Pensions

No escaping hard choices to defuse pensions time bomb


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It is generally understood that Ireland’s population is ageing. Longer life expectancy is, of course, a good thing and should be celebrated. However, it does lead to some challenges.

As a result of increases in life expectancy and reductions in the birth rate, the ratio of younger people to older people is shifting.

Probably the challenge of population ageing which is discussed most often relates to the so-called ‘pensions time bomb’.

With relatively larger numbers of retirees and relatively fewer people of working age, funding pressures will arise for pay-as-you-go pensions systems.

This includes Ireland’s contributory and non-contributory systems.

In very simple terms, there will be fewer workers to support the larger number of pensioners.

There are a number of possible ways to solve the funding difficulty.

We could impose higher taxes or we could reduce pension rates.

Clearly, neither is very appealing.

Another route to solving the pension funding issue is to extend working lives. This potentially helps the situation in two ways.

First, if people delay the point at which they receive pensions, there is a saving. Second, by remaining in the workforce, older people help to increase GDP and so pensions as a proportion of national income become more sustainable.

In a recent paper, my Economic and Social Research Institute (ESRI) colleague Dr Karina Doorley showed that much of the projected increases in the costs of pensions could be offset if retirement ages were increased by five years.

Dr Doorley and the ESRI were widely misquoted as “recommending” that the retirement age be increased.

The paper did not include this recommendation but only sought to quantify the impact of such a policy change.

There was a lot of negative reaction to the idea of increasing retirement ages, which is understandable.

However, we cannot escape the fact that population ageing will put pressure on our public pensions system.

On the assumption that increases in taxation or reductions in pensions rates would not be popular either, it is important to explore the various options, including extending working lives.

In what follows, I will explore some issues but before doing so let me be clear on some points.

I am not saying that people should be compelled to work longer.

The point here is that people who might want to work longer should (a) be allowed to do so and (b) facilitated.

Also, I am not saying that there should be a ‘one size fits all’ approach.

Clearly, working longer will not be possible in some physically demanding jobs.

Returning to my theme, let me pose a question: what is it about 65/66 that we now see this as being the standard age for retirement?

Somewhere along the way, the mid-sixties seem to have become the default ages for retirement.

A leading writer on this topic, Professor Axel Borsch-Supan, has argued that this standard retirement age is based on a number of myths.

It is useful to outline some of these.

According to Borsch-Supan, retirement in the mid-sixties may be based in part on the idea that declines in health status begin to impact on the capacity to work. However, in the modern age this is often untrue.

We are living longer due partly to improved health and the health status of many sixty-somethings is, thankfully, excellent.

In addition to health declines, Borsch-Supan also suggests that there is an assumption of productivity declines among older workers.

With the obvious exception of physically demanding jobs, there is little evidence across many occupations of lower productivity rates among older workers.

Another myth which Borsch-Supan refers to is the idea that we need people to retire in order to free up employment slots for younger people.

A similar argument was made in Ireland for many years to justify the exclusion of married women from many jobs.

We have come to understand that the most successful economies operate by facilitating increased employment generally and not by excluding groups.

We also understand that diversity in the workplace – across ages, genders, nationalities, etc – tends to increase productivity and creativity.

The fourth of Borsch-Supan’s myths is a bit more controversial.

He says that people often assume that retirement will be “bliss”, but there is increasing evidence to say that this might not always be the case.

Work undoubtedly involves pressures and headaches. However, work can also bring social connections and feelings of worth.

Economists and others have become increasingly interested in the question of whether retirement poses challenges for people through the loss of these positive dimensions of work.

We are fortunate in Ireland in having excellent data that allow us to study retirement-related issues.

Through the Irish Longitudinal Study on Ageing (Tilda) led by Professor Rose-Anne Kenny at Trinity College Dublin, we are tracking over 8,000 people who were aged 50 and over in 2010.

Using these data, Dr Irene Mosca and I have been comparing people who retire with those who remain in employment. Specifically, we look to see if the retirees see positive changes in their mental health compared to those who remain in work.

We don’t find this to be the case.

If anything, the people who remain in work appear to maintain better mental health.

These findings support Borsch-Supan’s idea that retirement being bliss may be a myth, at least for some.

Other research using the TILDA data sheds further light on the effect of working later in life.

We found that an older person who remained in work was happier if other older people in their area were also at work.

One implication of this research finding is that an increase in the prevalence of extended working lives could lead to a greater acceptance by others of delaying retirement.

Population ageing will lead to funding pressures on pensions. None of the proposed solutions – increased contributions, reduced payments or delayed retirement – will appeal to a broad spectrum of opinion or be politically popular.

However, we still need to find a solution.

If the evidence grows on the possible benefits of extended working lives, it seems to me that we should, at a minimum, explore how best to facilitate those who share the view that retirement may not be all bliss.

Prof Alan Barrett is Director of the Economic and Social Research Institute

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