The sorry mess that is the State pension

We all know the State pension is a ticking timebomb. The Pensions Roadmap 2018 – 2023 stated that over the next 40 years, the ratio of workers to pensioners is expected to fall to 2.3:1. This is going result in a pension deficit of €400 billion over the next 50 years if changes weren’t made.

There was a plan in place that started way before this report. Going all the way back to 2011, the Social Welfare and Pensions Act abolished the Transition Pension (payable at 65) from 2014. It also increased the age when people would receive the State pension from 66 to 67 from 2021. A further increase from age 68 from age 2028. This alone wasn’t going to solve the problem but it was going to reduce the cost to the State.

There was very little noise about this…but maybe that is because those who would be reliant on the State pension for an income didn’t know about it. But just before the first increase in pension age was to happen, there was a general election and the issue became one of the biggest topics in the run up to the election. Politics has now taken over the issue and it is a mess.

Pensions Roadmap 2018 -2023

Let’s go back a bit to the Pensions Roadmap and see what was set out. There were a number of objectives that it wanted to achieve.

The first objective is to ensure that the pension paid is sufficient to protect against the effects of poverty. The government wanted to set a benchmark that the State pension provides an income of 34% of the average national earnings.

The second is to ensure that pension payments can be financed in a sustainable manner. The State pension would be linked to life expectancy so the average payout period for the State pension is the same for all generations. If life expectancy increases, so will the age that the State pension is paid. The next review of life expectancy and when the State pension would be paid wasn’t going to be until 2035.

The third is to ensure equity of treatment both between current pensioners and between current pensioners and future pensioners/current workers. The ‘yearly average’ approach is to be replaced by a ‘total contributions approach’ (still not changed). The report also states:

“it would be inequitable to require the current generation of workers to maintain, or more likely increase, contributions to fund a pension system for current retirees that delivers significantly better payments than those that might be available to them when they retire.”

In other words, future generations shouldn’t be lumbered with the cost.

What is happening now?

Minister for Social Protection Heather Humphreys announced that the State Pension age will remain at age 66. An option will be made available for people to defer this up to age 70 and receive a higher amount, which is expected to be 5% a year (The numbers don’t add up on why people would do this).

Despite numerous reports, both in Ireland and around the world telling us that the current pension system isn’t sustainable, the Irish government have decided to make no significant changes in a bid for their own political survival. They are avoiding making the hard decisions on the State pension. So how will the State pension be funded in the future? By paying more taxes in the form of increased PRSI contributions.

But they aren’t going to do it now, there is going to be an actuarial review (yet another review!) of the social insurance fund. The full State pension is €253.30 or €13,171.60 a year (excluding the Christmas bonus). To buy the equivalent of the State pension on the market would cost you €274,000 at today’s annuity rates. You don’t have to be an actuary to have a fair idea on what this report will say and the tax increases required to make future State pensions sustainable.

Reports say that the increased PRSI contributions are unlikely to happen until the 2024 and they will be incremental. But we have to have a general election before 20 February 2025. Do you think a sitting government is going to increase taxes in the year before an election? If I was a betting man, I would bet on nothing being done and they will just kick the can down the road…again.

Steven Barrett

26 September 2022