Pensions reform plan is a cop-out that loads the burden on younger people

The Government is settling on a plan to reform the State pension regime which does nothing to address the serious question about how to pay for all this as the population ages. Fewer people at work and more people retired makes the whole pensions show more expensive to run – a lot more expensive. The indications are that the Government has decided the bill will be picked up by those in the workplace. It is not a reform process, it is a stick-up of the younger generation.

Let’s go back and remember how all this started. The Irish population is younger than most other European countries, but is ageing relatively fast. There are now about 4.5 working-age people for every pensioner. This will fall to 3.5 to one by 2031, and 2.3 to one by 2051. Sooner rather than later, unless something is done, the whole system will become unsustainable financially. This was the reason for the proposed increase in the age at which people qualify for the State pension, which became so controversial in the last general election campaign. The State pension age had already increased to 66 and was due to rise to 67 last year and 68 in 2028.

This was all put on hold and ministers decided to kick the whole issue to a Pensions Commission, chaired by former Revenue Commissioner Josephine Feehily. It produced a well thought-out report, the key theme of which was that the State pension was an issue of social solidarity and the costs of the rising bill in the years ahead should be shared between older people, younger people at work and the general taxpayer.

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Before the report was even published, it was clear that it was making the Government uneasy. The problem, politically, was that it had recommended a very gradual increase in the age at which people would qualify for the State pension. This would reach 67 by 2031 and 68 by 2038. Hardly revolutionary in an era when people are living, and working, longer. But any increase in the State pension age is now seen as too toxic to handle in Irish politics.

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The Government has been trying to decide ever since how to deal with this hot potato, kicking it for further advice to the Commission on Taxation and Welfare, but now seems to be close to deciding on a plan.

Taoiseach Micheál Martin confirmed recently that in his view the State pension age should not increase. This is a costly decision – the Irish Fiscal Advisory Council puts the cost of not proceeding with the increase to the age of 67 in 2021 as originally planned as €575 million in that year alone. Department of Finance calculations show that the cost by 2030 of not proceeding with the original plan to increase the State pension age would be close to €1.5 billion in cash terms in that one year. Clearly, the cumulative costs accrue slowly, but are really substantial.

The way the State pension system works is often misunderstood – it is not funded like a normal pension but essentially involves those in work now paying for those currently retired. These trade-off between higher taxes and the terms offered to pensioners is rarely made explicit. Younger people, with a lot of working years ahead of them, have the most to lose.

The Government is also considering allowing more flexibility to those retiring – they may be able to choose to work beyond 66 and built up an entitlement to a higher pension. It is also discussing indexing State pension payments for inflation with automatic annual rises. These were also options put forward by the Pensions Commission. But it did so in the context of increasing the retirement age and also asking retired people to pay PRSI on their incomes, including occupational pensions. People aged over 66 are currently exempt from PRSI.

Off limits

Will the Government even bite this bullet? It will certainly signal higher PRSI on the rest of the working population and the self-employed. And it will presumably also commit to prop up the Social Insurance Fund, out of which pensions and other benefits are paid, from the general exchequer each year. Up to now, State money has gone in only when the fund is short of cash. But the third stool of the Pensions Commission plan – imposing a portion of the cost on older people – seems off limits. The concept of social solidarity, of everyone chipping in, including the older generation, has been quietly parked.

If it does promise to index pension payments to inflation, or wages growth, will the Government also promise to index tax bands and credits for inflation, rather than letting on that an increases in these is some kind of budget “giveaway”? And if pensions – and perhaps the tax system – are indexed for inflation, how the heck is this going to be paid for?

Perhaps the more prudent parts of Government may pare back some of the promises being floated before the plan is signed of. But the big surge in taxes of the past couple of years has lulled the political system into a false sense of security. The Social Insurance Fund, too, has been boosted by strong employment growth. But just read the dire Bank of England economic forecasts this week to understand the kind of economic risks that may lie ahead.

The public already face higher taxes in the years ahead – political parties are just loath to tell them. An economic slowdown would quickly underline this. Much of this burden will fall on people at work – the ones who always pay. Asking them, in addition, to carry the full burden of State pension provision is quite simply unfair. But Irish politics remains under the spell of the grey vote and it looks very likely that this is what is going to happen.