|Members of the Irish police force can retire in their fifties with a full state pension.|
We know that a raft of tax hikes and state spending cuts are coming down the line because we have to get our deficit down by another three billion or so in 2013. It's all part of the EU/IMF plan under which we got the bailout money and which requires us to balance the nation's books -- or at least get the deficit down to three percent -- by 2015.
We will be looking at the financial torture that is on the way for us in detail in this column in the coming weeks. But before we start talking about the budget it's worth taking time to focus on a real hot issue here which so far has stayed just below the radar.
I'm talking about the pensions time bomb that is ticking away in the background in Ireland. (It's also relevant to the debate about Budget cuts and we will come back to that in a moment.)
The pensions time bomb is a huge issue for people in the private sector here -- in other words, people who work for private companies, not the state. The fact is that the pension schemes in most companies here -- big and small -- are bankrupt.
Close to 80 percent of the Defined Benefit pension schemes in private companies here are in deep trouble, with huge black holes in their pension funds caused by the property and stock market collapses.
Defined Benefit (DB) pension schemes are so called because the benefit the retiring person gets is defined in advance. In most cases, someone who worked for a company for 40 years would get two thirds of their salary as an annual pension. So if you were earning €60,000, your pension would be €40,000 a year.
Because people move around, not many people would have 40 years service in one company. In our example, if you had 20 years service, your pension from the company would be 20,000 a year. (A full pension is 40 sixtieths of final salary, so if you have, say, 27 years service, you get 27 sixtieths of your salary.)
The most important thing is that the benefit is defined in advance when you join the pension scheme.
The DB schemes were financed usually by both the company and the employee who together would put in around 18 percent of the person's salary in monthly contributions into the fund (12 percent from the company and six percent from the person's salary).
This money was put into the pension fund and then invested by the trustees into blue chip shares and bonds. The income generated paid the pensions as they arose.
The system worked pretty well over the years, with the usual ups and downs of the markets averaging out over time. However, the recent global financial crash was more than the DB schemes could handle, with the value of their investments plunging and their income vanishing.
Most DB schemes now have a black hole in the fund that was supposed to pay the pensions. The official statistics show that at least 80 percent of the DB pensions schemes in companies in Ireland are in trouble, unable to pay the retirees what they thought they would be getting.
Most of the big companies closed their DB schemes to new entrants over the past few years. New employees instead were put into Defined Contribution schemes, in which what you contribute is set but what you get at the end depends completely on investment performance.
A lot of companies have sharply reduced what their DB schemes will be paying out. Some (like the prestigious Superquinn store group a week ago) also said they would not be paying pensions until later -- in their case until former employees are 68.
A few companies -- and here I have to declare an interest because my employer (the Irish Independent group) is one of them -- have either shut down their DB schemes completely or are shaping up to do it. Unable to meet their obligations, they are required to do so by law.
In my own case, I will be okay for various reasons which I'm not going to go into here. But for many people -- and we're talking tens of thousands of people here who have worked all their lives in private companies, in the real economy -- it's a heartbreaking situation.
It's hard to get statistics on this, but many of them are going to end up with around half what they were expecting, and in the worst cases they will end up with nothing, or almost nothing. And that after paying into their pension schemes all their working lives!
There are tens of thousands of people here who paid into their pensions in the private sector for years -- people now in their late forties or fifties or even sixties and just a few years from retirement -- and the modestly comfortable retirement they were looking forward to has been snatched away from them. Now their future is uncertain and bleak.
Given what has happened in the Irish economy, in share values and property values, this could be seen as unfortunate but inevitable. When the pension fund money is gone it's gone.
The whole country has to deal with the new reality, you could say. Everybody is feeling the pain.
But that would not be true.
Everyone is not sharing in the pensions pain here, which is where the ticking pensions time bomb comes in.
Private sector pensions here have been destroyed. But state sector pensions -- the pensions of everyone who is on the state payroll here -- have been completely protected.
So the politicians and all their advisors, the doctors, nurses, teachers, police, judges, soldiers, diplomats, civil servants, clerks and all the others who work in the administration jobs that keep the wheels of state turning, and all those in the numerous quangos who are counted as part of the state sector, they all will be getting their full pensions, worth up to two-thirds of their average salary.
That's fantastic, you say, the state must have done a brilliant job investing their pensions funds to be able to pay all those big pensions.
Well no, actually. You see, there is NO pension fund invested to pay the pensions of state workers. Instead, their pensions are paid out of current state revenue (which used to be taxes and is now mainly borrowing).
So we have the incredible situation where all these state workers will be getting their full and guaranteed pensions while at the same time tens of thousands of people in private companies have seen their pensions vanish.
And it's even worse than that, because in some parts of the public service (the police, for example), people can retire in their fifties on a full state pension.
The joke is that it is the taxes from the now pension-less private sector workers which paid for the state pensions up to now.
State workers and their unions have tried to justify the situation by pointing out that they have been forced to pay more towards their pensions in the last few years, but it's still way behind the increased contributions in many private sector companies where the employees have now ended up with half or a quarter of their expected pensions.
That's why I am calling this a ticking time bomb. It's a deeply unfair, almost unbelievable situation. Civil wars have been started over less.
Pay and pensions in the state sector here amount to close to one-third of all annual state spending here.
And pensions are a big part of that.
Which is where we bring the argument back to the big budget cuts we are facing in the upcoming budget in December. We need to save three billion? Here's how to save a billion or two without cutting services or hiking the tax load even higher:
Take an average of the cuts in pension payments that are happening in the defined benefit schemes in the top 100 private sector companies here and apply that level of reduction to all pensions currently being paid to former state workers.
Not only would it solve most of our budget problem this year, it would be the fair thing to do. Everyone would be carrying the burden. It just might prevent the ticking pensions time bomb going off.