THE MOUNTING deficit in the Social Insurance Fund, which last year reached €1.5 billion – with the shortfall met from tax revenue – is set to soar in the years ahead. Without policy changes the accumulated deficits will, by 2066, reach €324 billion in current money terms.
The Social Insurance fund is financed by some €8 billion in pay-related social insurance contributions (PRSI) and is used to pay State pension and welfare benefits. These stark and sobering estimates of the escalating funding gap are taken from a report commissioned by the Government – as yet unpublished. However, publication of the figures now means the Government can no longer ignore the issue in framing the budget next December.
The report by KPMG, a consultancy firm, has identified rapidly rising pension liabilities as the main factor in explaining the fund’s soaring deficit. The ever-widening gap between revenues and liabilities reflects demographic and economic changes. It also reflects higher pension payments awarded in recent years that are now seen as much less affordable, given the unprecedented economic downturn. In the decade to 2010, the State contributory pension rose by 90 per cent, a real increase of 62 per cent when adjusted for inflation.
What, with hindsight, are seen as generous pension and welfare increases – financed by buoyant tax revenues generated by a property boom – are nevertheless no longer sustainable. The challenge for Government is how to make the necessary adjustment: whether through raising revenue – via higher PRSI contributions which involves higher taxes; or by linking future benefit payments to inflation, rather than to average earnings in the economy.
At present, a State contributory pension amounts to about one-third of the average industrial wage, and is regarded as insufficient to finance a life in retirement. To adjust pension payments for inflation would leave a retiree with a much lower income.
For the Government, the deteriorating state of the Social Insurance Fund is part of its inheritance in office, which it will now have to address. In contrast, its efforts to tackle the wider pensions issue have been contradictory and largely incoherent. There, it has made a bad financial situation much worse. Private sector pension funds are beset by financial difficulties: four-fifths of all defined benefit – or final salary – schemes (which account for some 400,000 members) are in deficit, and unable to meet their full obligations to members, as required by law.
Most defined benefit schemes have been closed to new members. Some already have been – and more will be – forced to wind up their pension schemes. Against that background, the Social Welfare and Pensions Act passed, earlier this year, makes little sense. This now requires defined benefit pension schemes to set aside a “risk reserve” against future economic difficulties. For 80 per cent of schemes that have already failed to meet the minimum-funding standard, this imposition of a risk reserve requirement may only serve to hasten their demise.