Ministers have been warned that the State’s pension pot will be hit with “growing deficits” in the years to come despite an expected multibillion-euro surplus this year, increasing the pressure for tax increases in the future.
A private paper given to the Cabinet on Tuesday shows that initial indications from a review of the social insurance fund (SIF) — the pot of money which funds the State pension — are that the current surplus will be eroded as demographic pressures build on the pensions system.
The review shows that while in the short term it is “likely to be in surplus”, the trend will reverse in the years ahead and that “the medium- and long-term positions indicate growing deficits”.
The Cabinet was told that with the number of working-age people whose contributions finance State pension payments dwindling, the SIF would experience “very significant deficits” in the years ahead.
This indicates the prospect of yawning deficits in the future which have been forecast in previous reviews. The last review, published in 2017, predicted the deficit would be €3.3 billion by 2030 and €22 billion by 2071.
The SIF has outperformed expectations, with predictions that the massive spending during the pandemic would drive it into a sustained deficit. When this occurs, a subvention is paid by the exchequer into the fund.
Launching the Coalition’s pensions reforms on Tuesday, Minister for Social Protection Heather Humphreys said the indications were that the SIF would be in surplus by €3 billion — driven by stronger income tax receipts from the post-pandemic economic upswing.
Nonetheless, the briefing given to Ministers shows the long-term trend is expected to return, increasing the pressure on the Government to adequately provide for pensions in the future.
The pensions commission, which reported last year, said the SIF could be made more sustainable by moderating expenditure or increasing revenue.
This week the Government introduced a new method of calculating the pension entitlements of retirees which is expected to save billions by shifting to a lifetime contributions approach, but other measures identified by the commission — such as raising the retirement age or cutting entitlements — are not politically palatable.
Ms Humphreys has indicated instead that PRSI increases will bolster the finances of the State’s pension scheme and enable the Government to keep the retirement age at 66.
Ministers were told the costs associated with allowing greater pension entitlements for carers would be relatively small — between €2.5 million and €25 million annually — although the Cabinet was told it was hard to predict the precise level. The note suggests that if the trajectory follows that set out by the pensions commission, increases will see additional revenue for the exchequer of €19.2 billion annually — and that if this was not met by increased PRSI contributions, it would fall to the exchequer to bridge that gap.