Irish pension spending expected to grow by 0.7% of GDP in 2020s – OECD

Public spending on pensions in Ireland is expected to increase by 0.7 per cent of GDP over the decade, according to the OECD.

Its Economic Survey of Ireland, published today, 14 February, focused on the impact of Ireland’s ageing population. The proportion of those aged over 65 is expected to grow much quicker than most OECD countries. The increase in pension spending over the next decade is in part (50 per cent) associated with demographic-driven public costs.

Ireland’s state pension operates on a pay-as-you-go basis, meaning that pension disbursements are funded by the taxes and social contributions of current workers. An expected rise in the old-age dependency ratio, from 20.5 per cent in 2016 (i.e. 4.9 workers for every old age dependent) to 44 per cent in 2051 (Parliamentary Budget Office, 2019), will threaten the sustainability of the system, the OECD stated.

Noting the recent state pension age increased, and future planned increase to 68 in 2027, the OECD said, thereafter, it should be linked to changes in life expectancy.

In addition, the OECD said state pension increases are determined in a discretionary manner as part of the annual budget process. This, however, contrasts with many other OECD countries where the benefit rate is indexed to domestic wage or price developments.

“Since 2002, the state pension benefit has risen by 65 per cent, following a heavily pro-cyclical pattern, compared to a 20 per cent rise in Irish consumer prices. Compared with other OECD countries, the value of the basic pension in Ireland appears adequate at present. Indexation of future benefit increases to consumer price inflation would be a more transparent system that, based on recent historical experience, would produce budgetary savings,” the report recommended.

Furthermore, the OECD said there was scope for private pensions to play a greater role in the pension system. It noted that private pension coverage is currently low in Ireland.

“The authorities outlined a Roadmap for Pension Reform in 2018, which included an auto-enrolment system, whereby private pension contributions from employers and employees (subject to an earnings ceiling) will be partially matched by the government,” the report stated.

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