The government can’t linger on every pension decision it has

This is good news in a very uncertain world.

Tánaiste Leo Varadkar said any surplus should be split between funding specific measures and setting aside a fund for bad times. We previously had two of these funds. One was called the National Pension Reserve Fund and the other was simply called the Rainy Day Fund.

Unfortunately, it rained pretty heavily on both. The NPRF built over 21 billion euros in value when the financial crash hit. The Rainy Day Fund had about €1.5 billion in it when Covid hit.

Each new rainy day fund would likely only cover the next big virus likely to emerge in the years to come. In the meantime, we have what the OECD called last year a fiscal time bomb coming in terms of pension funding.

Higher pay in the public sector brings with it longer-term funding problems to pay these pensions.

We are one of only two countries in the OECD that do not have some form of automatic enrollment or similar pension scheme for private sector workers. This leaves us hopelessly underserved when it comes to paying state pensions and future living standards for an aging population.

Without such a system, people will depend on the state pension system. State pensions are paid out of the Social Security Fund, which is collected from PRSI payments each year.

Instead of having its own investment fund for state pensions in the future, the money will be paid out of a fund that also pays pensioners’ utility bills and television licenses.

According to the annual report of the social insurance fund, it took in 12.2 billion euros in 2019. State pension payments this year totaled 7.1 billion euros. In the previous year it was 6.7 billion euros – an increase of 400 million euros in one year.

Auto registration is coming, we’re told. It has been debated for decades and the rough structure of a program was approved by Cabinet in March this year.

If fully operational, around 750,000 workers would be placed under a new occupational pension scheme. For every €3 an employee saves, an additional €4 is credited to their retirement savings account.

After all, the employees contribute 6 percent of the income. Your employers will contribute 6 percent and the state will contribute 2 percent.

But it’s not expected to start until 2024. It will introduce a phased contribution system that will not be fully implemented until 2034. That would take more than 16 years.

Auto-enrollment has been helpful elsewhere, for example in the UK, where 90 per cent of low earners have stayed in the system rather than opt out.

It will certainly be helpful here, too, to compensate for part of the dependency on the statutory pension in the future. But it remains a long way off.

Mr Varadkar commented last week that higher inflation could last for several years. It’s hard to imagine that at a time when the cost of living is still depressingly high, the introduction of an automatic enrollment system that will lower net pay in the short term is unimaginable.

Likewise, higher inflation leads to higher wage demands, so employers won’t be too happy trying to grant raises while paying into new employee pension schemes.

The program will also mark a big payday for private pension fund managers, although it would certainly have been better off handing it over to someone like the NTMA.

Successive governments have continued to bury their heads in the sand when it comes to funding future pension needs. The Tax Commission’s report, due to be released later this year, is said to call for higher property taxes, congestion fees and the introduction of a location tax to plug some of the revenue shortfalls that factors like an aging population will create in years to come.

Taoiseach Micheál Martin again played a short-term game last week by repeating his pledge that the state pension would be paid from age 66, rather than the age of 67 as previously recommended.

In the meantime, we will continue to fund state pensions from Social Security. KPMG already estimated in 2017 that the present value of future projected shortfalls in state pensions by 2070 would be €335 billion.

At that time, social security had a surplus of 400 million euros. In 2019, this surplus amounted to 3.8 billion euros. The fund primarily takes money from PRSI and pays most of it back to state pensions and various social benefits.

While the excess goes into an investment account maintained by the NTMA, funds are also withdrawn from this account on a regular basis. Imagine funding an entire nation’s pensions from annual earnings and not saving large sums to benefit from investment returns and fund future needs.

Most surprising is the fact that this plan will not change. Auto-enrollment will provide workers with a private savings scheme, but we will still need a state pension and there are no real plans to develop an adequate structure to fund this over 30 or 50 years.

The government is once again talking about a rainy day fund. A gigantic deficit in funding future pensions could be one of the biggest rainy days ever.