a solution. It is my opinion that this solution represents a ‘quick fix’ and the huge disadvantage of this decision –a population working two years more- is significant and should be fully explored. The obvious point here is that the decision to raise the national retirement age is grossly politically unpopular. When the French government raised the national retirement age from 60 to 62 there were riots on the streets, in Ireland it seems that although the decision was unpopular it appears that Irish Society values years spent retired significantly less than the French, making the decision to raise the national retirement age much more acceptable.

It should be noted it would be equally convenient to cut current pension levels to a more sustainable level or equivalently to freeze pensions nominally and let the effects of inflation counter the shortfall in outflow of pension payments. The political effects of this alternative are certainly long term as William T. Cosgrove’s decision to cut the old age pension in 1924 from ten shillings to nine shillings a week, still negatively imposes on Fianna Gael’s election campaigns. For these reasons it is extremely unlikely to be introduced by any government.

More importantly than any of the above points with respect to political popularity is the overall consequence to society. To give this analysis an actuarial context we must consider the wider duty of care to society when giving any actuarial advice. Both the effects of a citizen working two years more than previously planned or reducing a pensioners spending power certainly have negative impacts on society as a whole. An actuary must consider these negative impacts even if they do not directly affect the client the actuary is advising. Ultimately if the costs the society as a whole are too great it may be decided to simply continue with the current pension system despite the financial strain and make cuts elsewhere in public expenditure.

We could of course engage in a higher degree of means testing thereby paying the pension to those who need it most but neglecting those who are wealthy enough to do without it. I am strongly against this idea as I believe it discourages saving and self provision of a private pension as those who have done so are penalised in later life by not receiving the state pension. Other indirect solutions include lowering future state pensions to a more manageable rate and then incentivising citizens to provide for themselves but due to an exceptionally poor uptake of the PRSA schemes I have little confidence in a government’s ability to incentivise their population to save.

In my opinion the most beneficial solution to society and the state would be to make pension contributions compulsive to a scheme that is run by the state. The idea of nationalising all private pension funds is by no means a unique one. We need only look to Singapore’s Central Provident Fund to see how a compulsive state run scheme can be very successful. Under this system all public and private workers are legally obliged to contribute to a state run social savings plan which aims to provide working Singaporeans with a sense of security and confidence in their old age. The CPF has a long history of success since it’s inception in July 1955. There are obvious economies of scale from this scheme as many of the administration and marketing expenses associated with private schemes are removed. In my opinion the introduction of such a scheme in Ireland would greatly reduce many of the current problems without the costs to individuals in society. The introduction in the short term would see a windfall in capital to the state pension reserve fund when the pension contributions built up in private schemes transfer over to the state. Key to society’s confidence in this scheme is the prefunding of future pension payments. In the current ‘Pay As You Go’ scheme pensioners are at the mercy of government pension policy at the time of their retirement. I believe the success of such a scheme requires the replacement of the government’s social contract to pay pensions at an appropriate level with a financial contract that is legally contractible. We have seen how in the current Irish financial crisis that the pension reserves fund can be used at the discretion of the government for matters other than pension payments. A prefunded legal financial contract would ensure public confidence in the scheme and ensure that that the scheme would be successful independent of economic cycles. The benefit to society of a population not having to work longer and not seeing a reduction in real amounts of pensions appears to be unmatched by the costs of implementing such a wide scale operation. For this reason it is my opinion that it is the best placed solution to the current shortfalls in public pension policy.


The purpose of this article is to inspire thought and debate so please do not hesitate to leave a comment, criticism or question in relation to any relevant material.