August 22, 2016
How much will be left for your pension? This is the question you should be asking yourself because the notion that the tap will be still on, with crisp euros gushing out when you reach retirement age, is at the very least a dubious proposition.
At the moment, unlike most of the rest of Europe, Irish demographics are still just about right, thanks in the main to the Pope’s Children baby boom that peaked in June 1980 – nine months after the Pope kissed the tarmac in Dublin in September 1979. These workers are paying for their parents now.
After 1980, the Irish birth rate dropped off substantially and only began to recover in the 2000s. But it never recovered to its 1980 peak. This is typical of most mature democracies. And we are all living longer so there are now, and will be in the future, more old people knocking about who need to be paid.
In the next few years, retirement age is slated to rise to 68 and it may well have to rise again. The mathematics are very simple: unless we have more workers paying for the older cohort, either the weekly pension falls or taxes on younger workers have to rise to pay for the existing pension.
It will come down to a choice between different generations.
Many years ago, Tony Benn, the English socialist, remarked to me that “the young and the old have one thing in common, they are both bullied by the middle-aged.” For now, as long as the middle-aged hold the reins of power, public pension provisions will be eked out for as long as possible.
But something has to give because unless we have a massive increase in immigration, it’s hard to see how the present system can be maintained.
There is another argument which is that given high levels of job insecurity among young people, should the state be handing over so much cash to the elderly, when arguably the young are the ones most in need of a helping hand?
The central assumption of the pension system is that the old need the money more than the young. But is this the case now, or will it be the case in the future?
Consider the following.
The nature of work is about to be transformed by artificial intelligence that could wreak havoc on all forms of traditional work, particularly white-collar work. For example, in many “safe” professions such as law and accountancy, much work will be done by machines.
One implication of this is that unemployment in what used to be the solid professions will increase. Ultimately, only the very creative or entrepreneurial will thrive. This means we have to think very differently about how we organise our economy. It implies that younger people will have to reassess their futures, what they are going to do and how they will make a living.
Those who are content to “outsource” entrepreneurial ventures to others and are merely happy to become workers, might find that easy option closed off. If not closed off altogether, it’s highly unlikely to be the road to prosperity.
When faced with these types of dilemmas, societies will also need to reassess how they spend their resources and this brings me back to pensions.
Why spend so much money exclusively to prop up older people’s incomes via pensions when maybe we should be spending some of this money on a start-up fund for younger people?
Implicit in the pension debate is that the economy will be able to provide the jobs, to generate the income, to generate the taxes, to pay the pensions. What if AI undermines this?
In this case, we would need far more entrepreneurs. However, one of the major impediments to “start-ups” is a lack of capital. Banks are not in the business of seed capital for small businesses. As well as having a state pension fund for the elderly, imagine if we were to share some of the resources and have a state start-up fund for young people?
This is a half-baked idea right now, and needs refinement, but think about what is going on.
We are spending huge resources at one end of the age cohort – which is right and proper – yet at the other end, when people just come into the labour market, they are falling behind. We know that this generation of Irish people could well be the first in many generations to be poorer than their parents. What is their future?
It seems to me that the future is a creative entrepreneurial one and that standing on your own two feet will require people to take more risks in order to set up businesses. But in the same way as children need stabilisers when they first learn to cycle, people (all citizens) will need some help to start their own businesses. People need collateral to start and if you don’t have collateral or capital, you won’t get started.
Here’s where the idea of a “start-up fund” as well as a “pension fund” comes in to help at both ends of the labour market. To avoid wasting money and rather than give younger people cash as income, why not pledge collateral to them backed by their small but not insignificant part of a sovereign wealth fund? They could “bank” this collateral with one of the banks, releasing seed capital. This move will give them the leg-up they need and will also begin the process of actually fostering a real self-sufficient, entrepreneurial economy that may be able to withstand the assault of artificial intelligence on the work force.
I know its counterintuitive to imagine that you can become self-sufficient while depending on a state fund for collateral, but when was the last time you saw a child just get up on a bike for the first time and cycle off?