27 February 2018
Posted on 12 May 2017
The last report from the COR (Pensions Advisory Council) was full of concern and bad news over the ongoing shortfall in funding the State pension schemes. This time, the message has changed. Solutions are just a click away. The COR has put online a simulator that enables you to salvage the pension system right from your own home! A fun tool, very informative but not completely reassuring.
The simulator allows you to choose between four different scenarios corresponding to annual growth in wages and salaries of between 1% and 1.8%, coupled with a level of unemployment of 7%. The basic assumption is that these “target” levels will be achieved in 2032 and remain stable up to 2070. Two additional variants are proposed, with unemployment rates at 10%, or 4.5% for the most optimistic of people.
In order to simplify using the simulator, the choice has been made of talking in terms of wages growth. The COR report, however, talks of growth in labour productivity. In both cases, what does this mean? It is an assessment of changes in the mass on which contributions are based. The COR has based its projections on stability in working hours and the distribution of wealth between capital and labour.
In the long run, given little growth in the working population, it is right to assume that the levels of wages growth contained in the different scenarios would roughly correlate with the expected levels of GDP growth. For example, the 1.5% scenario corresponds to a progression in GDP of 1.4% to 1.6% between 2021 and 2070.
Once the user has selected an economic scenario, the next step is to modulate the variables likely to correct imbalances in the system: retirement age, contributions and the ratio of pensions to wages. By adding a few months, after 2020, on to retirement age or half a percentage point to contributions, a balance can be achieved earlier on. This exercise is, of course, much easier to do on a simulator than in reality!
The default values correspond to current regulations. It is not surprising that between 2030 and 2070 the age at which one’s working life finishes will stabilise between 63 and 64; this corresponds to the forty-three years of contributions required for generations born after 1973. The average levels of contributions are expected to remain stable. On the other hand, the ratio of pensions to wages drops sharply in even the most optimistic of economic scenarios. In the event of a constant increase in wages of 1.8% per year, the ratio of pensions to wages would fall from 52% in 2017 to 34% in 2070. If wages growth were 1.5% then the decrease would be less: i.e. 37% in 2070. This is due to the fact that pensions are indexed on inflation whereas wages are linked to productivity. In addition, the simulator offers the possibility of biting further into pensions, thus increasing even more the gap between pensioners and people in work.
Now you know the rules, so over to you! What options would you go for? Prolong the duration for paying contributions and wage an industrial relations war, increase contribution rates and risk damaging companies’ competitiveness, or just carry on quietly chipping away at pensioners’ income? Rest assured. The simulator gives you the keys to altering the different variables, but does not require you to assume the consequences in the face of public opinion that is particularly sensitive on these issues.