How will the State pension proposals affect you?

Dominic Coyle’s Q&A: Commission proposes fundamental reform of system but change is likely to be gradual

Around a third of all workers – and close to a half of all those in the private sector – rely solely on the State pension for their retirement income.

Around a third of all workers – and close to a half of all those in the private sector – rely solely on the State pension for their retirement income.

 

The report of the Pensions Commission, published late on Thursday, has the potential to fundamentally change the Irish contributory State pension system. The commission was put in place to examine the State pension age and its funding after the issue became a major bone of contention with voters at the last general election. But how will it affect workers and what are its major proposals?

Why did we need another review of the State pension?

The pension became an election issue in 2020 as voters worried about plans in place at the time to increase the age at which it was paid to 67 in January 2021 – and to 68 in January 2028.

This was an issue particularly for workers whose employers were forcing them to retire at 65 in line with the State pension age up to 2014.

Why is the State pension age so important?

The age is critical because, at present, around a third of all workers – and close to half of all those in the private sector – rely solely on the State pension for their retirement income.

Efforts to persuade people to invest in private pensions over many years have delivered only limited success. So, for many, when they leave work at 65, they have no pension until they turn 66. In the meantime, they are forced to sign on for unemployment benefit.

Why is the pension age rising?

The State pension age is increasing because there is growing financial pressure on the Social Insurance Fund from which all State pensions and other welfare payments are made.

Much of this pressure is simple demographics: we’re living longer and there are fewer people working – and paying into the fund – to support a growing number of people looking for financial support from it.

The percentage of working age people is expected to rise by 9 per cent over the next 30 years; the number of people over the age of 65 is expected to double over that same period.

Where people lived to an average of 78 (for women) and 72 (for men) as recently as 1991, these figures are projected to jump to 86 and 83 respectively in 10 years’ time, and to 88 and 86 by 2051.

Isn’t 2051 a long time out to be worrying about?

Not really, in working or pension terms. There are people in their mid-thirties now who will be looking to retire around then.

They are currently paying PRSI to fund their parents’ pensions but are increasingly uncertain whether the money will be there for a State pension when they come to retire.

With a retirement age of 66 currently, people can expect to live – and draw down a State pension – for close to 20 years in retirement, half as long as their full working lives.

How much are State pensions costing?

Figures from the Department of Finance say the pension related costs as a percentage of modified gross national income (GNI*) – considered the most accurate measure of the size of the Irish economy – will jump from 3.8 per cent just two years ago to 5 per cent by 2030 and to 7.9 per cent by 2050.

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The department predicts that if there are no changes to the State pension, the Social Insurance Fund will be €2.3 billion in the red by 2030 and €13.4 billion by 2050.

What is this new report suggesting?

The commission’s report makes a number of suggestions but the most central is that the State pension age will continue to rise, but more slowly.

There’s an understanding that the previous plan to increase the age to 68 by 2028 was too dramatic.

Now, the proposal is to keep the State pension age at 66 until 2028. From there, it would rise by three months every year until 2031, so in 2029, you would qualify for the pension six months after you turn 66, and nine months after turning 66 in 2030. By 2031, the State pension age will be 67.

Thereafter it will rise by another three months every two years until it hits 68 in 2039.

But what if my employer is forcing me to retire at 65?

Under proposals in the report, that will no longer be allowed.

To do so, the Government will have to enact legislation to force employers to align the retirement age in employment contracts with the gradually increasing State pension age.

The suggestion is that such legislation would allow a worker to continue working until they hit a State pension age but that they would have the option of retiring earlier if they chose.

In that case, they would generally rely on their workplace pension to cover living costs until they qualify for the State pension.

So you won’t be able to access the State pension early?

Well the Commission says there is merit in a proposal that people who have accumulated 45 years of PRSI contributions can access a full State pension at 65 as long as they are not also working.

But what if I don’t have enough stamps for a full pension?

The report also recommends flexibility for people in this position. They would be able to defer taking their pension for a few years – as late as 70 – and receive a larger weekly payment at that age. Anyone choosing this option would have the right to continue to make PRSI contributions beyond the State pension age to maximise their State pension entitlement.

Speaking of PRSI contributions, are there plans to charge us more?

Yes, the report backs plans to increase PRSI contributions for everyone – workers, employers and the self-employed – to make sure there is enough money in the Social Insurance Fund to meet pension costs.

It presents four scenarios for raising PRSI on workers and employers. These involve increases of between 1.45 percentage points and 3.9 percentage points for each. The report leans towards the lower rate of increase – to be phased in over the next few decades. Under the preferred, 1.45 percentage increase option, both workers and employers would see their stamps rise by 1.35 percentage points in 2040 and by a further 0.1 of a point in 2050.

For the self-employed, it suggests initially raising the rate paid from 4 per cent to 10 per cent over time, ultimately bringing it to 11.05 per cent – the same as the rate currently paid by employers for their staff.

So, more to pay but not yet?

That’s it, and there’s more. In an effort to broaden the PRSI base, the report suggests people working beyond the age of 65 would no longer be exempt from PRSI contributions. This, it argues, would be in the interests of intergenerational solidarity, given younger people currently pay to support those who are older. As it stands, once you hit 66, you pay no PRSI regardless of what you earn.

The kicker is that these “Class K” contributions carry no social insurance benefits.

The Commission also recommends removing the exemption from PRSI on occupational pension income – whether a private or public sector pension – but not on welfare payments, including the state pension itself.

And how much of a pension will we get for all this?

The maximum State contributory pension is worth €248.30 every week, plus an additional €165.40 payable for an adult dependant under the age of 66, or €222.50 if they are 68 or over. As it stands, the decision on whether or not to increase this payment rests with the Government every year at budget time. For instance, there was no increase last year.

The report advocates introducing indexing to ensure the pension rises with inflation annually. There would also be a complex smoothing arrangement to ensure the payment does not stray too far from the ratio to average earnings against which it is currently benchmarked.

What about the auto-enrolment of new workers in private pension schemes?

Though not strictly relevant to State pensions, the report does support autoenrolment. It’s still on track to be introduced ...sometime.

Have they decided to push ahead with the new way of counting your PRSI stamps for a pension?

Moves to the Total Contributions Approach – where you get a full pension for 40 years’ PRSI contributions and a pro rata payment for anything less, as long as you have a minimum of 10 years stamps – are supported by the report. However, it proposes a 10 year phasing out period for the old and less equitable yearly average arrangement to ensure the minority of people favoured by this way of totting stamps do not lose out.

They also said something about carers?

Carers currently lose out as they are out of the workforce and not paying PRSI. The report says the exchequer should retrospectively pay PRSI for anyone acting as a carer for more than 20 years so that they can qualify for a State pension.

So when will all this happen?

Well that’s the big question. Successive governments have dithered on pensions for decades. And then the current Minister, Heather Humphrey, made the strange decision to bring this report to cabinet and publish it at short notice on a day the cabinet – and the headlines – were focused entirely on the corporate tax debate.

It’s not clear what the rush was to get it out on an already busy news day for the Government, not least as the Minister says it will be the end of March next year before it comes back to Cabinet. It is likely to be a number of years yet before people will see concrete change as a result of this report.

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