Programme for Government misses opportunity for pension reform

Posted on Wednesday, 1 July 2020

The Programme for Government of the 33rd Dáil contains a commitment to continuing the pathway started by the previous government to roll out a system of auto-enrolment into private pensions for those employees in the state not already covered by such a plan. Social Justice Ireland believes an opportunity to increase fairness in the Irish pension system is therefore being missed.

The Covid-19 pandemic and the subsequent economic lockdown has precipitated what has been referred to as the greatest crisis in the history of the state. However, it has also given cause for re-evaluation of how we have structured our society and our economy. It is disappointing that a re-think about how we deal with retirement and income in old age has not been inlcuded in that.

The new Automatic Enrolment Savings System 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. Social Justice Ireland believes that this money could be better used to help provide a Universal Pension as a basic right to all citizens.

One of the ways in which a lack of fairness has long permeated the Irish pension system is 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 pension payments (and sometimes no pensions at all) for people (mainly women) who have spend long periods away from the labour force raising families or caring for elderly family members.

In March 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 on social insurance contributions.

The argument is often made that Ireland's State Pension has all angles covered: individuals qualify for a payment through (a) their social insurance contributions, or (b) through a means test: So either you get your pension as a result of having been employed all your life, or as result of having insufficient income to live on in old age. The implication is that those who do not qualify for a State Pension payment do not need one and do not deserve one. However there are thousands of individuals who fall between cracks.

As an example, Joan* is 69 years old. She entered employment at the age of 16 in 1965. In 1974 her first child Mark* was born with a disability. Joan was unable to return to work and devoted her life to caring for Mark who required fulltime care. Joan reached age 66 in 2015 and was advised by the Department of Social Protection that as she had only 460 paid contributions and 62 reckonable contributions she would not qualify for the State Pension (Contributory).

Because Joan’s husband was employed as a civil servant and paid a Class B stamp (pre-1995), his civil service pension was fully assessable in the means test of the State Pension (Non-Contributory) and so Joan didn’t qualify for either the State Pension (Non-Contributory) or an increase for a Qualified Adult (IQA), nor could she make voluntary contributions. Therefore, despite caring fulltime for Mark for 43 years, Joan has no entitlement to Carers' Allowance or any State Pension and so relies entirely on her husband for financial support.

Let's also think of Brid*. Brid has cared for her daughter Ann* since she was born with Down Syndrome in 1980. She does not qualify for the State Pension (Contributory) as she has only 434 paid contributions. Brid’s husband is a retired farmer with 60 acres of land. The land is not leased or used productively and is valued at €250,000. Because the value of the land exceeds the current statutory limit, Brid does not qualify for a Non-Contributory pension.

Few people would consider Joan or Brid to be undeserving of a State Pension payment, but situations like these are what the current system has created.

It should be clear, given the aforementioned cost, that Automatic Enrolment is not the best or the fairest way for Government to use its resources within the pension system. Auto-enrolment, as with private pensions in general, will benefit only those who can already afford to save for retirement.

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.

Social Justice Ireland’s proposal shows how to fund a Universal Pension System based on residency. This payment would replace all other social welfare pension payments to those over the State Pension Age 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. The Universal Pension should be set at the current rate of the State Pension (Contributory). It should be residency based, meaning that the more working-age years a person is resident in Ireland, contributing to society, 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.

Introducing our proposed Universal payment in 2019 would have cost the State €727m if no increase in the State pension had been included in Budget 2019. However, this additional expenditure could easily have been covered by reducing the rate of tax relief on private pensions from 40% to 20% - a move that would also make the tax system more equitable, as then all employees paying into a private pension plan would receive relief at the same rate - and increasing employers PRSI by 0.5%. These, along with some other smaller measures, would raise close to $1bn.

The study also argues that the State Social Welfare Pension should rise to 35 per cent of average earnings and be maintained at that level.

*Names have been changed to protect identitites. Thanks are due to Clare Duffy at Family Carers Ireland for providing the above case-study details.