Agri Month: Tackling the 'Pension Gap' challenge for farmers
The generational renewal challenge is highlighted by some stark statistics.
How the next generation of farmers will continue the family business presents a major challenge for the agricultural industry.
The agricultural industry needs to develop sustainable and profitable farm enterprises which are attractive for younger farmers to take over, while at the same time creating the circumstances which allow older farmers to retire with adequate retirement income. Otherwise, farmers will have to continue farming into their later years, or liquidate farm assets, to have adequate income in their old age; consequently, the transfer of farms to the next generation will be delayed.
The generational renewal challenge is highlighted by some stark statistics. Irish Revenue statistics from 2020, put the percentage of Irish farmers over the age of 50 in 2018 at approximately 54%. Furthermore, in terms of the low level of farm transfers to new entrant farmers, in 2018, of approximately 148,000 farmers operating in Ireland, only 322 farmers claimed retirement tax relief on transferring the family farm to another family member, while a further 420 farmers claimed retirement relief on sale of the farm outside the family.
In terms of the pension gap, the 2019 Irish Farm Report, published by IFAC Accountants, reports that 62% of farmers over 65 have no private pension, while 52% of farmers between 40 and 65 years old have no private pension plan or a plan in place for one spouse only. Given the low levels of average annual farm incomes in Ireland, it is reasonable to assume that lack of affordability is one factor contributing to the low private pension coverage. This situation means that many farmers continue farming into their later years to ensure that they have adequate income in their old age. Consequently, when older farmers refrain from transferring farm assets, this has a knock-on effect of preventing younger and/or new entrant farmers' access to land.
The history of the development of Pay Related Social Insurance (PRSI) for the self-employed means that low-income farmers retiring under the current regime are likely to fall short of the contributions necessary to qualify for the full State Pension (Contributory) (SPC) unless they have also worked consistently outside the farm. Spouses/partners who have worked on the farm may also be similarly affected. This leaves farmers and their spouses/partners looking to the State Pension (Non-Contributory) (SPNC) System for financial support in retirement.
However, recent research by academics at the School of Business in Maynooth University, reveals that because of the means testing rules for assessing entitlement to the SPNC, low-income farmers with even a small holding of land can fail to qualify either for the SPC or SPNC leaving them faced with working long into their retirement years or dependent on family members in their old age.
Generational renewal policies must be developed and implemented which have a multifaceted approach. Such policies need to encourage older farmers to retire and entice younger farmers to enter the industry. One policy that has gained some popularity in recent years, but could be developed further, is farm partnerships: whereby older and younger farmers farm collaboratively. Another possible incentivising factor for farm transfer is the provision of retiring farmers with sufficient income in the form of a pension. The reality is that in the absence of qualifying for SPC or SPNC many farmers enter semi-retirement and continue to rely on the farm to produce retirement income. This has subsequent consequences for the sustainability of generational renewal in industry.
In this context, a compulsory PRSI contribution system which gives all farmers and farm successors realistic access to the SPC would be a positive development for the farming community. It would require changes to the current and proposed new PRSI contribution system; specifically, mandatory PRSI contributions for farm successors and spouses/partners working on farms and not currently within the PRSI system, with a flat rate amount for those with income below a specified limit rather than the current voluntary option.
Spouses and partners working on the farm should also be obligated to pay the flat rate PRSI to maintain their contribution history in years where otherwise gaps would be created. The security of the promise of a full contributory pension for both the farmer and his/her spouse/partner would undoubtedly relax the web of anxiety around retiring, dependence on family for income into the future, and when the right time is to transfer the farm to the next generation.
It should help preserve the culture of the family farm, which is as an important fabric of Irish rural society. Importantly, by ensuring a specified level of income for retired farmers (post transfer), it reduces their financial vulnerability in difficult family situations. For the non-farming society, a contribution system spanning a farmer's entire working life, leading to a contributory pension on retirement would reflect a sense of fairness and farmers paying their way which also would be welcome.
Dr Michael Hayden is an Assistant Professor of Accounting at Maynooth University
