SHE Speaks

SHESpeaks about Pensions

By June 15, 2020 June 17th, 2020 No Comments

She Speaks about Pensions

Our pension system was the surprise star of the February 2020 general election debates and became a critical component in the preparation of the Programme for Government, published in June 2020 (hereafter referred to as PFG2020). In this post, She Speaks explains pensions and gets to the facts behind the plan to change Ireland’s pension age.

The Pension System

There are two parts to the Irish pension system.

  1. The first part is the State Pension (Contributory)which you are entitled to because you have paid PRSI, or ‘stamps’ as they were previously referred to. If you don’t have enough PRSI/stamps to qualify you can apply for a means tested State Pension (Non-contributory).

 

  1. The second part is usually referred to as a private pension. Private pensions are work related, usually where an employer sets up a pension scheme for her workers (called an occupational pension) or where you have a personal pension account that you organise for yourself. Because employers are not obliged to provide pensions for their employers, nor are workers required to take out personal pensions, only about 35 per cent of workers have a private pension when you take the public service out of the calculation. The vast majority of public servants have an occupational pension, and the PFG2020 plans to increase the numbers in the private sector with occupational pensions by making it compulsory for employers to provide occupational pensions gradually over the next decade. They are calling this automatic enrolment. You can read more about it here.

As most of the focus has been on the age from which the State pension is paid, we will concentrate on that for the rest of this article. The PFG2020 does not explicitly declare that it will reverse the legislation that sees the age due increase to next year and up again to 68 in 2028, instead it is being put forward for review in a Commission.

The State Pension, what is all the fuss about?

To understand why pensions are news, we first need to look at how the State Pension (Contributory) is funded.

The Social Insurance Fund

Most workers and their employers pay PRSI. The State accounts for PRSI contributions by allocating them to a fund called the social insurance fund. All social insurance benefits such as maternity, jobseeker, disability, carer’s, and the State Pension (Contributory) are paid from the social insurance fund. The means tested State Pension (Non-contributory) is paid from general taxation. In any year where more social insurance benefits are paid out of the social insurance fund than PRSI contributions being paid in, the Exchequer makes up the shortfall. By far the largest expense paid out of the social insurance fund each year are pensions. And herein lies the difficulty that pension policy makers have been grappling with.

Life Expectancy

In 1926 life expectancy was 57.4 years for men and 57.9 years for women. In 2015 this had increased to 79.3 years for men and 83.3 years for women. By the middle of the century life expectancy is projected to be 86.6 years for men and 88.3 years for females[1]. In addition to living longer, our families are smaller. Although we had the highest number of births in the EU in 2018, back in 1960 on average there were 3.78 live births per woman in Ireland. In 2017 it was 1.77[2].

Due to our relatively high birth rates we still have the youngest age profile in the EU with almost 5 working age people for every one person aged over 65. This is expected to edge downwards towards 2 workers for every older person by mid-century[3].

The Problem

If we proceed on the assumption that the projection about the change in the age profile of our population bears out, then the problem is presented as one of how to keep the social insurance fund afloat when you have a reducing number of people paying in and an increasing number of people getting pensions out of it, and for longer. Successive governments say they cannot commit to making up ever increasing shortfalls on an ad hoc basis into the future because it is not sustainable. So the solution seems to be either to increase the money going in or cut the money coming out. Or some combination of both.

Money In

To increase the money going in, the State could, for example, increase PRSI rates. Or it could think about saving money through restructuring the system of tax reliefs given to private pension savers in favour of additional State support for the social insurance fund. Increasing PRSI reduces take home pay for workers and adds to employers’ costs. A restructuring of the tax reliefs, depending on how it was designed, could also reduce take home pay for all workers who are saving privately for pensions, as well as reduce the value of pension savings if they became liable for tax. Neither present a palatable prospect for politicians with their eye on the next election which is probably why we don’t hear too much about this as an option in debates about pensions.

Or the State could do what it encourages people to do – start saving for pensions itself. But Ireland tried that before. It was called the National Pensions Reserve Fund which was set up in 2001 with the proceeds of the sale of Telecom Éireann and an ongoing annual contribution from the State. Following the 2008 financial crisis the fund was redirected to recapitalise Irish banks and part fund the agreement with the Troika. If the State started saving could it be redirected away from its intended purpose yet again? Mmmm. We note here too that Ireland is out of step with other EU countries in that it spends less than others on pensions. See here for details.

Money Out

Options for reducing the amount of money going out of the fund can be cutting the amount of old age pensions by reducing the weekly amount people get, making it harder for people to qualify, or pushing out the age from which the pension is paid.

The Plan

Successive Irish governments have spent a long time thinking about all this and after much deliberation a blueprint was put forward in 2010 called The National Pensions Framework. The blueprint supported the State Pension as the bedrock of the whole system and promised to peg the weekly pension for those with a full PRSI record at 35 per cent of the weekly average earnings. It proposed increasing the state pension age to 66 in 2014, to age 67 in 2021, and finally to 68 from 2028. In addition, employers would be required to automatically enroll most workers into an occupational pension plan to which they and their workers must contribute.

The blueprint also proposed changing how social insurance contributions were treated in the calculation of the state pension. They used to be averaged over the working lifetime of the pensioner and the annual average dictated the amount of pension receivable. This caused unfair anomalies where someone who started work at a young age, but had long periods out of work had a longer averaging period than someone with a shorter but continuous work record; and consequently received a smaller pension even if they had a greater number of contributions paid. The PFG2020 addresses this by confirming that it will go ahead with its plans for a different way of calculating the State Pension (Contributory) which it calls the Total Contribution Approach. This means the pension will be calculated on the total number of contributions paid, and not when they were paid. The PFG 2020 allows for credits to be awarded for people who stop work (and thus stop paying PRSI) to care for loved ones. Family carers of incapacitated children get a specific mention in the PFG2020.

This is positive for women who are more likely than men to be the family member who will change their working pattern to take on caring work.

The Current Debate

The increase in the state pension age to 68 featured in the bailout agreement with the Troika back in the day, and any public debate on the issue then was lost in the noise of everything else that was going on. So it passed into legislation with ease in the 2011 Social Welfare and Pensions Act. The issues that didn’t get an airing back then are what we are hearing about these last few months. These are:

  • Some contracts of employment state that an employee has to finish up at age 65. This was fine when their pension started the next day. But now it doesn’t. Anyone in this situation who doesn’t have a private pension to live on is stuck with no income. The people less likely to have occupational pensions include part-time workers, non-Irish nationals, people working in the accommodation, food, and leisure services; and those whose occupations are cleaners, helpers, labourers, and sales assistants. These are the sectors where you predominantly find women employed, and the majority of part time workers are also women. So there is a strong gender component to any plan to move the State pension age out.
  • Men and women do not have the same work patterns. While women can have long periods of full-time employment, it is more usual for them to combine periods of full-time and part-time employment with time out of the formal labour market as a result of the caring work they perform. So they end up with lower PRSI contributions leading to a lower State pension. Or none at all. We know this to be true because of the existence of a gender gap in pensions which is currently at around 28% – meaning that on average the pensions men receive are 28% higher than the pensions women receive.
  • Currently both parts of the pension system depend on work because a person pays social insurance (for their state pension) and pension contributions (for their private pensions) while working. Making both components of the pension system dependent on work would seem to be penalising people with a precarious or fractured pattern of working on the double. If the State pension is really the bedrock of the whole system, then a question to be asked is why not take workforce participation out of the equation for that component and pay the same universal pension to everyone based on another criteria such as residency. The PFG2020 says it will “examine options for a pension solution for carers the majority of whom are women, particularly those of incapacitated children in recognition of the enormous value of the work carried out by them”. A universal pension would solve that one for them.
  • Now that the State pension doesn’t start until 66, people who have a contract of employment stating they retire at 65 can sign on for jobseeker benefit – which is a benefit you are entitled to because you have paid for it through PRSI. However there is still a stigma attached to signing on, especially if it is the first time you have ever had to do it. You also have to be genuinely seeking work to get jobseeker benefit. Another complication is that it is only paid for nine months. The PFG2020 addresses this by proposing a new social protection benefit called the Early Retirement Allowance that will be paid to 65 year olds until their pensions kick in on their 66th birthday .
  • For some workers, getting as far as 65 is hard and the thought of another 2 (or 3) years is just a step too far. In particular we think of those in occupations requiring hard manual labour but just as equally those who are expected to keep on top of rapidly changing technological advances. Then there are those who have been working since their teenage years and may well have close to 50 years paid in with the end in sight, only to find the end has moved.

Clearly, one size does not fit all when it comes to the State pension age. So what should be considered as part of the proposed review? Increasing the money going into the social insurance fund, as suggested earlier is one solution. Perhaps even to the extent where no adjustment to the pension age is needed if projections about the age of the population turn out to be more modest than projected. Another is that rather than fix the pension age and stick rigidly to it, introduce flexibility. As the youngest population in Europe we don’t need to rush to 66 or 67 or 68 quite so quickly. Any increase in the state pension age could be linked to the actual increasing age of the population. This would bring about a much more gradual and realistic increase measured in days or months, not years, and at a much later date, while still protecting the social insurance fund. They do this in the Netherlands and Finland quite successfully.

Also, the reality of people’s lives needs to be recognised by bringing in flexibility to allow people to get the State pension early with a reasonable reduction (and no reduction for those with extensive PRSI records); or later with an increase. The reductions and increases can be calculated so that either is cost neutral to the social insurance fund. This works well in occupational pension schemes and deferring retirement makes an appearance in the PFG2020.

If you have found this article of use to you, please let us know. In the development of #SHESchool, we will be unpacking the facts behind various public policies to help you get behind the noise and understand why decisions are needed and what the various options are. Keep an eye on our website and social media for details.

[1] CSO Population and Labour Force Projections 2017 – 2051 available at https://www.cso.ie/en/releasesandpublications/ep/p-plfp/populationandlabourforceprojections2017-2051/mortalityassumptions/

 

[2] Eurostat Fertility Statistics 2019 Available at https://ec.europa.eu/eurostat/statistics-explained/index.php/Fertility_statistics

[3] European Union Eurostat 2019. Available at https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:Old-age_dependency_ratio,_1990,_2018_and_2050_(%25)_AE2019.png