Brian Keegan: Pension age debate likely to rumble on for some time
Brian Keegan: The pension age, private contributions, higher PRSI rates or more PRSI contributions from older people - all of these solutions are particularly emotive.
Many of us might think that the pandemic unemployment payment (PUP) is the biggest category of spend for government when it comes to paying benefits to citizens.
Not so. According to figures published last month, by the Department of Social Protection, in 2020, the single biggest item of welfare spend was on the contributory state pension.
The cost of paying the contributory state pension in 2020, at €5.8bn, was more than the €5bn spent on paying the PUP.
A further €1bn was paid out in non-contributory state pensions. The PUP will eventually be phased out as the pandemic hopefully recedes. It is unlikely that either form of the state pension will ever be phased out.
Given the scale and the permanent nature of the expenditure it’s hardly surprising that government will look for some way to manage or contain pension costs.
One way to do this is to reduce the number of pensioners by the simple expedient of raising the retirement age.
A review of the pension age was presented to Minister Heather Humphreys last week by a specially formed Pensions Commission.
At the time of writing, the detailed recommendations are not in the public domain but it may suggest an increase in the retirement age, currently set at 66. Other countries, such as the UK and Belgium, are making similar increases.
Despite the furore over the retirement age, which led to the establishment of the Pensions Commission in the first place, raising the age may be the least politically difficult of all of the possible solutions to managing the burgeoning cost of pension provision.
The rate of payment to pensioners could be reduced, but that option is so politically difficult that it won’t even make it to the table.
One alternative is to foster private pension provision and, thus, increase the number of people making pension contributions to their own pension funds while reducing reliance on the State.
There is a proposal to introduce a so-called auto-enrolment system, whereby workers would, by default, start contributing to private pensions and is designed to form a pension saving habit. This has yet to be implemented.
Another approach could mirror that taken by the UK government in the past 10 days, which is to increase the rate of national insurance contributions or PRSI.
In this country, PRSI funds pension payments. While the UK move was designed, initially, to put money into the British National Health Service, an increase in PRSI rates here could go towards funding state pensions. PRSI is an invisible tax to most because employers pay the bulk of it.
Employees paid €2.8bn in total in PRSI during 2020, the self-employed approximately €650m but employers paid a whopping €7.2bn.
Because PRSI is such a broad-based tax, any increase would have a very big impact on the total amounts collected and, thus, the capacity to pay out pensions.
Pre-pandemic, the PRSI take rocketed because the number of people working increased.Â
Emerging from the pandemic - and as full employment levels are reached - the number of contributors will be restored. The number of contributors could be increased further if the PRSI exemption for people aged 66 years and older was moved up.
The pension age, private contributions, higher PRSI rates or more PRSI contributions from older people - all of these solutions are particularly emotive.
So, no matter what the recommendations from the Pensions Commission are, the political debate is going to rumble on.
- Brian Keegan is director of public policy at Chartered Accountants Ireland
