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What does the row about the State pension age mean for your finances?

Smart Money: There is a lot more is at stake than when you might retire

The debate over the age at which people qualify for the State pension is hotting up. But whatever decision is made will affect a lot more than your retirement plans. Because with a big hole appearing in the Social Insurance Fund, out of which pensions are paid, something is going to have to be done – and issues such as future PRSI payment rates, bringing over 66-year-olds into the PRSI net, pension tax relief and even general taxation will also be in the frame for discussion.

1. Where do we stand on the age at which people qualify for the pension?

In a confused position. You will remember that this was kicked firmly into touch by the previous government before the last general election, with plans to raise the qualifying age for the State pension to 67 last year put on hold. The Pensions Commission, asked to advise on the issue, recommended a slower increase, which proposed that the qualifying age rise by three months every year from 2028 on, bringing it to 67 by 2031 and 68 by 2039.

Now the Oireachtas Committee on Social Protection has recommended the age remain at its current level, which is 66. The Government, meanwhile, awaits advice later this month from the Commission on Tax and Welfare, which it has asked for a view on the Pensions Commission’s plans. (If you think they are trying to avoid a decision, you are right.)

The bottom line is that the qualifying age does not look set to change over the next few years, but beyond that the Government has a big call to make. And this has much wider implications, as we will see below.

2. But what about my actual retirement age?

This also emerged as an issue during the election – people with contracts which obliged them to retire at 65 were having to apply for Jobseekers’ Benefit to carry them over to 66 when they qualified for the State pension. A new special payment is now in place, offering the same payment level as Jobseekers’ Benefit.

The Pensions Commission recommended that legislation should ensure that retirement ages in employment contracts keep pace with the qualifying age for the State pension. This would mean that that – with some exceptions – people would work longer. (Some leeway was suggested in cases where people had built up 45 years of PRSI contributions.)

This is also politically contentious, with the Oireachtas committee recommending this week that "legislation should be developed to ban the use of mandatory retirement clauses in existing as well as new employment contracts." Senior Ministers have also referred to the issue of people with physically demanding jobs, or who have worked since a young age.

For now, your legal employment contract, with may refer to a retirement age, will remain as it is. But particularly for those with a time to go before retirement, this is now in the policy mix as well, with alignment with the State pensions age appearing a sensible solution.

3. How will future pensions be paid for?

This is the big question. An ageing population, with fewer people working compared to those retiring, and increasing longevity are pushing up the pension bill. If nothing is done, a big hole will appear in the Social Insurance Fund, out of which payments are made. The Department of Finance calculates that this deficit would amount to €2.36 billion in 2030, €8.56 billion in 2040 and €13.35 billion by 2050.

Traditionally, deficits in the fund have been met from the exchequer – in other words from general taxation. But with these kind of numbers emerging it is clear something more has to be done.

The Pensions Commission suggested a mix of burden-sharing – saying it would not be wise to meet the entire deficit from one source, such as higher PRSI, or more exchequer contributions. So it opted for a mix, including higher PRSI payments for employers and employees from 2030 on, a gradual push out in the State pension qualifying age, exposing more income to PRSI and a permanent State contribution from general taxation amounting to 10 per cent of the annual pension bill. So the State would pay money in each year, and not just when the fund was in deficit. But each and every one of these is controversial, as the Oireachtas report makes clear.

4. Your PRSI bill

Social insurance, or PRSI payments, go into the Social Insurance Fund and are used to pay benefits. The term “fund” is a little misleading as this is essentially a pay-as-you-go operation with today’s taxes paying for today’s pension and welfare payments. Higher PRSI payments are thus one part of the likely solution to the emerging hole. The Pensions Commission said increases would be gradual and not introduced for some time in most cases, provided the State pension age was increased. But a decision not to increase the qualifying age would require earlier and more dramatic PRSI hikes, it said.

The Oireachtas committee recommended that the PRSI hikes be largely confined to employers, who currently pay 11.05 per cent on earnings over €410 per week. This is low by EU standards, but an issue for Government is that increases here may also be slated in to meet other upcoming bills, such as the proposed introduction of some kind of pay-related unemployment payment system. This will be a key issue for the tax and welfare commission.

Self-employed people also look very likely to pay higher PRSI. The Department of Finance in pre-budget reports has pointed out repeatedly that this group pays at 4 per cent, but is getting many of the benefits of employees, due to change in qualification rules in recent years. The Pensions Commission recommended a gradual increase to 10 per cent by 2030 in the self-employed PRSI rate and further rises to bring it in line with employer rates thereafter. The Oireachtas committee seemed to accept the general point but said increases should be gradual and well-flagged. So the self-employed look set to be in firmly in the firing line for higher PRSI payments in the years ahead.

The Oireachtas committee side-stepped the issue of employee PRSI, saying it felt taxes on income were high enough. However, with a wider increase in social benefits being planned, as well as the hole in the fund, a gradual rise in these payment also looks likely. The alternative is a move on the qualifying age for the pension. As Taoiseach Micheál Martin said in the Dáil, there are no easy answers.

5. Who pays PRSI?

Currently people aged over 66 are exempt from PRSI and it does not apply to any pension income. The Pensions Commission recommends that the income of people over 66 should be subjected to PRSI. It says this should apply to occupational pensions, including public sector pensions, but not to the State pension or other social welfare payments. This would, it said, put some of the burden on already-retired people as part of its wider approach of spreading the load of paying for the State pension. It recommended that the PRSI rate to be applied to this group should be 4 per cent. However, showing the political sensitivity of the point, the Oireachtas committee did not support this recommendation. Interestingly the Pensions Commission recommended that State pension payments be indexed-linked to inflation, which would offer significant security to recipients.

6. Other ways of paying

If the hole in the Social Insurance Fund is not paid for by higher PRSI or increasing the qualifying age – and if there is general agreement that pension payment rates should not be cut – then the only other source of funds is the general exchequer.

The Oireachtas committee calls on the tax and welfare commission to examine the idea of a wealth tax as one way forward. The Department of Finance has previously been sceptical about the revenue raising possibilities here – and the international evidence is mixed – though given the surge in wealth in recent years, these taxes are now on the agenda again internationally for discussion. The quickest way to tax wealth in Ireland would be to increase the local property tax, but taxing the family home is a very sensitive issue in political terms.

The issue of funding pensions comes as the exchequer faces a range of other challenges in the long term, notably the costs of climate change and other costs relating to an ageing population. The tax and welfare commission, due to report in the summer, has much to ponder in terms of budget sustainability. Higher taxes and charges are inevitable.

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