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Opinion Government is missing the links between the housing crisis and growing pension problem

Rory McNab says Ireland’s unaffordable housing means a whole generation will be without pension cover in years to come.

IN 2021, HOUSE prices rose by an average of 12.8% nationally in the year to November, according to the CSO. Within a year or two, prices are likely to return to their Celtic Tiger peak.

Meanwhile, the average cost of renting is already 32% above its pre-Grand Recession of 2008 peak and is still rapidly rising due to shortfalls in supply caused by complications in construction resulting from Covid, and longer-term issues relating to systemic failures in governmental policy.

Alleviating the plight of those cast into homelessness and economic hardship by the caprices of a malfunctioning housing sector is, and should always be, the primary motivation of those looking to tackle the current housing crisis. The acute symptoms of a dysfunctional housing system have been well documented and formed the basis this week’s Prime Time special on RTÉ, which looked at a generation locked out by unreachable house prices.

The pension question

However, the current housing crisis is also directly contributing to another systemic problem, and one which is predicted to worsen over the coming years: a lack of pension coverage.

We see today more public conversations around the state pension age and few would argue that the state pension will be adequate to live on as the population ages. When it comes to private pensions, fewer than half of people aged between 20-34 have either a personal or occupational pension, according to the Pension Coverage 2020 report compiled by the CSO.

Among those in this demographic without a pension, roughly one quarter say they are unable to afford one; while this figure rises to one third among those aged 35-44 without a pension.

Affordability, particularly for workers outside of professions where occupational pensions are common, is the main obstacle preventing people from saving for their futures. The correlation between the concerningly low uptake of pensions among younger age groups and the housing crisis is a straightforward point of economics.

Any given person will earn a set amount of income over the course of their working life. The greater a proportion of this income that is spent on rent, a mortgage, and on paying off the interest of this mortgage, the less money they will have available for other expenses, such as a pension.

Barely treading water

Indeed, the pioneering book Scarcity: Why Having Too Little Means So Much, by behavioural economist Eldar Shafir and psychologist Sendhil Mullainathan shows that when an individual is under immediate economic stress, humans are psychologically predisposed to borrow from our futures to pay for the ‘now’.

Thus, the need for people to pay increasingly exorbitant rents, and to try to save for a home, means that many are simply not in a position to even consider starting a pension.

According to a report on housing affordability in Ireland (published for the European Commission in 2020), between 1991-2006 the average age at which a person bought their first home remained relatively constant, around 27.

However, between 2006-2015, the average age rose to 35. In effect, this means that new homeowners are spending roughly eight years longer in rental accommodation before purchasing their first home.  

To do some beermat mathematics, someone renting at an average monthly cost of €600 for eight years before buying a house at the age of 35 will have spent an extra €57,600 compared to someone buying a house at 27. This figure rises to €86,400 if their monthly rent is €800 per month. Thus in effect, the average new homeowner in 2021 will have spent some €55,000-€85,000 more than someone in 2007 to get to the same position.

A generation locked out

However, the increased amount the typical first-time buyer spends on rent is only one part of the problem. While still below their Celtic Tiger peaks, house prices have been rising steadily since 2012, with the national average being €288,000 as of September 2021, according to the CSO – though it’s significantly higher in cities.

This means that a growing portion of one’s lifetime earnings will be spent paying a mortgage, and, importantly, the interest on that mortgage – rates of which are particularly onerous in Ireland.

Escalating housing prices, combined with the Central Bank’s post-crash edict limiting bank loans to a maximum of 3.5 times a person’s salary, or a combined salary of a couple, has meant a growing number of people end up having to save for deposits closer to 20-30% of a home’s value, thus increasing the amount of time they will typically have to first stay in rented accommodation.

And that’s just to mention those in a position to ultimately afford a house. An increasing proportion of young people in Ireland are consigning themselves to the idea that they may never be able to afford a home, particularly those in cities looking to remain among the community they grew up in. This is illustrated by one EU study which shows an increase in the proportion of tenants among the population from 22% to 31% from 2006 to 2016.

Housing and pensions policy

And there is no sign of the crisis in housing affordability abating, while last night’s much-anticipated TV debate between Housing Minister Darragh O’Brien and Sinn Féin’s Eoin Ó Broin did little to inspire the viewers with confidence.

Pre-existing supply issues, construction delays due to Covid, and real estate investment trusts (REITs) increasing their presence in the Irish housing market have caused both rents and house prices to climb, at 7% and 12.4% respectively, in 2021, according to and the CSO.

In essence, the housing crisis is resulting in people having to squander a greater proportion of their lifetime earnings on rent, before spending an excessively large amount (compared to EU averages) to purchase a home. An obvious consequence of this is that cash-strapped renters and new homeowners have less money to set aside for other expenses and to save for the future.

At its core, this is a problem experienced by individuals. Its effects are felt by those left struggling or unable to afford rent; by people who feel that their attempts to save for their own futures are futile, as house prices surge beyond their reach. However, the decrease in the proportion of people able to afford pensions poses a longer-term, existential risk to the government and the state.

For many years, experts have been warning of an impending ‘pensions timebomb’ that will predominantly affect the so-called ‘developed nations’. The European Commission’s 2021 Ageing Report predicts that demographic shifts resulting from declining birth rates and continuously improving medical care will cause the proportion of the adult population of retirement age, relative to the proportion of working age, to increase from 35% to roughly 60% across the EU by 2070.

Currently, the Irish government spends around 11% of its annual budget, or €8.8bn in 2021, on the state pension. Over the past four years, the nominal figure has risen by between €400-500m annually. Given the expected demographic shift to an older population, the amount of money that the state will have to spend on pensions annually will roughly double by 2070. This will all occur in the shadow of tax receipts from income taxes declining as the adult population shifts from having a majority of people of working age, to a majority of retirees.

The increase in pension expenditure is expected to put significant pressure on public finances. As such, despite committee recommendations on pension age limits, the spectre of the state pension time bomb will inevitably be raised again as the pretext for subsequent Government attempts to further raise the retirement age.

What’s more, according to the CSO’s Pension Coverage 2020 report, some 58% of people who don’t have a private or occupational pension say that they expect to be entirely reliant on the state pension when they retire. Leaving them reliant on an income of some €13,000 per year – assuming that it is indexed against inflation over the coming years. For anyone, still paying off a mortgage, this would be unsustainable.

Auto-enrolment in state pension

The most frequently proposed solution to this problem is the introduction of ‘auto-enrolment’. Auto-enrolment is a system whereby every employer is obliged to set aside a proportion of their employee’s salary into a pension fund, with both the employer and the state also contributing to the employee’s fund.
The latest iteration of this suggestion, from a paper published by the government in 2018, suggests that every employee between the ages of 20-69, earning more than €20,000 per annum, should be automatically enrolled in a national scheme whereby the employee’s pension contribution would be matched by their employer, and the state would provide an additional €1 for every €3 contributed.

However, the date of implementation, originally slated for 2022, has been pushed back. And, due to a number of logistical difficulties around implementing such a sweeping scheme, and numerous previous false dawns, such as former minister Joan Burton’s failed attempt to implement a similar auto-enrolment plan in 2011, expectations are not high that this current plan will be implemented in a timely fashion.

While such a scheme, if enacted, would undoubtedly help somewhat in redressing the impending shortfall in pension coverage for an ageing population, it is too myopic. Personal finances are complex, every euro saved or spent throughout someone’s life constitutes an opportunity cost.

For this government to ignore the fact that the crisis in the rental and housing markets is leading to swathes of people spending ever-increasing amounts of their lifetime earnings on both rent, and paying off interest on vast mortgages, thus diminishing their ability to save for the future, is a fundamental oversight.

Many Irish people are failing to save for their futures because current financial pressures, exacerbated by a decade of Fine Gael’s profoundly ineffective housing policy, simply don’t allow them to.

Lower house prices, lower rents, less onerous mortgage interest rates, would ease some of the pressures on younger and lower-income workers, creating some financial leeway that might permit these people to consider saving for their future by starting a pension.

The reasons to address the housing crisis are the urgent moral imperatives of raising those worst affected out of homelessness and above the poverty line. However, by failing to facilitate personal savings by curtailing the excesses of a malfunctioning housing sector, this government is jeopardising the economic future of thousands of individuals and, to a very real degree, the nation, by their continued inability to address this crisis.

Rory McNab is a journalist, editor and writer living in Dublin whose work focuses on politics, pop culture and satire.   


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