Fiscal Council calls for additional levy on baby boomers for pension fund

By 2050, the number of people reaching retirement will be 50% higher than it is now. Photo Credit Joe Giddens/PA Wire

The Irish Advisory Fiscal Council has called for additional PRSI contributions to be levied on baby boomers while they are working to ensure younger people are not financing older generations' retirements.

This is part of a proposed overhaul of the pension system in Ireland which would see the establishment of a State Pension Fund that would help address the increasing pressure that the current system will come under in the next decade.

The budgetary body said that by 2050, the number of people reaching retirement age will be 50% higher than it is now.

In a new paper, the Fiscal Council argues that a new long-term approach needs to be adopted to manage and fund the pension system going forward.

Under the current system, beneficiaries of the current State pension are paid using PRSI contributions from people working today.

The council suggests moving towards a system where the PRSI rate is set at a constant rate to finance the pension system over the long-term — rather than year-by-year — which would avoid the need for larger rate increases in the future on younger workers to finance the retirements of baby boomers.

This would be achieved by raising contributions on the baby boomers, the council said.

“By raising rates in the next couple of years and taxing the baby boomers while they are working, this would avoid larger tax increases in later years,” the paper said.

Rates rise

The paper added that this would require the combined employee and employer's PRSI rates to rise by about 3.5% over the current level of 15%.

Saving excess corporation tax receipts could help to fund future pensions, reducing the burden on future taxpayers.

It said that governments should also be required to have credible plans to finance this Fund on a very long-term basis.

The paper projects that this would lead to an accumulation of a State Pension Fund of 40% of gross national income by the second half of this century.

The Council's chairperson Sebastian Barnes taking steps now to raise the PRSI contributions and plan for the long-term would “avoid much larger PRSI increases in the future”.

“Ireland has a historic opportunity to put the State pension system on a solid footing for decades to come and to put corporation tax windfalls to good use,” he said.