Economic survey of Ireland 2008: Setting the pension system on the right track

 

Contents | Executive summary | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise chapter 5 of the Economic survey of Ireland published on 16 April 2008.

 

Contents                                                                                                                             

The pension system should be put on the right track

Ireland faces similar long-term fiscal sustainability pressures from ageing as other OECD countries; although its relatively young population today means that the problem is more distant, there is no room for complacency and it is important to act early so as to be able to deal with later pressures in a gradual way. It is well-placed to tackle these issues as taxation and government debt are low, some pre-funding of public pensions is being undertaken, and the sizeable investment programme will be scaled back well before ageing pressures peak. Yet, public spending on pensions is set to rise by more than 6 percentage points of gross domestic product (GDP) by 2050, more than in most other EU countries, while health and elderly care spending is also likely to rise rapidly. It is important to develop a long-term framework now to ensure the sustainability of public finances and adequate retirement incomes. Substantial increases in the effectively flat-rate state pension have reduced pensioner poverty. The current system will become unsustainable as the population ages, even with the resources in the National Pension Reserve Fund. This will eventually require substantial changes in the overall composition of public spending, in taxation or in the pension system. The standard retirement age should be indexed to longevity and an explicit target for the value of the state pension adopted. The current approach to up-rating public service pensions in payment should be reconsidered. Action should be taken to ensure that disability is not used as a route into effective early retirement and that those with some work capacity remain in the labour market. The recent Green Paper on Pensions has outlined options for reform. This should be used as an opportunity to implement a coherent package of measures that would put the system on the right track for the long term.

 

Old-age dependency will eventually match other OECD countries
Population aged over 65 relative to working-age population

Note:  The shaded area indicates the interquartile range of OECD countries.
Source: OECD, Demographic and Labour Force Statistics databases.

 

Despite increases in the pension level, there is still a large gap for most people between the state pension and an adequate replacement income in retirement. Private pension provision is therefore very important. Many people have good private coverage, particularly through employer defined-benefit (DB) schemes, but there is a substantial group without adequate private coverage. The current tax incentives to encourage private pensions are very costly and poorly targeted. These incentives should be reduced and better targeted. A system of capped matching payments, for instance, would be more effective. Alternatively, some degree of compulsion could be considered to raise pension saving, for instance by moving from “opt in” to “opt out” private pensions. If this approach does not succeed in raising pension saving, a fully compulsory scheme may become necessary. The private pension system should be made more efficient. Improvements to the funding standard for DB company pension schemes should be considered. The current emphasis on a “wind-up” test, that requires schemes to be able to buy annuities if the scheme were to close immediately, does not adequately reflect the future funding needs of pension funds and may encourage investment in low-yielding assets.

 

How to obtain this publication                                                                                   

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Ireland 2008 is available from:

 

Additional information                                                                                                  

 

For further information please contact the Ireland Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Sebastian Barnes and David Rae under the supervision of Peter Hoeller. Research assistance was provided by Isabelle Duong.

 

 

 

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