Paul O'Donoghue

ANYONE WHO DOUBTS that time is a flat circle need look no further or evidence than the debate around Ireland’s state pension age.

Recently, one of the country’s most prominent economic figures said we should prepare for a future where people will likely have to work longer. Really, where have we heard that one before?

What was different this time wasn’t so much what was being said, as who was saying it.
Gabriel Makhlouf, the governor of the Central Bank, recently gave a speech at an economics event in London where he warned that the demographics of many developed countries are going to dramatically change in the coming years.

Basically – there will be a much bigger ‘retired and elderly population’.

The way Ireland’s state pension system works is that the current workforce funds payments to those who are retired.

Right now, there are about five workers for every retiree. In slightly more than 20 years, it’s predicted that the balance will shift, so there are only two workers for every pensioner. Meaning far less people working – so without dramatically raising taxes on the workforce, how will pensions still get paid out?

Makhlouf’s suggestions were as follows: ‘We should also look beyond current thinking on dependency ratios that generally assume ‘retirement’ at 65.

‘Increased longevity as a result of healthier lifestyles presents opportunities for our citizens to have longer working lives, should they so choose.

‘Policies to incentivise working longer, alongside promotion of lifelong learning, need to be part of our thinking’.

Note that there is no suggestion for a mandatory increase in the retirement age.

Previously, the government had planned to increase the state pension age from 66 to 68 by 2028, but this decision was later reversed after public pushback around the time of the 2020 general election.

Makhlouf’s comments are indicative of the more ‘softly, softly’ approach many state officials are now taking – more carrot, less stick, to keep people working longer.
It also comes after the government introduced a measure at the start of 2024, whereby people can choose to delay receiving the state pension until 70, in return for getting higher payments. The measure is voluntary, with no change in rates or those who still choose to retire at 66.

Announcing the move, the government said the intent was to ‘provide people with more choice’.

While that was likely true – it makes sense to give increased flexibility to workers – another motivator was also likely to get people warmed up to the idea of retiring later in life.

So does Makhlouf have a point – should people be incentivised to work more? Let’s have a quick look over some key points.

A central part of Makhlouf’s argument is linked to life expectancy – because people are living longer than before, it makes sense that they would work longer.

‘If a middle-aged worker now expects to be working into their seventies, this incentivises education and training throughout their working life, rather than the common assumption that formal education and training largely ends in their 20s,’ he said.

“Addressing the coming demographic challenge is not just about looking for alternative sources of growth, but also re-assessing how we think about ‘retirement’.’

There is of course some merit to the life expectancy argument – they have dramatically increased over the last century.

Ireland’s life expectancy stats go as far back as 1925, when people were expected to live to 58. As of 2024, it’s 83, a frankly staggering increase in a relatively short space of time.
The state pension was first introduced in Ireland in 1908 – by a British Liberal government, when the country was still under British rule.

At the time, despite the fact that life expectancy was so much lower, the qualifying age for the payment was 70.

Life expectancy has soared since then, yet the qualifying age has actually gone down – so Makhlouf’s argument would seem to have merit.

The typical counter argument would be – shouldn’t the aim of the state pension be for it to improve over time – ie, be paid at as low an age as possible?

As society has progressed from a time when the average person wouldn’t expect to see their 60s, surely giving people some time to actually enjoy their old age is also a sign of progress?

There’s also the argument that Ireland’s state pension payment is actually too low and should be increased – a survey published last year found that a third of pensioners can’t afford a ‘basic’ standard of living.

These are both valid points, and in an ideal world, the state pension would be increased and made available at a lower age.

Unfortunately, these aspirations come up against the limits of the country’s finances.
The scale of the problem has been well outlined before, but for a quick reminder – by 2040, the state’s social insurance fund is expected to record a deficit of €3 billion every year due to the increased cost of the state pension if the current system remained unchanged, with the losses set to rise exponentially in the following years.

There are three basic ways Ireland can deal with this – cut payments, increase the retirement age and keep people working longer, or raise taxes on the workers who are the ones funding pensions.

There’s no suggestion that the state pension will be reduced – although there’s a legitimate argument that not increasing it in line with inflation is essentially a real-term decrease.

Ireland’s rate of inflation is currently hovering around 2%. State pension payments will rise by €12 in 2025 – equivalent to a rise of about 4%.

As discussed before, raising taxes is actually very much part of the government’s plan – PRSI payments have already started to rise, and could mean younger workers paying hundreds of extra euros per year.

But as noted by Makhlouf – ‘the social contract that exists between generations – whereby current workers support retired individuals in the expectation of similar support when they themselves retire – will become increasingly strained.’

If younger workers are hit with ever-rising taxes to fund pensions, inter-generational resentment is likely to escalate. It’s also just not the best practically – there’s only so much money which can be squeezed from a relatively smaller pool of workers.

That would leave people in work longer. Despite being suggested by multiple researchers, Increasing the retirement age is politically toxic.

With that in mind, the ‘softly softly’ approach suggested by Makhlouf is worth a try, in an attempt to achieve essentially the same goal, with less friction.

But a survey published earlier this year reported that less than one in five would be willing to wait until 70 to retire.

We’ll have to wait a while to see the actual uptake of the state’s new initiative to give higher payments to those who delay taking the state pension. But it seems unlikely that ‘carrots’ such as these alone will be enough to make up the gap.

So does Makhlouf have a point? Probably, yes. While unlikely to be enough by themselves, measures to incentivise keeping people working longer, willingly, can at least be part of the solution to Ireland’s pensions ‘timebomb’ – which creeps ever-closer to going off.