The saying that politicians think about the next election while leaders think about the next generation is attributed to various people. But one thing is certain: Europe today has a multitude of mediocre politicians and hardly any leaders. The looming pensions time bomb will spell misery to millions of people who will be retiring in the next two or three decades.
An ageing population is worsening the dependency ratio while the influx of migrants who are not being integrated fast enough in the labour market will not resolve the pensions crunch which in some ways is already acute. One country that is trying to address this serious issue is Ireland.
Like other European countries, Ireland has had some false starts in its effort to reform pension. This situation is about to change.
I admire the down-to-earth approach the Irish government is adopting. They acknowledge they will not have a perfect system overnight following announced reforms, but having a system that is “good enough” is actually more than most countries are prepared to have.
A sustainable retirement system with feasible dependency ratios requires that workers save more and retire later. This axiom is political dynamite. I am not surprised that various EU leaders have shied away from risking electoral unpopularity by imposing mandatory savings and linking retirement age to longevity. No one volunteers to catch a falling knife.
In a document published last February entitled Roadmap to Pensions Reform, the Irish government set out necessary measures to improve financial security for those retiring in the coming decades. These measures include a flexible retirement age as well as automatic enrolment to retirement savings schemes. Only 35 per cent of Irish private sector workers benefit from occupational pension schemes. Less than half of all workers have an occupational pension to supplement their State pension. This statistic is not good enough to avert a pensions crunch in a decade or two.
No one volunteers to catch a falling knife
Irish policymakers dared to learn from the lessons of other countries like Australia that tackled the pensions dilemma far more successfully than most EU countries. Britain too is trying to get to grips with this challenge. Since 2012, 10 million UK workers have been automatically enrolled in defined contribution workplace pensions schemes. Experience has shown that only 10 per cent have since opted out.
A relatively small proportion of younger generations have an understanding of how financial investment works. Even fewer know how their investment decisions will impact on their future financial security. Many invest in homes that are highly, if not excessively, specified in the belief that this will serve as their pensions pot when it is time for them to retire. Downsizing one’s living accommodation does not come without financial and psychological shocks as the equity in houses is often insufficient to guarantee a comfortable retirement.
It therefore makes sense for the Irish government to introduce auto-enrolment of workers in occupational pensions on a phased basis from 2022. The proposed scheme will see workers contributing six per cent of their wages, with the amount matched by employers. The State will add €1 euro for every €3 paid in by workers.
Increasing longevity is unfortunately often linked to higher morbidity in later years. The cost and scarce availability of affordable care homes for the elderly will see millions of people struggling in silence to keep their dignity intact in the final phase of their life. Children will continue to knock on the doors of their parents for financial help to buy their homes or to send their children to private schools. The public health system, even where it is free, will come under strain as budgets are tightened.
The present culture of borrowing and spending to enhance the current quality of life is unlikely to rescue many of today’s younger people from financial hardship when they are on the threshold of retirement.
Governments that are not prepared to bite the bullet of sensible pensions reform should at least educate people to save more and cater for their financial independence in old age. They should also protect savers from the abusive practices of those who offer high-risk solutions with promises that they can ‘guarantee’ extraordinary returns in a short time. The sobering reality is that sound saving takes many years to improve one’s financial position in any discernible way.
One can only hope that the European Parliament elections in 2019 will usher in a new generation of political leaders who will tackle the pensions crunch much more decisively.