Disjointed Pensions Policy will fail Older People
The Pensions Commission has completed its public consultation and is set to make its deliberations before its final recommendations to Government in June. While the issue of pension age will likely be high on the agenda, there is a risk that issues around equity, sustainability and bureaucracy that are inherent in Ireland's pension system will be missed.
In 2018, Social Justice Ireland published A Universal State Social Welfare Pension, an analysis of Ireland’s pension system and a fully costed proposal for the introduction of a Universal Pension in Ireland based on residency, not social insurance contributions. In it, Social Justice Ireland proposes three key adjustments to the present system:
- On equity: ensure every older person who has been resident in Ireland will receive a full pension payment (unlike the current system or the Government’s proposed new system, both of which leave large numbers of older people with only partial or no pension.
- On sustainability: make the system more sustainable by standard rating employee contributions to private pensions (unlike the current system which gives tax relief at the marginal rate which results in the major benefits going to the higher paid).
- On bureaucracy: dramatically reduce the bureaucracy by having only one test for accessing the payment and eliminating the myriad of conditions that are part of the current or the Government’s proposed systems.
With an ageing population and the number of people in defined benefit schemes falling, it is clear that the shortcomings in Ireland’s pension system need to be addressed urgently. Outside the scope of the Pensions Commission's remit, is the Government's policy a new automatic enrolment savings scheme. This, apparently, is not for moving. The proposed scheme is intended to bolster the contribution private pension savings plans make to retirement adequacy. This will result in an estimated cost to Government of €650m-€700m per annum, on top of the billions of euros in income already being foregone by the Exchequer on an annual basis to subsidise the private pension industry.
The prevalence and adequacy of private pensions will obviously have an impact on discussions of the level at which public pensions should be set (as it has informed policy in other OECD countries), and so it is bizarre that this has been omitted from the Pensions Commission brief.
One of the ways in which a lack of fairness has long permeated the Irish pension system is the manner in which entitlement to a pension from the State has been based on social insurance contributions. This ties pension entitlements to an individual's labour market participation history and has historically resulted in lower pensions (and sometimes no pensions at all) for people (mainly women) who have spent long periods away from the labour force raising families or caring for elderly family members. While some improvements have been made in this area in recent years, we still have a very long way to go.
Social Justice Ireland’s proposal shows how to fund a Universal Pension System based on residency. This would replace all other social welfare pension payments and would be funded by a restructuring of the tax relief system on private pensions and a modest increase in Employer PRSI. This is the best way to achieve a fairer and more equal Ireland. It is proposed that the Universal Pension would start at €243.30 a week, the same as the current State Pension (contributory). It would be residency based, meaning that the more working-age years a person is resident in Ireland, the higher the percentage of the full pension they receive. 40 years of residency between the age of 16 and the State Pension Age would entitle a person to the full amount.
There would be two primary mechanisms to fund the cost of this provision. First, reducing the rate of tax relief on private pensions from 40 per cent to 20 per cent and second increasing employers PRSI by 0.5 per cent. These, along with some other smaller measures, would raise in the region of €949m, which is €200m+ more than the additional cost of the Universal Pension in 2019. The study goes on to argue that the social welfare pension should rise to 35 per cent of average earnings and be maintained at that level in the decades ahead. The study projects the numbers forward to 2046.
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