Recently I helped a new client, of US citizenship, aged 28 and a full time worker in Ireland, set up a personal pension for herself. She wanted to make sure that her own retirement funding which she started in previous employments, also in Ireland, was continued. We chatted about pension funding in general and she was surprised that Irish people in their twenties didn’t treat it as seriously as she and her other American nationals do where it seemed to be the most sensible thing to do even when you have just started work. Indeed, it reminded me of my first job in an insurance company over three decades ago when, aged 17, my payslip had an automatic deduction for pension contributions. Nowadays, however, most employers aren’t as disciplined in showing leadership to employees in such matters.
On reflection afterwards, it struck me that we in Ireland had become so overcome by the effects of the Celtic Tiger that we have almost forgotten the basics. When the Tiger was rampant, “Good Time Charlie” syndrome existed – enjoy today, tomorrow will take care of itself. Retirement funding didn’t get a second thought unless, of course, you were aged 50 onwards. Post Tiger, only those that were disciplined with their retirement savings and investment strategy have anything of substance.
This week I read an article in an Australian newspaper on pension funding there and three main points stood out for me:
- It’s estimated that by 2030 only three working Australians will pay income tax for every retired person on the Age Pension. About 20 years ago, that ratio was six to one.
- Most retiring couples make poor spending decisions on retirement and are outliving their investments. This is mainly because they cash in their pension funds and splash out on holidays and other luxury items.
- The Australian government plans to raise the retirement age for the standard federal pension to 70 by 2035.
What many Irish people may not realise is that Australia has the world’s fourth largest retirement savings industry and is held up as a model for other developed countries. Annually it pays more than AUS$72 billion a year in retirement funds, double the regular federal pension, their equivalent of the Irish State Old Age pension.
All very well, one might say but what has Australian pensions got to do with Ireland. Directly, nothing but, indirectly, everything. Australia is merely a few years further down the curve from Ireland in its demographics but even then the level of non State pension funding is far higher there than in Ireland. If the problems of Australia seem bad, then the timebomb that is the Irish pensions problem is horrendous and will only get far worse as Irish people age.
Several years ago before the Global Financial Crisis there were moves afoot to deal with the long term retirement problem. Needless to say righting the economic for present day spending took total focus away from the future problem as pressure from the EU and the IMF took precedence. As we are now in somewhat better shape than the recent past it is time for the pension timebomb to come front and centre and be dealt with properly.
Moving back to Australia, when the enforced private pension funding was introduced, Australian citizens had to contribute 3% of salary per annum. Now it is 9.25% and it is scheduled to be 12% in the next 5 years. Last year the UK introduced automatic enrolement into pension funding for all employees. Part of this was driven by future strategic planning driven by some amazing longevity statistics.
Government driven research in the UK has estimated that the first person who will be in receipt of UK State Pension at age 120 is already in receipt of the State pension. This means that that such an individual will spend more time in retirement than they ever worked, if you assume that they started work in their late teens and retired at age 65. Furthermore the same research estimates that the first person to live to age 140 in the UK has already been born. Extrapolate those numbers across to Ireland and you can see that a huge uphill battle looms in retirement funding here.
Returning to my 28 year old client, the estimated funding level for her to provide a pension of 2/3rds her final salary at age 68 (the new State Retirement Age for someone of her age) is an annual contribution level of 23% of salary. Compare that to the advanced thinking of the Australian Superannuation system with its 12% contribution level and you can see why many Australian retirees now find themselves in financial difficulties.
Rather than scoff at the Australians let me tell you that, as a financial planner in Ireland, most Irish people balk at paying more than 5% p.a. into their pension plans. The problem in Ireland is far worse than in Australia as larger contribution levels, time and good investment returns are needed. As such, this requires action not only by the State but also by individuals who need to feather their own nest, so to speak.
Good Time Charlie may be gone but as we now know that we will live far longer than our predecessors, albeit in quite probably not great health, perhaps now is the time to grasp the nettle and start taking responsibility for ourselves. We cannot afford to rely on the State to play the benevolent rich uncle!