Who should pay the bills if the State pension age stays at 66?

Barra Roantree: Keeping State pension age at 66 is unfair to younger generations

Ireland is ageing, and ageing rapidly. The Central Statistics Office estimates that while there were five working-age people for every pensioner in 1991, this will fall to 3.5 by 2031 and just 2.3 by 2051.

A key reason for this is that people are living longer, healthier lives. While this is unambiguously a hugely positive outcome, it comes with it some fiscal costs.

One of these is the increased cost of State pensions. The Department of Finance forecast that this will rise from 3.8 per cent of national income in 2019 to 5 per cent by 2030, and more than doubling to 7.9 per cent by 2050 – an increase equivalent to what the Department of Education and Skills currently spends every year.

To offset these rising costs, the plan of successive governments has been to gradually raise the age at which individuals can claim the State pension to 68 by 2028. However, these increases – which had been proposed in 2010 and legislated for in 2014 – were initially delayed after they became the subject of heated debate during the 2020 general election. Following the election, the current Government set up the Pensions Commission to advise how to proceed. The commission made a very reasonable set of recommendation, including that increases to the State pension age should go ahead alongside other reforms to both State pension benefits and the way these are paid for.

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Instead, earlier this year the Government said it would leave the State pension age at 66 – and even expand eligibility to some groups – with the increased cost of the state pension to be paid solely through unspecified increases to pay-related social insurance (PRSI).

Continuing with the current approach of keeping the State pension age at 66 and paying for this through PRSI increases on those of working age merely loads the costs of change on to future generations

This is a tax that applies to the incomes only of those under age 66, a group whose relative size is going to shrink over time. As a result, the effect of the Government’s approach is to put on younger generations the cost of letting those currently in their 50s and 60s retire earlier than planned.

It is particularly hard to see how this is fair when the scale of the demographic changes we are facing is such that it’s highly likely – if not inevitable – that the State pension age will ultimately be increased in the future. This would leave younger generations paying higher taxes over their working lives, without ever seeing the benefit of an earlier State pension age.

Even if it is unwilling to consider increasing the State pension age, the unfairness of the Government’s approach could be mitigated by adopting some of the other reforms the Pensions Commission recommended which have seemingly been kicked to touch.

These include extending PRSI to the non-State pension income of those age 66 plus, including occupational, personal and public-sector pensions. Such a change was also supported by the Commission on Taxation and Welfare, which further recommended reducing the tax-free lump sum that is available on pension drawdown at retirement.

This tax-free lump sum is currently capped at an exceptionally generous €200,000, primarily benefiting those with substantial pension wealth and encouraging the withdrawal of large lump sums on retirement, something hard to reconcile with a policy goal of encouraging individuals to ensure a regular stream of income in retirement.

As well as making the overall tax system fairer, these measures would go some way to reducing the burden on younger workers and employers by necessitating smaller increases in PRSI, with little effect on lower-income retirees (few of whom have substantial non-State pension income or take a large, tax-free lump sum).

But continuing with the current approach of keeping the State pension age at 66 and paying for this through PRSI increases on those of working age merely loads the costs of change on to future generations, something we also see with successive governments’ responses to other issues such as climate change and housing.

Barra Roantree is an assistant professor and director of the MSc in Economic Policy at Trinity College Dublin. He was part of the Government’s Commission on Taxation and Welfare from 2021 to 2022

Laura Bambrick: Intergenerational fairness must be a two-way street

In September 2022, the Government agreed to keep the pension age at 66. Raising the pension age to 67 and again to 68 in 2028 had become a key battleground during the last general election and the most important deciding factor for voters, after health and housing. Support for the Siptu-led Stop67 campaign has not waned. Public opinion polls show two-thirds (66 per cent) of voters are in favour of keeping the pension age at 66. Support is strongest among 18-34 year olds, suggesting that the intergenerational fairness argument to justify hiking the pension age does not have the support of almost seven in 10 (69 per cent) of the intended beneficiaries.

Unions have never denied the challenge Ireland’s ageing population presents for the future sustainability of the State pension and for younger generations if no action is taken now.

The projected scale of this challenge has moderated significantly over successive actuarial reviews of the social insurance fund, as noted by the Comptroller and Auditor General in this year’s audit of the State’s accounts. Nonetheless, a yawning gap remains between anticipated pension expenditure and the fund’s resources.

Keeping the pension age at 66 will mean higher and new social insurance contributions and other pension policy reform.

But there is scope for revenue raising. The yield from employer social insurance contributions alone would need to almost double just to reach the European Union average. Already a 0.7 per cent increase in employer, employee and self-employed social insurance rates, to be gradually rolled out, has been flagged. From next October, a worker on average earnings will pay 90 cent more a week in PRSI when the first of five annual increases kicks in.

Intergenerational fairness must be a two-way street. At the moment, PRSI is not levied on any earned and unearned income of those aged 66 and over. This blanket exemption needs to go. Why should, for example, landlords stop paying PRSI on their rental income profits when they turn 66? But – and on this unions are clear – care must be taken when ending the PRSI exemption on over-66s that it does not unfairly impact certain groups of pensioners, such as pre-1995 civil and public servants who have no entitlement to the State pension, or unduly weaken the incentivise to work or save for a secure retirement.

A flexible pension age to incentivise and reward longer working lives is a much fairer policy to pushing up the pension age for everyone

Landmark pension reform is already well advanced to move away from a one-size-fits-all pension age to a European-style flexible pension age. From January 1st, when a worker reaches age 66 they can choose to delay claiming their State pension up to age 70 in return for a higher weekly payment. This deferred pension option will also give people who are short the required number of social insurance contributions the choice to work longer to build up their PRSI record.

Unions have long argued there is a sizeable and growing number of workers who are forced to retire earlier than they would wish because of the age of retirement in their employment contract, typically 65. Legislation ending forced retirement before the pension age is due to go to Cabinet for approval soon. Early access to the State pension for workers with a long work history and social insurance record – having worked from a young age typically in physically demanding jobs – is under consideration. In Germany, for example, workers who have paid social insurance for at least 45 years can claim the state pension at 63, three years earlier than the pension age and with no deduction in the weekly payment.

A flexible pension age to incentivise and reward longer working lives is a much fairer policy to pushing up the pension age for everyone.

Political realities mean that the pension age is far from a settled question. The most popular party in the polls, Sinn Féin, says it should be cut to 65 – a pension age for which only very few people qualified before it was abolished in 2014. Another general election fought on the pension age may be just around the corner.

Dr Laura Bambrick is the Irish Congress of Trade Unions spokeswoman on pensions