Legislation which will pave the way for establishing new funds to pay for public service and State old-age pensions was moved in the Dail last night. The Minister for Finance, Mr McCreevy, proposed moving £3 billion (€3.8 billion) into a temporary fund, pending full legislation next year.

This temporary or holding legislation must be approved before the end of the year, otherwise the monies would automatically go towards paying off the national debt. The legislation to establish the funds on a permanent basis is being drafted and will be ready in February or March.

Last July, the Government said it would set aside 1 per cent of GNP annually towards the Exchequer cost of social welfare and public service pensions in the future. It amounts to £582 million this year.

Mr McCreevy told the Dail that the Eircom float raised £3.667 billion. Of this, the Government would use £1.25 billion to pay off liabilities to the Eircom and An Post pension funds. The remaining £2.417 billion was being added to the temporary fund.

Mr McCreevy said future demographic changes would have major Exchequer implications. By 2025 the cost to the Exchequer of maintaining the current level of pensions and health service provision would have risen by about 4.5 per cent of GNP or more than £2.6 billion.

By 2050, he said, this would have risen by 7 per cent of GNP or by more than £4 billion. He added that the increased Exchequer costs associated with ageing would require a 17 per cent increase in overall tax levels by the middle of the next century, merely to maintain the existing level of service.

Informed sources said last night that such a projection was 50 years away and the percentage of GNP needed to fund pensions was low by EU standards.