Facing up to pension reform

By Vanessa Chanliau

Since 1980, the average age of the population of the developed world has been rising steadily. Life expectancy has gone up by four years since 1980 (when it was 70 years), and the age bracket that has increased the most is the over-85 bracket. According to the BBC, in Britain the over-65 population has nearly doubled since 1984. It has been projected that 5% of the population will be over 85 by the year 2031.

The result is an ageing population and a diminishing ratio of workers to pensioners. In addition to these demographic changes, the collapse of Lehman Brothers and the financial crisis, as well as the continued weakness of equities, have caused pension funds to record very poor returns in recent years. This undesirable situation has forced governments to step in and revise policy.

In order to prepare for the inevitable increase in pension funding that will be necessary in the coming years, the trend has been to encourage private savings for retirement. Last March, the Irish Government unveiled the framework for a new national pension plan. The plan encourages private saving for pensions by automatically enrolling all workers over the age of 22 in a pension plan.

According to the plan, unless employees opt out, workers now contribute 4% of their salary to a pension plan, with their employer and the Government each contributing 2%. The State expects to see Government expenditure on pension funds increase from the current 5.5% of GDP to 15.5% by 2050. Employers cannot opt out of the pension programme. The plan is not without its critics, nevertheless, with the Irish Business and Employers’ Confederation claiming that automatic enrolment will bring about demand for higher wages and a further erosion of competitiveness.

In the United Kingdom, where an austerity budget is currently being implemented, the Conservative Party’s policy of repeatedly slashing state pensions is also designed to encourage saving on the part of the employee. State pensions are a mere £86.05 per week for a single retiree, and £131.20 for a couple. It must be noted, however, that the UK stands alone in adopting this policy. In most other European nations, this means of resolving the pension crisis is seen as politically impossible.

While encouraging private saving, the trend has also been to raise the retirement age. By 2028 in Ireland, the age of qualification for the State pension will be 68 (up from 65 in 2010). France is aiming to raise its retirement age from 60 to 62. In the United Kingdom, the age will be raised from 60 for women and 65 for men to 65 for women and 67 for men. Similarly, the United States is increasing the age of full retirement from 65 to 67.

While most readers are far from a time when they must worry about their own pensions, the current pension crisis is a symptom of an ageing population. As long as more of the population is retiring than is coming into the workforce, there will be effects not only on pension schemes but also economic growth and savings.