Last week’s budget may have promised some relief for young people facing the cost of living crisis in the form of rent and energy credits, as well as tax cuts and the extension of the purchase assistance program. However, the measures are unlikely to do much to reverse a stronger trend in which this generation faces an uncertain financial future.
Recent weeks have seen an overhaul of the state pension to incentivize people to work longer and place a greater financial burden on younger generations, as well as a recommendation to raise inheritance taxes. Here, we look at some of the ways people in their 20s and 30s today are likely to be less financially stable than their parents.
1: Less likely to own their own home
A lack of decent housing, more contract-type work, fixed incomes and more expensive housing; all combine to make buying a home a much more difficult prospect than it has been in the past.
According to an ESRI report this summer, 60% of people aged 25 to 34 owned their own homes 18 years ago. By 2019, however, that figure had dropped to just 27%, and experience suggests it has fallen further since.
Not only that, but the ESRI study suggests that even, as might be expected, more and more people currently in this age group are able to buy a home as they get older. grow older and their incomes increase, far fewer will still be in that position than they once were.
For example, the homeownership rate for 35-44 year olds is currently 58%. Seventy-one percent of this cohort is expected to eventually own their own home (note that this is also down from previous generations). When it comes to people aged 25 to 34, only one in two people are expected to buy their own home.
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Of course, this is only an estimate and may change if, for example, income growth outstrips house price growth for an extended period, or if housing policy initiatives are successful. However, this decline in homeownership observed among the younger generation is reflected in broader trends.
As the ESRI report notes, homeownership rates are about 10 percentage points lower (about 80%) for those currently aged 55-64 and 45-54 compared to current retirees. (about 90%).
2: Will have higher housing costs due to rent
If this age group is not buying their own house, they must be renting. And the figures show that more people are renting now – and paying far more than they might have in the past.
In 1991, less than 10% of the population rented, according to CSO figures. Fast forward to 2016 and the private rental sector has expanded to almost 20% of the population, with a further 10% in social housing. Thus, almost a third of the population is now a tenant.
Many of these tenants are younger and spend a large portion of their money on rent. According to figures from the Residential Tenancy Board, the national average rent for a new rental in the first quarter of 2022 was €1,460, up around 46% from the second quarter of 2008. In Dublin, the average new rent was €2 €015, up about 55% from the previous high in 2008.
This has an obvious negative impact on a household’s finances. It is therefore perhaps unsurprising that in the ESRI report, more than 20% of households aged 25-34 face high housing costs, compared to just 6% among those aged 55-64 and only 1 out of 100 of people aged 65 and over.
“Across all age cohorts, the incidence of high housing costs is significantly higher for non-homeowners,” the report says.
3: They will probably be older if they buy
When members of this younger generation manage to buy a house, it is likely to be later than their predecessors. And it can also have financial consequences.
Central Bank data shows the average age of a first-time buyer last year was 35. Contrast that with the typical age of 29 just 16 years ago, and even earlier before that.
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This has a number of major impacts on a household’s financial health. First, the later you buy for the first time, the less time you’ll have to generate equity and “trade in” to a home that’s better suited to your family.
Second, it will affect how much you can afford to borrow. If you are 40 years old, for example, a bank is unlikely to lend you for 30 years, but repayments on a 25-year loan will be more expensive on a monthly basis (although ultimately “cheaper” due to the lower amount of interest paid) . This can impact where and what you can afford to buy. Whereas if you want to swap, the remaining time for another mortgage will again be shorter and even more expensive to maintain on a monthly basis.
Third, the later you buy, the older you will be when you finally finish your mortgage. This means that you will have fewer financial resources to devote to building up a retirement fund. Not only that, but some homeowners may need to take out a mortgage in retirement.
4: Can get a smaller inheritance tax-free
A gift from mom and dad’s bank has become increasingly common to help first-time buyers move up the housing ladder, but a recommendation from the Tax and Welfare Commission’s recently released report would reduce the amount that the children can receive without incurring a tax burden. .
The report called for a “substantial” reduction in the amount of money parents can leave their children tax-free, suggesting that the parent-child tax exemption threshold should move closer to Group B thresholds and of Group C. This would represent a massive drop in tax-deductible income, as these thresholds are only €32,500 and €16,250, respectively.
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While the government has since said there is ‘no appetite’ for change, the amount children can inherit tax-free has proven volatile. In 2009, for example, the parent-child threshold was €542,544. After the financial crash, it fell to €225,000. Although it has since increased, it now stands at €335,000, around 35% below the 2009 peak. Anything above the €335,000 threshold is subject to a 33% tax.
5: Less money in retirement
Part of the reason many of those in their 20s and 30s today will face a more difficult retirement in the future is that they may not own their own homes. As the ESRI report notes, “Owning a home in retirement provides security in the form of low and stable housing costs, as well as an asset to draw upon as a potential source of income in retirement. retirement “.
Without it, retirement seems much more difficult. Housing costs are considerably higher for those who rent than for those who own. The ESRI report suggests that with a “low” homeownership rate of 63%, the income poverty rate could reach 31%. But when homeownership is 92%, it only drops 14%.
Those currently aged 65+ pay just 0.5% of their income in mortgage costs as a group, while the vast majority have paid off their mortgages and therefore have no housing costs in retirement .
6: A longer working life — with lower benefits at the end
Until 2014, you were entitled to a state pension at age 65. She then rose to 66, cutting around €12,000 in state benefits in one fell swoop. By the time people in their 20s and 30s retire, even if the benefits are similar to those of today, they will have paid a much higher price for them.
Under sweeping changes announced last month, due to be introduced in January 2024, the retirement age of 66 is set to remain, but the cost of providing it will rise as more of the population reaches this age with relatively fewer young people working. to pay it. This means that young people will inevitably have to contribute more to the PRSI to ensure that the pension continues to be paid, including when they finally become entitled to it.
The government has indicated that it will impose “gradual and progressive increases in social insurance rates over time”. The Irish Tax Advisory Board, however, later warned that instead of being “gradual”, “significant” increases are likely to be needed to maintain stable funding.
Younger people will also be offered the option of postponing their retirement altogether, with a ‘higher’ rate of public pension payment available to those who wait until age 70 to apply (of course , it is not necessarily a higher payment, as you will have given up a certain number of years of payment, so you will have to live longer to benefit from it).
The new approach means, at current payment rates, a payment of €253 per week for someone retiring at age 66, rising to €266 at age 67; €281 at age 68; €297 at age 69; and €315 at age 70, or an additional €3,224 per year for someone retiring at age 70.
Young people also face challenges on the private personal pension front. Unlike the current generation of retirees, many of whom are on an end-of-career salary/defined-benefit pension, young workers will have to depend on themselves more than their employer to secure their own retirement.
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