Special measures are needed to tackle the looming crisis caused by an older age profile, writes John Bruton
Last week's census figures show that, like the rest of Europe, Ireland will face an ageing crisis. But, unlike the rest of Europe, Ireland still has time to do something about it.
The average number of children per family in Ireland has fallen from 2.2 in 1981 to 1.6 in 2002. Furthermore, the CSO's Labour Force Projections predict a further decline in birth rates due to the "expected fall in the number of females in the prime child-bearing group, aged 20 to 39".
Conversely, the CSO predicts that the number of over-65s will double from 400,000 to 850,000 over the next 30 years. This has substantial implications for the pension bill, a bill which has to be met out of the incomes of those at work.
While the number at work in Ireland will continue to grow for some time to come, the substantial fall in the Irish birth rate since 1980 will eventually feed through in the form of a much reduced workforce.
This reduction in the number at work, relative to the number of elderly, will eventually create a crisis of the kind now facing Italy and other continental European countries.
The number of elderly in Italy will jump from 24 per cent to 46 per cent of the population by 2040. Instead of one elderly person supported by every two workers, each Italian worker will then have to support an elderly person. If present benefits for the elderly are maintained, and met from tax, the tax burden in Italy would have to increase by the equivalent of 12 percentage points of the Gross Domestic Product (GDP).
There are other implications of this ageing process. As "baby boom" Europeans move from the "high-saving" age group (45-65) to the "pension-receiving" age group (post-65), there will be a reversal in the flows of money to financial institutions. Money flowing in at the moment will be flowing out again in 10 years' time. This means that the price European financial institutions will have to pay for money, in other words the interest rate, will have to go up to get people to save rather than spend.
Present low euro interest rates are therefore completely unsustainable. Demographics mean that, in the medium term, interest rates have to rise.
Against that background, it is truly mystifying that the Irish Central Bank is allowing banks to extend so much mortgage credit to homebuyers at variable rates of interest. Those interest rates are bound to rise substantially during the life of the mortgage.
Ireland cannot avoid this because our interest rates are tied to euro interest rates.
We can, however, partially defuse other problems to do with ageing.
Already we are in the healthy position that the average age of retirement in Ireland is higher than the EU average - 63 years as against 60. In Luxembourg, the average age of retirement is only 57!
State pensions for private sector workers are far less generous in Ireland than on the Continent. This may help Government finances, but many future Irish retirees face acute poverty if a diminishing workforce is unable to increase taxes enough to maintain the already low purchasing power of the social welfare contributory old age pension. These social welfare pensions will be the sole income for many Irish retirees.
The problem of nursing home care for the very old is already upon us. Particularly where the elderly person has only one adult child to contribute, the cost of long-term nursing home care can already be a staggering burden.
In 25 years' time, there will be twice as many over-80s in Ireland than there are today, and the fall in birth rates since 1980 will mean that there will be even fewer adult children to help pay their nursing home bills. Without large-scale immigration, the labour shortage will also mean that wage costs in nursing homes will be higher than they are today.
This dilemma is inevitable. It is the result of choices in favour of a reduced birth rate made over the past 20 years. Some of the choices have been individual, others have been choices in public policy.
The abolition of the child tax allowance in the 1980s, and the concentration of all family tax allowances on the adults, whether they had children or not, has contributed to the fall in the number of children. Tax policies of the present Government , based on "individualisation", have added to that trend because they increase the financial burden involved in taking time off to have children.
The unwillingness of employers, public and private, to offer part-time work opportunities of a kind compatible with parenting is making the situation worse. So also is the low housing density policy, which forces young married couples to move up to 60 miles away from their retired parents. Retired grandparents are the preferred childcarers of most working mothers.
If Ireland is to mitigate this impending crisis now facing its neighbours, it must adopt policies that are genuinely family-friendly. I would make the following two suggestions:
Substantially increase child benefit: Beveridge, the author of the Welfare State, said that child benefit should cover the "subsistence needs of the child" which he estimated to be one quarter of average disposable income. That would mean an annual child benefit of €6,488, almost four times its present level. That would, of course, need an increase in the relative tax burden of those without children, but they could consider it to be a contribution towards those who would eventually be paying their pensions.
Promote fixed-rate two generational (60-year) mortgages to meet today's one-off housing demand. Housing demand is very high at the moment, but it will ease off over the next 15 years.
The houses now being built will last two or three generations. One generation, the generation between 20 and 39, which is the only one that can have children, is being asked to bear the entire cost of paying for housing for the next three generations.
This is undoubtedly making it financially exceptionally difficult for them to have children. A 60-year mortgage at a fixed rate would be a much lesser burden on them and it would allow the subsequent generation, that will inherit or buy the house being built today, to meet some of the cost.
Ireland needs long-term thinking. The census returns of last week are a warning that that thinking should start now!
John Bruton TD is a former Taoiseach