Benchmark needed to tie pensions to inflation
People march through the streets of Dublin in September 2022 to protest against increases in the cost of living. The protest was led by the ‘Cost of Living Coalition’ which is made up of 30 organisations including trade unionists, student and pensioner bodies and opposition political parties. Age Action Ireland believes that linking the State pension to average earnings would provide greater security for retirees.
With smaller families and longer life expectancy, the profile of our population is changing and the proportion of older people growing.
This raises important questions about policies to protect our quality of life in older age, now and into the future, according to Camille Loftus, head of advocacy and public affairs, Age Action Ireland.
“The current Programme for Government commits to maintaining access to the State Pension age at 66, describing it as the ‘bedrock’ of pension provision, and committing to progressively increasing payment levels – but it is silent on how much it will be increased by, or what level of State Pension Government is aiming for.”
She adds that the Pensions Commission recommended State Pension payments be formally linked to a percentage of average earnings, for a number of reasons: “A benchmark payment level provides certainty to current and future State Pension recipients, helping people to plan for an adequate income in retirement.
"A fixed benchmark ensures that the State Pension keeps pace with earnings growth, and price inflation. It signals a commitment to ensuring that the State Pension remains adequate to prevent poverty in older age. Almost every European country uses a benchmark like this – Ireland is a conspicuous outlier.”
The value of the State Pension has been falling behind the recommended benchmark over recent years, she explains, with the personal rate of State Pension approaching €50 per week lower than the level recommended by the Pensions Commission, with the gap widening every year.
“This leaves older people managing on less income in real terms, taking account of price inflation, and at greater risk of poverty. It also signals a worrying trend for younger people, who cannot assume that their State Pension will be sufficient to prevent poverty when they retire.
"Much more of them will reach older age still paying high housing costs for example: at the last Census, 43% of people over 40 were living in the private rented sector, where rents continue to rise.”
Deferral of pension until 70 comes at a cost – especially for women Government policy allows people to defer claiming their State Pension up to the age of 70.
“Some people will do this to continue earning the social insurance contributions they need to qualify for an adequate State Pension - women are particularly affected, as they are more likely to take time out of the workforce to provide unpaid care.”
However, she points out that deferral comes with a financial penalty: “Average life expectancy is currently 83 years of age. A person who lives this long, and defers claiming their State Pension until age 70, stands to lose almost €18,000 in State Pension payments over their lifetime, rising to over €34,000 if also claiming for a partner, compared to claiming your State Pension at 66.”
This financial penalty contradicts another stated goal of Government policy - supporting longer working lives.
“Age Action opposes mandatory retirement, and believes that people should – on a voluntary basis – be able to continue earning an income for as long as they choose. The Roadmap for Pensions Reform committed Government to facilitating older people to voluntarily continue working beyond traditional retirement age, to enable them to provide for a better income in retirement, and so that society can benefit from the skills and experience of older workers. In a full employment economy, this makes sense.”
Age Action calls for a new national strategy on ageing and older people. A Bill on contractual retirement ages is currently making its way through the Oireachtas, but is very limited in its scope, aiming only to increase the ‘standard’ retirement age from 65 to 66, or minimum State Pension age.
“In contrast, for public servants recruited over the last 20 years, mandatory retirement age is 70. Age Action calls for amendments to the Bill to allow private sector employees to continue working up to age 70, if that is their preference.”
From January 2026, auto-enrolment to a supplementary pension fund begins – this means most private sector workers who are not already contributing to a supplementary pension will be automatically enrolled in a new workplace pension scheme. Both employees and employers will contribute, at a rate rising with length of enrolment; government will provide a top-up to contributions.
“This will help to address a significant disparity in pension coverage. For example, only a quarter of accommodation and food service staff have supplementary pension coverage, compared to 92% of people working in finance, insurance and real estate; 36% of people working in ‘elementary’ occupations contribute to a supplementary pension, compared to 84% of professionals.”
She points out, however, that people in lower paid jobs, which includes a significant number of younger people, just starting out in their working lives, will still find it harder to be able to afford pension contributions.
“They face high housing costs, childcare costs, and potentially the costs of providing care for a family member, for example.”
Pension contributions are subsidised by tax relief. Higher earners get tax relief on pension contributions at 40%, lower-paid workers only get relief at a rate of 20%.
“In other words, the people who most need help to contribute to a supplementary pension get the least help. Higher earners, who are more likely to contribute in the absence of any subsidy, get more help: this is known as ‘deadweight’, it is inefficient expenditure.”
Age Action believes that a better approach would be to make this tax relief available at the same rate for everyone: “We’ve proposed 30% for the current budget, giving lower-paid workers greater support to contribute to supplementary pensions to secure their incomes in older age.”
It is important that we are all supported to provide an adequate income in older age when we are no longer earning, she adds.
“But it’s also important that Government plans for the future: Age Action is calling for a new National Strategy on Ageing and Older People, so that we can all be assured of a decent quality of life in older age. The time to start that work is now.”
