The New Fiscal Enemy Within: The Elderly

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“Old people don’t need companionship. They need to be isolated and studied so that it can be determined what nutrients they have that might be extracted for our personal use.”

– Homer Simpson

The Irish Times published the highlights of a paper produced by the Department of Public Expenditure and Reform (DEPR) purporting to show the latest crisis awaiting us – the crisis of unsustainable public pensions.  DEPR produced some numbers:

  • The number of people aged 65 and over is projected to increase from 570,000 in 2013 to 855,000 in 2026.
  • Spending on the contributory and non-contributory State pension schemes already account for €4.93 billion, or 25 per cent, of the total cost of social protection services.
  • The State could have to provide annual increases in funding of nearly €200 million up to 2026 just to keep pace with the growing elderly demographic.  This means a 50 percent increase in spending on state pensions by 2026

These look like truly scarifying numbers – 50 percent increase in the number of pensioners and 50 percent increase in pension costs.   No wonder the newspaper headline read:

‘Cuts to state pensions “must be considered”

What can we do, short of setting up a kind of Hunger Game for the elderly?  Thankfully, DEPR has some ideas:

  • Cut the weekly pension by €8.50 per week
  • Scrap the €10 weekly top-up for people over the age of 80
  • Bring forward the scheduled dates for raising State pension eligibility
  • Abolish the free TV licence.
  • Means test fuel allowance for new recipients of the Department of Social Protection’s household package of benefits.
  • Abolish free travel passes for spouses and companions of the elderly

Or we could take another route:  increase PRSI contributions and/or cut back on expenditure in other areas (health, education, etc.).  Thankfully, DEPR is on top of things, laying out the painful but necessary reforms (i.e. cuts) necessary to sustain our public pension system.

What does all this add up to?  Rubbish.

Let’s go through these bogeyman numbers.  I will use DEPR’s own estimates – 50 percent increase in pension costs by 2026.  Up to 2018, the Government assumes a nominal GDP growth of 5.1 percent.  After that, I use two scenarios: nominal growth rates of a moderate 4.5 percent and a low 3 percent respectively. What do we find?

 

1Wow.  Under DEPR estimates, the costs of pensions actually fall – as a percentage of GDP.  Under a moderate growth scenario, the cost of contributory and non-contributory pensions would actually fall – from 2.8 percent of GDP in 2013 to 2.3 percent of GDP by 2026.  Even under a low growth scenario, pension costs fall – to 2.5 percent of GDP.  So the headline in the Irish Times should have read:

‘Cuts to state pensions not necessary, overall costs to fall over the next decade’

While that would have been more accurate, it wouldn’t have been as sexy – and those recommended cuts to deal with a non-existent crisis would have been redundant.  There would be no reason to call in Homer Simpson.

We can look at this another way.  The DEPR paper estimates that pension expenditure will rise by €200 million each year over the next 13 years.  You might say, hmmm, that means we will have to find €200 million in savings – that is, cuts – to keep our elderly in the lap of luxury they are accustomed to (of course, you’d have to forget that one-in-eight elderly suffer multiple deprivation experiences).  But is this so?

Between 2015 and 2018, tax revenue is estimated (by the Government) to rise by €7.5 billion.  That’s without any provision for tax increases or tax cuts.  That is the estimate revenue increase on foot of a growing economy.  That’s a growth of €2.5 billion each year.  Compare that to DEPR’s estimated rise of €200 million each year in pension costs.

If we assume that tax revenue stays constant at 29 percent of GDP up to 2026 (this is really ultra-low tax rate territory), then revenue will rise by €35.3 billion over that period.  Compare that to DEPR’s estimated pension cost rise of €2.5 billion over that same period.  And even this latter is not a cost since a significant proportion of that expenditure will return to the state in the form of tax revenue, with the expenditure creating more jobs and increasing business turnover.

But this is really strange:  if DEPR wanted to scare us, they delivered us an old Hammer horror rather than an Exorcist or Nightmare on Elm Street.  In their estimate of increased pension costs they didn’t factor in pension payment increases.  It assumes that pension payments would be the same in 2026 as it is today.  This is not politically feasible (it would constitute a huge real cut in pensions – after inflation).  If they had even factored in a modest one percent annual increase from 2016 on, the cost of pensions would rise further; though it still wouldn’t reach the 2013 level as a percentage of GDP.

Further, even without pension payments increases, the cost will rise since a higher proportion of retirees are eligible for contributory pensions, which pays more than non-contributory (which is means-tests).  DEPR didn’t factor this in.

So DEPR can’t even scare us properly.

Any way you look at it the DEPR paper, on its own numbers, is manufacturing a crisis.  Why?  There is an ideological agenda to push people away from saving for retirement through the social insurance system (PRSI) and into saving through private pensions.  This will, of course, transfer income risk to individuals (private pensions relying on the vagaries of the equity, bond and property markets) with no guarantee of a defined income.  It would further relieve employers from making higher contributions through the social insurance system.  And it would allow the government to step back from its role as guarantor of adequate retirement income and living standards.

This is not how it has to be.  We badly need pension reform – one that guarantees a dignified standard of living in retirement.  But we need far better estimates of the likely cost of our future pension system and the impact of any reforms.  We need a full debate on all options –upsides and downsides.

But in the short-term we have two options.  We can start probing and poking the elderly to see just what nutrients we can find.  Or we can do something far more effective.

Buy DEPR a calculator.

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