For the last decade, pension policy has been guided by the National Pension Framework (NPF), a wide-ranging programme of reform affecting public and private pensions.
Two particularly contentious elements of that framework were the subject of negotiations in the inter-party talks on a programme for government: the proposal to raise the state pension age to 67 in 2021 and the introduction of auto-enrolment pensions in 2022. So, what are the merits of these two policies and what does the draft programme for government, Our Shared Future, propose?
The pension age increased to 66 from 65 in 2014. In line with the NPF, it is proposed to increase it to 67 in 2021 and – it should be noted – to 68 in 2028. There is a clear, well-documented rationale for the proposed pension age increases: the rise in the share of older people in the population and the associated rise in the share of pension expenditure in national income.
The most recent actuarial review of the state’s social insurance fund spelled all this out in some detail. There are a number of reasons, however, why the increase to 67 should be reconsidered by the incoming government.
Quite simply, the poorest and most vulnerable older workers stand to lose the most from this policy. About half of the current workforce have occupational or private pensions, and those who do not have such pensions are primarily lower-paid workers. In other words, the state pension is the sole (or predominant) source of income for many retired workers.
Currently, there is a transition payment to bridge the one-year gap between the conventional retirement age of 65 and the current pensionable age of 66. This transition payment is, in effect, the jobseekers benefit, payable until age 66 at a rate (for one person) of €203 weekly for those retirees who meet the social insurance contribution requirements.
In contrast, the state pension (personal rate) is €248.30. Meanwhile, the poverty line is €264 weekly. When additions such as the living alone allowance and the household benefits package are included, the state pension comes close to the poverty line. However, jobseekers benefit is significantly below it.
The proposed programme for government simply endorses the current policy. It suggests eliminating “the requirements of having to sign on and be actively seeking work for those retiring at 65”. This is not an improvement on the present position, as the signing-on and seeking-work measures for the unemployed are not currently applied to the retired.
A pension age of 67 in 2021 implies that large numbers of retirees (those retiring at 65) will not receive the state pension for two years; this transition status with a lower income will last three years after 2028 if the proposal to increase the pensionable age to 68 is implemented then.
There is a danger, therefore, that one of the policy successes of the last quarter century, the reduction in income poverty among the elderly, may be reversed if the strategy of cumulative increases in the pensionable age is pursued as proposed.
The policy of increasing the pension age is also too crude and is not sufficiently coordinated with other aspects of policy. Critically, many workers’ employment contracts specify a retirement age of 65. There is now anecdotal evidence that some such workers use legal means or industrial relations procedures to avoid retirement at 65, precisely because of the absence of a pension entitlement at that age.
This predicament is less likely to arise for higher-income or public-sector employees as they generally have an occupational or private pension payable at 65.
Equally, the one-size-fits-all change to a higher pensionable age of 67 (and later to 68) ignores the diversity in the health and employment contexts – and preferences – of older workers. Some workers have poorer health than others; some workers are in physically demanding occupations and others not; some older workers have caring responsibilities and others do not, and so on.
The net point is that some degree of choice should be allowed in the age at which workers receive the pension. This would allow workers to align the age at which they receive the pension more closely to their circumstances, and would reflect the consistent findings in the research that having a degree of choice over retirement and pension decisions leads to better outcomes in retirement.
Our Shared Future offers a welcome – although very limited – proposal in this area. Workers should be facilitated “to defer receipt of the pension on an annual basis to include actuarial increases”.
Policymakers are right to highlight the gradual ageing of the population and its implied economic cost. However, they should consider reforms to the Social Insurance Fund as an alternative to simply increasing the pension age. To begin with, PRSI contributions into the fund underpin all of the social insurance benefits: invalidity, illness, jobseekers, for example, as well as the state pension.
It would bring pensions funding and expenditure (current and future) into sharper focus if a specific part of the PRSI contribution was earmarked for the pension and paid into a designated pension fund. Under current arrangements, the net financial position of the fund arises from both long-term trends affecting pensions and the volatile trends affecting jobseekers in particular.
The fund recorded an accounting deficit during the financial crash because of high unemployment, then it gradually moved into surplus in 2018 and will presumably record a sharp Covid-19 related deficit in 2020. These cyclical swings in the fortunes of the fund obscure the trends in the pensions-specific contributions and expenditure.
Of far greater importance is that the contribution rates are low by international standards; the headline PRSI rates for employees and employers are 4 and 11.05 per cent respectively. All of the independent analyses of Ireland’s pension and social welfare arrangements highlight these low rates and the low share of social insurance in national revenues.
The case for not increasing the pension age would be strengthened if policymakers, employers and workers all acknowledged the unacceptably low contribution rates and accepted phased increases in these rates to meet the current and future costs of pensions.
This is not a technical problem; the contribution rates required to meet pension costs under different pension-age scenarios are easily calibrated. The problem is political; it requires an explicit and collective expression of support for the social insurance basis of the state pension and for the contribution income required to sustain adequate, comprehensive pensions.
Our Shared Future does not commit to increased rates of PRSI but, to its credit, it does acknowledge the link between PRSI revenue and expenditure on benefits, and implies that the incoming government would be amenable to such increases. Specifically, it would request the proposed commission on welfare and taxation to consider “what changes can be made to employer and employees PRSI to improve existing benefits and provide additional benefits”.
A pensionable age of 67 – or even 68 – may be consistent with the long-term rise in life-expectancy and the aspirations of some older workers. However, facilitating older workers who can and wish to remain in work is very different from simply imposing a minimum pensionable age for all workers, no matter what their circumstances.
At the very least, the divergence between the pensionable age of 65 in many employment contracts and the proposed state pension age should be redressed through legislation. Arguably, workers with a presumed or legally explicit retirement age of 65 should not be compelled to retire if the age increases to 67; alternatively, they should be awarded the state pension at 65 if the contracted retirement age cannot be legally superseded. Our Shared Future makes no reference to this issue.
The other major plank of recent governments’ pension reforms is the introduction in 2022 of auto-enrolment pensions. Basically, these new pensions are for workers without occupational pensions (about half of the workforce and mostly on lower incomes).
Workers above a minimum age and income threshold will be automatically enrolled by their employers in a scheme. Employer and employee contributions will be obligatory and matched by a contribution from the state, but employees will have the option to withdraw from the scheme. The funds will be collected by a new central processing authority and then distributed to preferred providers such as financial institutions who will manage individual workers’ pension funds. The pension paid will depend on the return to the funds invested.
There is a complex and controversial debate among pension specialists about the merits of auto-enrolment in principle, and the precise details of the scheme have not yet been finalised, but in this context there are two important problems with it.
Firstly, it has the potential to increase coverage as more workers will have an employment-based pension, although this is not a guarantee of adequacy as the pension paid will depend on the return to the fund, and many of the workers at whom it is targeted will need a substantial pension to supplement the modest state pension.
Secondly, the initiative, while adding considerable complexity to the pension system, will not make any improvement to the pensions of existing pensioners.
Finally, the combination of auto-enrolment and the planned increases in the state pension age is fundamentally an attempt to dilute public provision and expand private provision. The amount of policy effort devoted to building the enrolment system is striking when a reformed and improved system of social insurance pensions would be a more effective means of improving the pensions of lower-income workers.
That the incoming government should simply endorse this ongoing strategy is – at best – a disappointment. It seems that the programme negotiators had no strong, independent views on pension policy because the proposed programme adheres closely to the decades-old National Pension Strategy.
Anthony McCashin is a visiting research fellow at the School of Social Work and Social Policy in Trinity College Dublin