We need to keep working after 65 — or else the young will pay

The pensions debate was muddied last week, while clarity was brought to a big inequality question, writes Dan O’Brien

AFTER decades of toil, there are days when I think it’d be nice to retire. Many people beyond the first flush of youth have felt the same way from time to time. Some feel it all the time.

But retiring early is not really an option for most people. And it is becoming even less of an option, as evidenced by the fact that more older people (both under 65 and over) are working than ever before.

This is mostly a good news story. Ireland is among the developed countries that have seen the biggest gains in longevity in recent decades. Just 30 years ago, the average Irish lifespan was 75. Now it is up to 82 — and it continues to rise, unlike a good number of peer countries in which the long trend toward longer life has come to an abrupt halt over the past few years.

Ever-lengthening lives in Ireland is to be celebrated. Life is precious. Having more of it is good, even if there are consequences which need adjusting to. Among these adjustments is the abolition of employment contracts which stipulate that employees must stop working at 65.

Another adjustment is that we accept longer lives do not costlessly lead to more years without work.

The reluctance to face the consequences of the greying of the population in many countries has led to well-founded fears of a ticking “pensions time bomb”.

If and when it goes off, those who are young now will be affected most — there will be insufficient resources to pay them pensions in later life and they will have to eke out a living into their 70s and beyond.

The demographics of all of this are not in dispute. The number of 20- to 64-year-olds relative to those aged 65+ is falling. It will likely continue to fall for decades, because people are living longer and also because Ireland’s birth rate is now at an all-time low and still falling (the economic upturn has not generated a baby boom, as past periods of good times did). This means the cost of funding ever larger pension outlays will fall on an ever shrinking group.

The good news is that defusing the pensions time bomb is not rocket science. There are three ways of dealing with it: save more during your working life; take a smaller pension after retirement; and/or retire later so that you delay taking from the pot.

Ireland’s political system is not always far-seeing in addressing urgent challenges. But the decision, taken in 2011, to increase the age of retirement gradually to 68 by the end of the current decade, was just that.

Despite this, the retirement age has emerged as an election campaign issue. The debate around it suggests a lot of people don’t accept that reverting to a retirement age of 65 will not lead to a shift in resources to one generation from others. Time and again over the past week it has been claimed that it is unfair to ask people to work beyond the traditional retirement age of 65.

There is now an active campaign to bring the retirement age back to 65 for everyone. This is in effect to ask younger generations to pay for pensions that they, in all likelihood, will not receive.

If the political system caves in to arguments cloaked in the language of fairness when they are anything but, it will be a retrograde step.

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The issue of fairness arose in an entirely different context last week. Why is Ireland so unequal when it comes to how much people earn compared with other developed countries? This is a big question. Until last week, nobody had tried to answer it in a systematic way.

A paper presented last week by ESRI economist Barra Roantree has brought some clarity. He has crunched a lot of data to find the reasons why Irish people’s incomes before tax and welfare payments are the most unequal in Europe.

He discounts one possibility, raised in this column two months ago, that a widening wage gap could explain it. The study finds that above-average growth in both high-paying jobs, such as those in multinational companies, and low-paying jobs — in the hospitality sector, for instance — is not a significant factor in earnings inequality. “Wage polarisation” may be an issue to watch for a number of reasons, but it not the cause of Ireland’s extreme pre-tax and welfare income inequality.

So what is the cause? The answer may be a little counter-intuitive, so consider the following illustration.

Put two people in a room. One has a minimum wage job. The other person is unemployed and his income comes entirely from welfare benefits. The difference between the person with no earned income and the person on the minimum wage is — without exaggeration — infinitesimal.

The point of this example is that if you have a lot of people in a country who have no earned income, you will have a high level of income inequality before taxes are redistributed.

The most important finding of last week’s ESRI paper is that Ireland’s unusually high share of adults whose only income comes from redistributed taxes is the reason for high pre-redistribution inequality.

There are two main reasons that Ireland has such a high proportion of population dependent on welfare, despite having one of the strongest economies in Europe.

The first is the number of jobless lone parents. Ireland also has more lone parent households as a share of all households than any other of the 28 that are members of the EU. This is curious. With a low divorce rate and a socially conservative society until recently, it is not clear why lone parenting is much more common in Ireland.

Another unusual aspect of Ireland’s lone-parenting phenomenon is less surprising, and that is the high cost of childcare. For many lone parents, the cost of having someone mind their kids is more than they can earn, or close to it.

There is an entirely separate reason Ireland has a high share of its population whose only income comes from welfare benefits. Among single people, Ireland has the highest share of people in the EU who cannot work for reasons of illness and disability.

In the decade up to the property crash, the numbers rose by tens of thousands. It was during this period that Ireland moved out of line with other countries, despite no evidence to suggest the general health of the population had declined (quite the opposite in fact).

There is no stronger reason to have a welfare state than the help and security it gives to those who are sick and disabled. But if the system is classifying people who are going through a rough patch as ill and disabled, it risks detaching those people from the world of work, leading to long-term welfare dependency. That has happened in Ireland. It is a nettle that the next government, regardless of its composition, will need to grasp.