VALUING IRELAND’S PENSION SYSTEM. Quarterly Economic Commentary, Summer 2007

Whelan, Shane (2007) VALUING IRELAND’S PENSION SYSTEM. Quarterly Economic Commentary, Summer 2007. [Working Paper]

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Abstract

Despite considerable research, no consensus has yet emerged on the design of a sustainable pension system for Ireland. This paper takes a novel market-consistent approach and, in so doing, challenges the assumptions underlying the costing of alternative systems presented in Pensions Board reports (2005, 2006). It is shown that by ignoring investment risk and its consequences, the cost and value of pensions are materially understated. It is argued that risky investment strategies are not appropriate for modest or mandated pension savings and they propose, at the very least, that the state develops and maintains a market in index-linked stock to help pension savers manage investment risk. It is shown that a system based on mandatory personal pension savings in low risk government guaranteed investments is functionally very similar to a sustainable pay-as-you-go (PAYG) system. The two systems are contrasted from the perspective of value-for-money for contributors. We conclude that the sustainable PAYG is superior, delivering pensions of the order of one-fifth higher for the same level of contribution due to lower administration costs. Accordingly, we propose a better solution than simply the state maintaining a market in index-linked securities: Ireland’s current PAYG system should be developed into a sustainable version that provides all mandated pensions.

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