Big decisions are coming on Irish pensions policy, with significant implications for the national finances and for people’s personal finances. A vital call will be what happens to the age at which people qualify for the State pension, currently 66 years of age. But there are a range of other policy changes which are also likely to be considered in this most politically sensitive of areas.
1. The age of retirement
The previous policy of gradually increasing the qualifying age for the State pension – referred to as the State pension age – was put on hold due to controversy before the last general election.The State pension age had increased from 65 to 66, but planned rises to 67 last January and to 68 by 2028 were put on hold, pending a study by a pensions commission. Its report is understood to recommend that any further increase be delayed for seven years, with a gradual rise in the State pension age to 67 in a series of incremental steps between 2028 and 2031 and an increase to 68 by 2039. However its full analysis of the cost implications of this and what other reforms are needed has not been published yet. There are also key issues relating to what happens with people’s employment contracts, many of which specify retirement at 65 years of age.
These decisions are obviously hugely important for those approaching retirement. They are also a big deal for the public finances. And there are signs of a big debate brewing, with a Department of Finance report published recently saying that the current policy was unsustainable and that increasing the pension age in line with life expectancy – as planned before the last general election – would be a key step towards making pensions more sustainable. This would see the qualifying age reaching 68 by 2028. The Department then proposes that it would then rise further, increasing by nine months for every additional year of life expectancy in the years ahead.
Finance Minister Paschal Donohoe said delaying the policy decision could store up problems for the public finances.While he did not lay his cards fully on the table, it seems a tense cabinet discussion lies ahead on this issue. A key part of the discussion is the deficit in the Social Insurance Fund, out of which pensions and other benefits are paid, which has emerged after the Covid-19 crisis. In policy terms this can be addressed either by increasing the contribution from the general exchequer, cutting the bill in some way – such as pushing out the State pension age of changing eligibility – or raising more money from higher PRSI contributions, which go to support the fund.
Higher employer PRSI contributions certainly look to be on the cards and the Commission on Tax and Welfare, due to report next summer, may recommend wider increases.
2. The costs
A lot of estimates are flying around. Perhaps the most detailed piece of work, from the Irish Fiscal Advisory Council, was that the annual cost of keeping the pension age at 66 would be €587 million next year, rising to €700 million by 2026 – and the cost of standstill would increase to €1.5 billion in 2028, the year when it was due to rise to 68. To put this in context, the total amount available for tax reductions in this year's budget, on the Government's sums, is €500 million.
Official Government estimates, drawn up before the change in policy, would appear to suggest that the cost could be slightly lower, around €480 million per annum. Presumably slightly different assumptions account for the difference. But either way the amounts involved are significant in the context of the annual budget.
The Department of Finance report focuses more on longer term costs, looking at the significant additional bill which would accrue – amounting to €50 billion by 2070 – compared to the cost had the planned increase in the State retirement age taken place. However it does warn that the annual costs ramp up quickly over the next few years.
Future policy in this area is uncertain. Sinn Féin has said that it wants to return the State pension age to 65. It says a Government department has told it that this would cost €127 million. This sounds low, when compared to the much higher costs of not increasing the pension age further. Part of Sinn Féin’s argument is that the budget figures for the years ahead have already now taken into account the decision not to increase the retirement age further.
However the Government has yet to consider the Commission on Pensions report, so we will have to see what it decides.
3. Wider pension issues
The Commission on Pensions was charged with specifically looking at the State pension issue. However there are wider questions in relation to pensions policy, both in the public and private sector, involving issues such as the low level of private sector coverage and the high cost of tax relief on pensions. A proposal that private sector employees should be automatically enrolled – auto-enrolled in the jargon – to pension plans has been on the table for some years, but has yet to be implemented and would be a complex and controversial task.
Other measures could reduce the cost to the State of pension provision, but none of them is easy. Sinn Féin has proposed cuts to tax relief on what it calls “gold-plated” pension pots.
In a presentation to the Budgetary Oversight Committee ahead of this year's budget, ESRI economists Dr Barra Roantree and Dr Theano Kakoulidou made a couple of suggestions on where the State could look for revenue. They pointed out that the bulk of employer pension contributions were never subject to PRSI, which could be addressed by levying this charge when the payments are made, or by charging PRSI on the income of those above the State retirement age, who are currently exempt.
The ESRI researchers also highlighted that the €200,000 limit on the tax free element of a retirement lump sum payment here was very high by international standards. This mainly benefits higher paid public servants and also those in the private sector with very large pension pots. Higher earners are also the beneficiaries of the €2 million lifetime limit on the amount which can be contributed to a pension fund tax free and this could also be targeted for a reduction, they pointed out.
Beyond that is the long-standing issue that pension tax relief is offered at the marginal rate for employees, meaning a bigger boost for those who pay at the higher rate.
4. Choices, choices
Like most areas of policy there are no “right” or “wrong” answers. But there are vital trade-offs. Pensions are increasingly expensive for the exchequer and keeping the State retirement age at 66 means foregoing money which would be spent elsewhere. Likewise there is the question of the wider viability and efficiency of the pensions system. And there is an element of inter-generational equity here. Should, for example, younger employees be expected to pay more PRSI to fund generous pensions to older people, who themselves have benefited from tax relief over the years? Of course the younger employees will reach pension age themselves eventually, but already the likely retirement income of many is much less than those now reaching retirement, due to changing working patterns and the effective ending of defined benefit plans for most employees except those in the public service.
