Do pensions have a future? SPOILER: doom & gloom!

Dingle_berry

I know little to nothing about pensions, so forgive me if I'm missing something obvious here, but who is going to pay my pension when I draw it down?

I know that currently state and public service pensions are funded by taxation. Private pensions are paid from some kind of stock market magic... The main thing being that the money contributed to pension funds is not guaranteed. It's not locked away somewhere to wait for me, it goes to bulk up in a money-gym!

Fast forward 40 to 50 years, our already low birth rate (Ireland being the highest in the EU at 2 births per woman - i.e. barely replacing each adult?) will result in a smaller workforce, smaller tax base, more pensioners drawing state pensions, smaller economies resulting in less stock market magic(?) and surplus of property.

Are we headed for an horrific depression in 40 years where society literally won't be able to afford the elderly and the pension system will collapse?
Whats the point in building a pension pot if it won't be waiting for me at the other end? Or even buying property if our current boom will turn into a surplus?

troyzer

Basically, yes. There are huge problems economically on the horizon. Japan is the country that is most advanced in terms of demographics. It has a ridiculously large older population and the kids just aren't having their own kids. 

The problem has gotten so bad that there are towns with thousands of people where pensioners make up the majority and they don't even have a local school. Simultaneously, the young are ridiculously overworked and can't afford a flat in Tokyo. There have been calls to decentralise to equalise the rural/urban property market divide and also new tax incentives to have kids but the elephant in the room is that Japan simply doesn't allow migrants in large numbers. Ireland doesn't really have this problem but making your population younger by taking on immigrants can only go so far and realistically it's just pushing the problem around. 

I'm 24 and working in my first proper job since finishing my Masters and I'm looking for pensions at the moment. I know that I'll probably have to work until I'm 75 and there won't be a state pension at the end.

me_right_one

The whole economy is just a big pyramid scheme. There is waaaaay too many people in Ireland, we can only self-sustain about 1 million with the current lifestyle we have. The only real way to head off this pension trouble is to own your own property and at least then you can sell it when you need to.

Peregrinus

Essentially pensions are a mechanism by which wealth is transferred from workers to retirees. It makes no difference whether the transfer mechanism is taxation, or a funded pension invested in company shares, or something else. Regardless of the mechanism used, what is essentially happening is that a worker is produced goods or services, and they are transferred to a retiree who consumes them.

So, yes, if the dependency ratio - the number of workers as compared with the number of retiree - changes, this puts pressure on the system. The workers have to give up more of the goods and services they produce, or retirees have to consume less, or a bit of both.

The dependency ratio is changing, but not just (or even mainly) because we are having fewer children. It's also changing because we are living longer. When the Old Age Pension was introduced in 1908, only a bit more than half of the population lived long enough to qualify for the pension and, among those who did qualify, on average they drew it for only four-and-a-half years before dying. Changes in life expectancy since 1908 have made the pension system much, much more expensive than it would otherwise be, and this is going to continue.

It doesn't follow, though, that collapse is inevitable. The effect on the workforce of a falling birthrate can be offset by permitting or encouraging higher emigration. If people are living longer it's because they are healthier; they don't necessarily have to retire at 65 any more. Expect to see more and more economically active seniors, who draw only a partial pension, or none at all, at an age when full retirement use to be the norm. And, as we get wealthier, we may grumble about higher taxes, but we are more able to pay them. Increasing taxes is never very popular, but a on a national level a question like "would you rather pay an extra 0.5% in social insurance, or have Great Auntie May come and live with you?" will concentrate the mind wonderfully.

me_right_one

Peregrinus wrote: »

It doesn't follow, though, that collapse is inevitable. The effect on the workforce of a falling birthrate can be offset by permitting or encouraging higher emigration. If people are living longer it's because they are healthier; they don't necessarily have to retire at 65 any more.

And then what'll happen? THOSE people will have kids, and they will have to pay the pensions of an even BIGGER population! That has got to be one of the most ludicrous solutions to the pension problem ever, I cant understand why it gets so much traction.

The simple truth is we need population control, and some generation will have to take a hit on their pension. I'd rather it was me than my kids.

Peregrinus

Your opening position is that Ireland can sustainably support a population of only about 1 million at our current lifestyle, but you offer no evidence or argument for this.

I agree with you, a solution which requires a constantly increasing population is not sustainable indefinitely, but nobody has suggested that. What a sustainable pension system needs is a (reasonably) steady dependency ratio, but this doesn't require a constantly increasing population, and nobody in this thread has called for that.

76544567

As has been seen already, the government are able and willing to just put their hands into private pensions and take them.
Nothing the owner or the administrator of the pension can do.
So if you want to stash away a heap of money for your retirement that you can't touch or protect, but the government can take at will, you are more trusting than i am.
Until pensions are protected PROPERLY I won't be locking money away in one.
I did before but i stopped when the government dipped into it.

me_right_one

Peregrinus wrote: »

Your opening position is that Ireland can sustainably support a population of only about 1 million at our current lifestyle, but you offer no evidence or argument for this.

Apparently, if all money vanished overnight or a war, we can only grow enough food / produce enough electricity / make enough turf etc. for 1 million people. And even at that, our lifestyle would be more akin to 1930's Ireland.

So said my fifth year geography teacher, so blame him

Peregrinus

I don't think the purpose of a pension scheme is to protect you against the sudden disappearance of the concept of money. If that's the risk you're trying to guard against, I think you need to be constructing a bunker in the woods and stocking it with tinned goods and ammunition.

What a pension is designed to do is to provide you with an income when you no longer wish to work. All pensions essentially depend on the willingness of the current generation of workers to give some of what they produce to retirees. Owning your own property is an effective way of doing this only if the property is readily saleable (or lettable), and it's property you can sell (or let) in retirement - i.e. it's not your home. And even then, this only works if you assume that there will be people who want to buy it (so money has not disappeared, and the population has not suddenly reduced ton 1 million) and that it is property which will not decline in value.

me_right_one

Peregrinus wrote: »

I don't think the purpose of a pension scheme is to protect you against the sudden disappearance of the concept of money. If that's the risk you're trying to guard against, I think you need to be constructing a bunker in the woods and stocking it with tinned goods and ammunition.

What a pension is designed to do is to provide you with an income when you no longer wish to work. All pensions essentially depend on the willingness of the current generation of workers to give some of what they produce to retirees. Owning your own property is an effective way of doing this only if the property is readily saleable (or lettable), and it's property you can sell (or let) in retirement - i.e. it's not your home. And even then, this only works if you assume that there will be people who want to buy it (so money has not disappeared, and the population has not suddenly reduced ton 1 million) and that it is property which will not decline in value.

Agreed, but you have to start from a situation thats sustainable. There is no point in trying to feed millions of people at the cost of starving others.

This is simple economics. Its what every war in history was fought over, resources and living space. If we did have a sustainable population of 1 million, one third should be in school / growing up, one third should be retired, and the middle third should be doing the work / paying the way of all 3 thirds. They got a free ride when they were young, and they will again when they're old. Thats how any sustainable system works. We need to be aiming for that, and the most pressing thing at the moment thats out of whack is the population.

Esel

me_right_one wrote: »

Agreed, but you have to start from a situation thats sustainable. There is no point in trying to feed millions of people at the cost of starving others.

This is simple economics. Its what every war in history was fought over, resources and living space. If we did have a sustainable population of 1 million, one third should be in school / growing up, one third should be retired, and the middle third should be doing the work / paying the way of all 3 thirds. They got a free ride when they were young, and they will again when they're old. Thats how any sustainable system works. We need to be aiming for that, and the most pressing thing at the moment thats out of whack is the population.

I am intrigued by your theories and wish to subscribe to your newsletter.

Merowig

76544567 wrote: »

As has been seen already, the government are able and willing to just put their hands into private pensions and take them.
Nothing the owner or the administrator of the pension can do.
So if you want to stash away a heap of money for your retirement that you can't touch or protect, but the government can take at will, you are more trusting than i am.
Until pensions are protected PROPERLY I won't be locking money away in one.
I did before but i stopped when the government dipped into it.

Even with the pension levy a pension wrapper was the best way to save for retirement - especially when you were paying the higher tax rate.

And you could and still can transfer pensions abroad to another EU country - e.g. to a pension vehicle in Malta.
It is your money in the end so it is up to you if you want to have a private pension later or not.

76544567

Merowig wrote: »

Even with the pension levy a pension wrapper was the best way to save for retirement - especially when you were paying the higher tax rate.

And you could and still can transfer pensions abroad to another EU country - e.g. to a pension vehicle in Malta.
It is your money in the end so it is up ot you if you want to have a private pension later or not.

At the moment they can put their hands in and take 100% if they feel like it. When it is 100% protected I'll be back, but until then ....

Merowig

The government can also come and take away your house if you see it this way...

Nate--IRL--

76544567 wrote: »

At the moment they can put their hands in and take 100% if they feel like it. When it is 100% protected I'll be back, but until then ....

Can they? Could they also do this in the same with a bank account?

Nate

Merowig

On the state pension - the current system is an insurance against having children - you are more or less incentivesd in not having children - so in Germany there were already thoughts that people with children should get a higher state pension which makes sense in my opinion.

howamidifferent

You could have the problem then that people who spent their life on benefits spitting out children every year will continue to benefit while those who worked and couldn't afford children will be penalised further.

76544567

Nate--IRL-- wrote: »

Can they? Could they also do this in the same with a bank account?

Nate

Well they have already do e it with pensions. And you couldn't stop them at all. Just had to sit and watch. Your pension should be cast iron safe from anybody dipping into it.
What we have seen is that the government had no problem at all going into everyone es private pensions and helping themselves.
Next time it will be worse.
And they were asked to take steps to prevent this happening to pensions in future. What do you think they did .... Ignored it.

dutopia

So should we be putting money into a pension fund or just save it ourselves and buy a property to sell?

Merowig

Though these children have chances to become future workers and tax payers. And you can cap this to a certain amount of children as well.

sbsquarepants

They have already dipped into peoples private pensions (Enda & Co and Zimbabwe I think are the only ones to have done so!) - once the precedent has been set they will do so again once it suits them.

Merowig

76544567 wrote: »

Well they have already do e it with pensions. And you couldn't stop them at all. Just had to sit and watch. Your pension should be cast iron safe from anybody dipping into it.
What we have seen is that the government had no problem at all going into everyone es private pensions and helping themselves.
Next time it will be worse.
And they were asked to take steps to prevent this happening to pensions in future. What do you think they did .... Ignored it.

Wrong - the option to transfer your pension abroad existed already during the times of the government levy...

76544567

dutopia wrote: »

So should we be putting money into a pension fund or just save it ourselves and buy a property to sell?

Well i am well diversified already so not too fussed at this stage. But i would worry seriously about the government's failure to address the ring fencing and protection of your pension fund

Merowig

dutopia wrote: »

So should we be putting money into a pension fund or just save it ourselves and buy a property to sell?

Yeah and when the housing market crashed you have all your eggs in one nest.

http://www.irishtimes.com/business/personal-finance/property-or-a-pension-where-can-you-get-a-better-return-1.2945443

I would go both ways - having at least one property and also having a private pension.

howamidifferent

Merowig wrote: »

Wrong - the option to transfer your pension abroad existed already during the times of the government levy...

No doubt all the cute hoors who knew this could be done, did so, while all the rest of us Joe Soaps, the 99.99% got fleeced.

76544567

Merowig wrote: »

Wrong - the option to transfer your pension abroad existed already during the times of the government levy...

I looked i to that kind of thing. Check out AAM. Plenty of threads about it there. It's a disaster of a process and very risky.

Show me where a 40 year old transferred their pension fund to Malta, while still working in Ireland though. I'd be interested to see that and to hear how they got on. We are talking about pension funds here, not the already retired .

76544567

howamidifferent wrote: »

No doubt all the cute hoors who knew this could be done, did so, while all the rest of us Joe Soaps, the 99.99% got fleeced.

One good think came out of it. You now know all the guff about your pension money being safe was a lie.

Merowig

howamidifferent wrote: »

No doubt all the cute hoors who knew this could be done, did so, while all the rest of us Joe Soaps, the 99.99% got fleeced.

A huge majority of the population has no or very little interest in personal finance - even if their standard of living depends on it.
In case someone does not want to get involved themselves / inform themselves, people can ignore the topic and then miss out on things - or get independent fee based financial advise - which means you have to pay some stranger to get information served on a silver plate...

Merowig

76544567 wrote: »

I looked i to that kind of thing. Check out AAM. Plenty of threads about it there. It's a disaster of a process and very risky.

Show me where a 40 year old transferred their pension fund to Malta, while still working in Ireland though. I'd be interested to see that and to hear how they got on. We are talking about pension funds here, not the already retired .

I am already active on AAM

And on your second question:
Michael O’Sullivan V Canada Life Assurance (Ireland) Limited

The judge ruled that:
“PRSAs are not related to employment; they can be taken out regardless of employment status”.


http://www.eversheds-sutherland.com/global/en/what/publications/shownews.page?News=en/ireland/michael-osullivan-v-canada-life-assurance-ireland-limited-april-2014
http://www.qropsspecialists.com/irish-pension-transfers-qrops-malta/

76544567

Merowig wrote: »

I am already active on AAM

And on your second question:
Michael O’Sullivan V Canada Life Assurance (Ireland) Limited

The judge ruled that:
“PRSAs are not related to employment; they can be taken out regardless of employment status”.


http://www.eversheds-sutherland.com/global/en/what/publications/shownews.page?News=en/ireland/michael-osullivan-v-canada-life-assurance-ireland-limited-april-2014
http://www.qropsspecialists.com/irish-pension-transfers-qrops-malta/

Oh,so you would have to actually be retired already and you would have had to go to court to do it.
Not really an option for me at the momemt.
And it seems.like a lot of trouble to avoid the government dipping into your pension. Far better if they would just do something to restore confidence that it CANT be dipped don't you think.

Merowig

76544567 wrote: »

Oh,so you would have to actually be retired already and you would have had to go to court to do it.
Not really an option for me at the momemt.
And it seems.like a lot of trouble to avoid the government dipping into your pension. Far better if they would just do something to restore confidence that it CANT be dipped don't you think.

The guy was not retired - he continued working in Ireland.
And only because he went to court - it does not mean everyone needs now to go to court!

Merowig

Dingle_berry wrote: »

I know that currently state and public service pensions are funded by taxation. Private pensions are paid from some kind of stock market magic... The main thing being that the money contributed to pension funds is not guaranteed. It's not locked away somewhere to wait for me, it goes to bulk up in a money-gym!

will result in a smaller workforce, smaller tax base, more pensioners drawing state pensions, smaller economies resulting in less stock market magic(?) and surplus of property.

You do not need to have your pension fund invested in shares. You can usually advise them to hold bonds or to hold even cash.
The stock market magic has the highest returns historically though. Cash will be impacted by inflation...
Furthermore you do not need to limit yourself to Irish stocks. My funds are invested globally.

troyzer

76544567 wrote: »

Nate--IRL-- wrote: »

Can they? Could they also do this in the same with a bank account?

Nate

Well they have already do e it with pensions. And you couldn't stop them at all.  Just had to sit and watch.  Your pension should be cast iron safe from anybody dipping into it.
What we have seen is that the government had no problem at all going into everyone es private pensions and helping themselves.
Next time it will be worse.
And they were asked to take steps to prevent this happening to pensions in future.  What do you think they did .... Ignored it.

I probably wouldn't care so much if they swapped cash for bonds to those who were sufficiently far enough away from retirement for it not to matter.