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Charlie Weston Twitter Email
YOUNG people face a huge challenge building up enough wealth to fund their retirement.
This means those still in the workforce face lower standards of living than previous generations, an academic paper published by the Central Bank says.
Demographic changes have led to a build-up in wealth among older generations.
But there is so much money in investments, property and shares that younger people are struggling to get a decent return on any money they have invested.
Low interest rates and a heavy investment concentration in housing among older people means there are small gains for younger people.
The paper, by Simone Cima, says “an increasing amount of wealth is concentrated among older populations”.
“These developments have contributed to a decline in rates of return on wealth, as there is an abundance of wealth relative to the working population,” she argues.
What is called an inverted population pyramid has developed.
This is due to large shares of the population at older ages and progressively smaller younger age groups.
Large numbers of younger people entering the workforce are required to fund pensions and health benefits for older people, economists argue.
The Central Bank paper has been issued a day after the Irish Fiscal Council controversially said younger workers face paying an extra €2,500 a year in taxes so that older people can retire at 66.
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The State’s budget watchdog said people now in their 20s, 30s and 40s will foot the bill for Ireland’s growing number of retirees, which is estimated to rise by 50pc by 2040
According to the IFAC analysis, people earning an annual salary of €35,000 will pay an extra €2,000 a year in PRSI payments to fund the future pension pot.
However, others have pointed out that the State could have had a nest egg of €70bn to pay for social welfare and public sector pensions by 2025 if the National Pension Reserve Fund had not been raided to bail out the banks.
Instead, the fund has been tapped to recapitalise the banks, with little now left, Goodbody Stockbrokers found in a 2011 report.
The Central Bank said lower rates of return on investments mean that it will be increasingly difficult for younger people to build up wealth for retirement through the accumulation of returns.
The paper notes that younger people earn more than previous generations.
But “the negative effect of lower returns means they may not be able to accumulate as much wealth out of their savings as previous generations”.
“With current demographic trends, future retirees will likely face a progressively lower standard of living as a result.”
It said this made it important to find ways to fund longer retirements.
The Pensions Commission had recommended an incremental increase in the state pension age to 67 between 2028 and 2031, before gradually rising to 68 by 2039. However, after huge political pressure the Government decided to keep the official pension age at 66.
Mr Sima noted that wealth transfers from older to younger generations may help offset some of the problems today’s workers have in building up decent retirement funds.
However, longer life expectancies means wealth would be transferred later in life, and, due to lower birth rates, it will transfer to a smaller number of heirs.
This and existing wealth inequalities means that wealth transfers may exacerbate both intergenerational and intra-generational inequality.
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