Its time for some long term thinking

Article by Brian Hayes MEP published in the Sunday Business Post, 5th April 2015

This week the ESRI said that we actually could have a budget surplus within two years. They raised the prospect that the economy might be overheating. Putting money aside for future pensions is a good way to take the heat out of the economy. When you have it; save it for the rainy day. Or at least that’s what Charlie McCreevy correctly did when he saw the economy overheating.

Pension policy is always the problem for the next government in Ireland. Irish politics is not good at doing the long term. Unfortunately our horizons are pretty much short term, as political parties vie against each other from one election date to another. That´s especially so when it comes to pension policy and the need to make adequate provision for the enormous liability that is fast coming down the tracks. The good news is that we are all living longer. The problem is paying for it. So a few solutions are needed and quickly.

If ever there was an issue where some all-party agreement could be forged it’s surely in the area of pensions. Would it be possible for our political parties to come to some agreement on what´s needed in the area of adequate pension cover, while going to war about everything else? We need to and the sooner it happens the better.

Recently Brendan Howlin announced the establishment of an open forum to consider pay, tax and overall public expenditure. As the economy returns to growth and government revenues increase a wider range of choices become available. But will we do the right thing?

Obviously improved public expenditure is dependent upon a competitive economy with improving growth and job creation rates. I expect the Spring Statement to set out the broad economic parameters; the choices, the challenges and the opportunities. But I hope that the Howlin Forum being proposed will address the issue of Ireland’s pension problem from the wider perspective of future public expenditure needs.

For the last seven years this country has been in firefighting mode. As we move into recovery mode we need to raise our heads and plan for the future. Providing for future pensions, both public sector and the ordinary state pension, must be an important part of the national debate. That’s the central message of the ERSI this week.

One of the most important documents published in recent years was a study published in April 2014 called; Population and Labour Force Projections 2016 -2046. The study has been forgotten by almost everybody, but it contained some figures which should be a wakeup call to us all. Currently in Ireland there are approximately 600,000 people over the age of 65. In thirty years that figure will be close to 1.5 million, an increase of 150%.  These figures have huge implications for health, social welfare and pension policies. They are also compelling arguments to encourage us to pursue sound fiscal and economic policies. Most pensioners can reasonably anticipate 20 to 30 years of retirement. Most retirees will depend on the state for their pensions. Steady economic growth and careful husbandry of the fruits of such growth will be needed to fund future health and pension requirements.

Charlie McCreevy deserves great credit in establishing the National Pension Reserve Fund fifteen years ago. Unfortunately when the economic crisis took hold contributions to the Pension Fund were suspended and later the Fund itself was raided to shore up national finances. Without the NPRF the crises would have been even more difficult. We were lucky it was in place.

Providing for future pensions should be a central element of the government’s economic and social forum. Some basic facts to consider include the following. In 2014 public sector pensions cost €3.4 billion, equivalent to 1.8% of GDP. By 2030 public sector pensions are estimated to consume 2.9% of GDP. Likewise the cost of providing for the state pension is also set to increase.  If life spans continue to increase pension costs will increase even further.

Under the original McCreevy proposal the equivalent of 1% of GDP was put aside each year. In retrospect I think that was probably too ambitious, particularly given the opaque nature of Irish GDP figures. Possibly a better measurement might be a certain percentage of annual government revenues?

It´s worth pointing out that the majority of what´s left in the NPRF, about 7.2billion, is now transferred to the Strategic Investment Fund, but the NPRF is still in place as a dedicated fund for future pension provision. Maybe it´s time to start paying into that fund again?  A modest investment of €250million  into the Fund in the 2016 budget, with a commitment to increase the amount year by year to perhaps 1.5% of government revenues by 2025?

Early figures indicate that government revenues for 2015 are going to be strong. However putting money aside for the rain day probably doesn’t fit into the current electoral cycle. But it should. If we could agree on an all-party basis in advance of the general election about resurrecting the National Pension Reserve Fund, at some point in the immediate future, it would really be a first for Irish politics.

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