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 the 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 a 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 that the pension related costs as a percentage of modified 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.
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 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.