Economics of Policy Issues EC3060 Spring 2018

Transcription

1 Economics of Policy Issues EC3060 Spring 2018 Case Study: Irish Pension System and Challenges Michael King 1

2 Additional Readings Supplementary National Pensions Framework (2010) pdf OECD Review of Irish Pension System 2

3 Case Study: The Pension Crisis How will your generation solve the looming pension crisis? How will you vote? Short Video: Elderly Fuel Povertyhttps:// MExFs

4 Elderly Poverty in Ireland (2011) Elderly poverty in Ireland did fall significantly in the boom years greater social expenditure. Elderly poverty in Ireland is real. In 2011: 10% suffer from low incomes 11% suffer from deprivation 19% suffer from low incomes or deprivation. 4

5 Future: The Perfect Storm 1. The greying of Ireland Increased life expectancy Lower birth rates 2. Cost of elderly care Increasing medical costs Increasing costs of old age care 3. Failure of private pension provision Insufficient pension coverage Lack of private savings Increased old age dependency rate α 5

6 1. The greying of Ireland Increased life expectancy Lower birth rates Increased old age dependency rate α nr a æ ö = ç ènw ø The number of people in the retired generation = n R The number of people working = n W This dependency rate excludes children 6

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8 Old Age Dependency Rates 8

9 2. Cost of elderly care Increasing medical costs Increasing costs of care 9

10 3. Failure of private provision Insufficient pensions coverage 10

11 Long term fiscal implications Note: By OECD standards Ireland already has a low minimum government pension rate but it will be costly to maintain. 11

12 The Battle of the Generations: What will you vote for? What will you vote for: 1. Increase significantly taxes on working age population (to maintain state pension or massively subsidise private savings) 2. Reduce significantly other expenditure: social expenditure (health, education) or expenditure on infrastructure 3. Reduce significantly state pension 4. Increase significantly eligibility age 5. Combinations of the four. 12

13 How long will you live? rl/calcform.html Results Life Expectancy: years Lower Quartile: years (75% chance you will live longer) Upper Quartile: years (25% chance you will live longer) Resources Needed 20 30,000 p.a. = 600,000 Only have 30 years to raise this assuming minimal growth need to save approx. 18,000 per year. 13

14 How long will you live? rl/calcform.html Results Life Expectancy: years (RIP: April 2065) Lower Quartile: years (75% chance you will live longer) Upper Quartile: years (25% chance you will live longer) Resources Needed 20 30,000 p.a. = 600,000 Only have 30 years to raise this assuming minimal growth need to save approx. 18,000 per year. 14

15 How long will you live? rl/calcform.html Results Life Expectancy: years (RIP: April 2065) Lower Quartile: years (75% chance you will live longer) Upper Quartile: years (25% chance you will live longer) Resources Needed 20 30,000 p.a. = 600,000 Only have 30 years to raise this assuming minimal growth need to save approx. 18,000 per year. ØConsider how you will provide for you golden years early and often! The Life Cycle Hypothesis! 15

16 Irish Pension System Overview: The Three Pillars Pillar I: Flat rate partly funded PAYG system In per week represents Pillar II: voluntary private pension system - Occupational and private schemes ½ the workforce 72bn in Pillar III: Non-pension wealth earnings, investment income etc Unequally distributed 70% of net personal sector wealth in UK 16

17 2015 State Pension Rates 17

18 Pillar 1 Income Replacement Rates 18

19 Summary of Irish System Pillar 1 comprises of two parts a basic minimum safety net based on needs assessment a contributory pension, where value is linked to the level of PSRI paid Pillar 1 pensions provide low income replacement rates - defining characteristic of the Irish system 19

20 Pillar 2: Private Pensions At the end of 2005, only 52.6% of the labour force possessed private pensions. considerably below the target set out in the 1998 NPPI report of 70%. Projections of the coverage rate indicate that without policy action the private pension coverage rate will only rise from 52.6% in 2006 to 54.5% in Favorable tax arrangements to encourage the growth of the private voluntary pension system. Tax reliefs are currently available on: employers and employees contributions on the investment income the capital gains of the funds lump sum on retirement 20

21 Failure of private provision Lack of private savings Replacement Rate of 0.5: There is also widespread pension savings insufficiency with an estimated shortfall of 3,300 per annum per worker (2004). 21

22 Evolution of retirement age 22

23 Summary of Challenges 23

24 Irish Pensions Framework 2010: Highlights Seek to maintain the value of the State Pension at 35 per cent of average weekly earnings. Apply credits rather than disregards to homemakers and backdate these to 1994 for new pensioners from Introduce a standard age of 66 for the State Pension from 2014 and gradually increase state pension age to 68 by

25 Irish Pensions Framework 2010: Highlights Proposed new auto-enrolment system private pensions scheme are as follows: Employees (aged 22 or over) will be automatically enrolled unless they are a member of their employer s scheme (which provides higher contribution levels or is a DB scheme). Employees will be required to make a fixed percentage contribution. There will be a State contribution equal to 33 per cent tax relief and employer contributions to match the State contribution. Once-off bonus payment for people who remain in the scheme for more than five years continuously. Current tax relief for contributions to existing occupational and personal pension arrangements will be replaced by a State contribution equal to 33 per cent tax relief. 25

26 Budget 2011: Private Pensions 1. Private pension contributions will no longer be able to claim relief from Pay Related Social Insurance (PRSI) and the universal social charge. (Savings = 150 million in a full year) 2. Signaled further reductions in the tax relief on private pensions. 3. In 2015 q q There is a limit on the earnings that may be taken into account. The limit is 115,000. The older you are the amount of your earnings that qualify for tax relief increases. 26