The Report of the Commission on Pensions presents compelling evidence that the current financing of Social Welfare pensions is not sustainable (https://www.gov.ie/en/publication/6cb6d-report-of-the-commission-on-pensions/)
Future projected outlays on social welfare pensions will be far larger than projected PRSI receipts resulting in large deficits in the Social Insurance Fund (SIF).
The main solutions proposed by the Pensions Commission are base broadening by increasing PRSI receipts and reducing outlays by extending the age of retirement.
Increasing the Retirement Age
The Pensions Commission recommended a gradual increase in the pension age to 67 in 2031 and to 68 in 2039. This proposal is supported by many informed commentators.
The Oireachtas Joint Response to the Report of the Commission on Pensions rejected this proposal.
Instead, the Oireachtas Committee recommended that the State pension age should remain at 66. This position also has the support of many groups such as Chartered Accountants (Ireland) and ICTU.
While rejecting an increase in the retirement age, the Joint Oireachtas Report does support measures which would facilitate working beyond the retirement age, for example, legislation to ban mandatory retirement clauses.
The Oireachtas Report is silent on other proposals by the Pensions Commission, for example, on deferring access past the State pension age enabling a full contribution record, or deferring access to the State Pension with an actuarial increase in payment rates.
The Pensions Commission Report also recommended that those with long contribution histories, of 45 years, would not be required to work beyond the age of 65. The Oireachtas report recommended 40 years.
There are, however, areas of agreement of the Oireachtas Committee Report with the Pensions Commission proposals.
In relation to gender equality, the Pensions Commission Report states that reforms must be assessed in relation to “gender equality and poverty proofing”. Similarly, the Oireachtas joint Committee recommends that “mechanisms are developed to ensure equality exists between men and women regarding State pension entitlements”.
The Oireachtas Joint Committee accepts the Pension Commission proposals:- that there should be an increase in self-employed PRSI rates from 4% to 10% by 2030 and then to normal employer rates and that there should be an increase in employers PRSI.
The Oireachtas Committee does not explicitly reject the Pension Commission proposals to increase employee contribution rates. The Pensions Commission had proposed an increase of 1.35% for both groups by 2040.
The Oireachtas Committee rejected the Pension Commissions proposal “to move workers over the age of 66 to Class K”.
Currently persons over the age of 66 do not pay PRSI on their earned or unearned income. The pensions Commission recommended that they should do so but at a reduced rate. This could be achieved by classifying this income as ‘Class K’ which has a PRSI rate of 4%, but does not result in any social insurance benefits. Class K applies to certain public office holders with an income in excess of €100 a week, for example, members of the Oireachtas (https://www.gov.ie/en/publication/aec76e-prsi-class-k/ )
The rationale for introducing such a measure by the Commission on Pensions was intergenerational equity, but the forecast receipts are relatively low at €79 million by 2030, partly because PRSI on lump sum payments is excluded (Report of the Pensions Commission, p.162).
It is likely that the current generation of retired persons will have higher pension incomes than future generations.
They will also have accumulated more assets.
The issue of generational effects is a major difference between the two reports. The Pensions Commission has some references to this issue. The Oireachtas Report has none.
It is difficult to justify why those aged over 66 should not pay some PRSI on their income.
Retired persons also benefit from extra tax reliefs and benefits in kind such as free travel.
These issues are important because of substantial differences in wealth between younger age cohorts and retired persons, in terms of ownership of housing and pension entitlements. These differences are likely to persist because of declining house ownership amongst younger age cohorts. For example, the median age of a single person house purchase was 42 in 2019 compared with 34 in 2010 (https://www.cso.ie/en/releasesandpublications/fp/fp-cropp/characteristicsofresidentialpropertypurchasers2010-2019/ageofpurchasers/ ). Between 2013 and 2019 house prices increased by 111% (https://www.cso.ie/en/releasesandpublications/ep/p-rppi/residentialpropertypriceindexnovember2021/) and have increased further since then. House prices are now over 7 times average earnings, thus, making house purchase impossible for those on low incomes.
House price inflation plus high rents mean it is difficult to accumulate sufficient resources to enable house purchase. Low returns, negative interest rates on bonds for example, have reduced returns on pension fund assets and increased capital sums required to provide adequate pensions in retirement.
The Pensions Commission Report strongly advocated an automatic enrolment (AE) pension system. An AE scheme means employees are automatically enrolled in a pension scheme but may decide to opt out. The proposed AE scheme envisaged a state body managing membership and collecting contributions by employees and employers, which would attract valuable tax reliefs. Funds accumulated would be managed in the private sector and invested in a portfolio of assets of varying risk. The accumulated lump sum could then be turned into a stream of pension income. (https://assets.gov.ie/10968/9740541c18cc4eaf92554ff158800c6f.pdf )
The Oireachtas Joint Committee noted that auto-enrolment could involve significant investment in pensions by the State and stated “Exchequer funding should not be prioritised over the retention of the State Pension age at 66”.
An AE pension system is intended to increase pension saving and coverage.
The problem is those in low pay sectors, accommodation and food for example, are also most likely to be those without or have low pension coverage.
They are most likely not only to have inadequate savings for house purchase, but to also have little disposable income because of high rent charges
Occupational pension coverage for those in Employment in Ireland 2018-2020
Accomm. and food
Other NACE activities
Wholesale and retail
Admin and support
Source:- CSO Pension Coverage, various issues.
(1). Includes only occupational pensions from current employment and personal pensions in current contribution. Aggregate pension coverage (in brackets) rises to pension coverage is defined to include those eligible for, “personal pensions where payments had been deferred “.
The Minister for Social Protection is quoted as stating: “Ireland was the only country in the OECD that does not have an auto-enrolment pension scheme for workers” (Sunday Business Post, 2 January 2022).
Within the EU, Member States have a mandatory earnings related component to retirement saving, but very few have an automatic enrolment component to their pension system.
A mandatory earnings related component is in most cases not funded. One exception is the Netherlands.
Funding the Social Insurance Fund
The Pensions Commission Report has two main proposals in relation to funding the SIF:-
(1). A separate SIF account for State pensions only, would be established;
(2) There would be an annual Exchequer contribution of 10% of expenditure to this SIF account, described as a “buffer”, meaning reserve.
Overall, the SIF (including pensions and working age payments) may be very variable because of the economic cycle. Pensions costs are far less variable.
The Pensions Commission argues a separate SIF (pension fund) would result in increased transparency of Social Insurance pensions costs;.
The reasons given for establishing a reserve (buffer) is:-
(1). The Social Insurance system is funded by the State when “necessary” so that “trust in the social insurance system is maintained”.
(2) Establishing a separate SIF ‘buffer’ would help pay pension costs while demographics are “relatively favourable” (Pensions Commission, p. 70).
The Pensions Commission rejects the establishment of a funded pension reserve, citing the history of the National Pension Reserve Fund. A funded rather than a nominally funded pension system may be regarded by some as providing greater security to future income of retired persons. However, a funded pension system is more expensive in terms of administrative and other costs and is more risky.
Both pension systems face similar risks as they require a future transfer of resources via taxation or a stream of future income to future retired persons. There can be no guarantee that either mechanism will result in a fund that would be used “for its intended purposes” as stated by the Pensions Commission (p. 72).
The key choice is in terms of efficiency and cost in terms of delivering income to retired persons.
The Oireachtas Report does not discuss the merits or otherwise of these proposals
Inflation and Pensions
Inflation is likely to have adverse effects on retired persons. Those on fixed pension incomes will experience a large drop in real income. Those in Defined Benefit type schemes, who also own real assets such as equities and housing, will gain.
Conversely to owners of Government debt, the nominal value of Government debt falls and assuming real GDP does not fall, the Government debt/GDP ratio will fall.
There may also be adverse effects within the working population. Wages in some sectors may match inflation, while in other sectors nominal wages are more rigid, implying a fall in real wages.
As benefits are fixed in nominal terms, but payments are a function of earnings, wage inflation may also have the effect of increasing revenue to the SIF.
This also means those with high earnings are contributing, in an actuarial sense, far more than those with low earnings. There is a strong redistributive element to PRSI.
The bulk of PRSI payments are most likely made by a minority of employees. For 2018, 77% of income tax was paid by 20% of cases (https://www.revenue.ie/en/corporate/documents/statistics/income-distributors/earners-income-tax-by-rate-status.pdf )
This may be a source of risk if high wage jobs were switched from Ireland.
The Benefits of Pay-As-You-Go
Pension systems are necessarily long run and are path dependent. Demographic and other projections are uncertain. In this context, policy making is difficult.
A State administered PAYG system based on solidarity and consensus is the best solution in providing flexibility and equity in future pension provision.
Given the need for change, policy should proceed on the basis of what can be agreed, for example, those who wish to extend their working career should be enabled to do so. Incentives to delay receipts of State pensions should be introduced.
There is also a consensus, including IBEC, that employer PRSI rates should be increased (IBEC, Sustainable pensions and Longer Working Lives, p.10). (https://www.ibec.ie/-/media/documents/media-press-release/ibec---pensions-commission-submission.pdf )
Prof Jim Stewart
Dr Jim Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.
He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).