I move: "That the Bill be now read a Second Time."
The Financial Emergency Measures in the Public Interest (No. 2) Bill 2010 gives legislative effect to a number of the important measures decided on by the Government and announced in the national recovery plan and budget 2011. These are difficult but necessary measures which Ireland must take to secure the budgetary position and promote national recovery.
In summary, this Bill reduces some public service pensions by 4% on average to save €100 million in 2011; applies a further substantial reduction to the pay of the Taoiseach, the Tánaiste and Ministers; and amends the National Minimum Wage Act 2000 to allow the Minister for Enterprise, Trade and Innovation to set a new national minimum wage and give effect to the Government's decision to reduce the minimum hourly rate from €8.65 to €7.65 an hour.
These measures are an essential part of the strategy decided on by the Government, a strategy which we must begin to implement immediately if we are to bring order to the public finances and restore the competitiveness of the economy. I assure the House that the Government has not decided to reduce pensions or the minimum wage lightly. All of us wish that Ireland was not in this position and that our society did not have to face such difficult choices but the Government must act in the public interest and, in view of the severe constraints now confronting the economy, we have decided that the wider public interest requires that these measures be introduced. Since the House passed the two Financial Emergency Measures in the Public Interest Acts last year our economic position has become more difficult. Ireland is now in a position where we have had to seek external assistance from the IMF and the EU. Without any correction, the level of public expenditure on pensions is simply not sustainable. Either this House acts now to deal with the problem or the necessary actions will be imposed at some stage in the future.
It is important to stress that the Government is also sharing the burden. In asking others to accept income reductions, this Bill shows that the Taoiseach, Tánaiste and Ministers are accepting significant reductions in their own incomes. Ministerial pensions will also be reduced as part of the measures being introduced for the entire public service.
Considerable controversy arose today regarding the payment of bank bonuses by AIB. The legislation introduced on foot of the State guarantee prohibits the payment of performance bonuses to senior executives and this continues to be the case. Certain bonuses have been paid to a range of bank employees for performance in previous years where pre-existing contractual rights have been built up and legal action was taken by employees to enforce their rights. The schemes where such rights were accrued have been withdrawn since State support was given to the banks. I made it clear yesterday and I repeat today that no bonus has been paid to senior bankers for 2009 and 2010.
The AIB executive chairman, David Hodgkinson, has indicated that 2,400 workers will receive an average bonus of €16,700 in respect of moneys owed for duties performed prior to 2008. I welcome that he has clarified that the payments relate to a culture in AIB which he believes belongs to the past and will not relate to the future of the bank. He noted that the issues faced by the bank means that it currently relies on the support of the Government and taxpayers and he is working to ensure that in future the bank's pay and benefit policy is more reflective of its responsibilities, performance and the economic climate in general. I welcome the statement by the chairman of AIB.
The measures contained in this Bill point to the future. They are prospective rather than retrospective. They deal with the future and not the past.
Lest there be a lingering doubt in any mind about the position of the Government on this, I have made it clear that no bonuses have been paid to senior bankers in 2009 and 2010 and, as far as the future is concerned, I propose to introduce an amendment to the Finance Bill to put this matter beyond any doubt and provide a 90% rate of charge on any banker's bonus. That should copperfasten this matter and put it beyond any doubt whatsoever.
It is the Government's strongly held conviction that the primary means by which we must reduce the deficit and continue on the road to economic recovery is to reduce Government spending. The cost of providing public services has to be reduced to bring it in line with sustainable revenue levels. That is why this legislation has been introduced.
The Bill reduces some public service pensions by about 4% on average, a step which will save some €100 million in 2011. It is not often recognised that many public service pensions are very low. Data for the Civil Service show that about 25% of pensioners have pensions of €5,000 a year or less, while 40% of pensioners have a pension of €10,000 a year or less. It is the case, of course, that many of these pensioners had short service, others may be survivors or dependants of retired civil servants, and some may be also entitled to a state pension. No matter what the causes may be, the fact remains that the pension being paid to these older people after their working lives is small. There is every reason to think a similar pattern is repeated throughout the public service.
We have to protect the many public servants and their survivors and dependants who rely on low pensions. Pensioners do not have easy ways of finding new sources of income or reducing their expenditure and, since their incomes are already low, it is entirely appropriate to protect those on public service pensions broadly equivalent to the state pension.
Accordingly, the Government has decided that the first €12,000 of pension will be entirely exempt from the reduction. All public service pensions which are equal to or less than this amount — an amount broadly equivalent to the state pension — will not be reduced. Above this level of €12,000 a year, public service pensions will be reduced in accordance with the income bands and rates in section 2 of the Bill. This tiered approach ensures that those with higher public service pensions make a greater contribution than those receiving lower pensions. The rates and bands are set out in section 2 with a 0% reduction on the first €12,000, 6% on the next €12,000, 9% on the next €36,000 and 12% on the remainder of pension income.
The Government is satisfied that this is a progressive and proportionate approach, taking account of the need to protect pensioners on low incomes as much as possible. For example, a public service pension of €15,000 a year will be reduced by €180 or just more than 1% annually. A pension of €25,000 a year will be reduced by €810 or 3.2%. On the other hand, a person with a pension of €80,000 will see a reduction of €6,360 or 8% a year in that pension. It is right that those with larger pension income will see the largest reductions. Former public servants in receipt of higher rates of superannuation benefit, including former members of the Government and the Oireachtas and other office holders, including the Judiciary, will bear the largest reductions.
I want to make clear to the House that this Bill does not alter the terms of public service pension schemes in that the reduction will be applied after the pension has been determined in the standard way. The reduction applies only to the pension and does not affect lump sums in any way. The reduction applies to public service occupational pensions only. It will not affect the state pension a person may receive from the Department of Social Protection. The calculation of the reduction in public service pension does not take account of the state pension that may be payable to retired public servants who were members of co-ordinated pension schemes.
I also ask Deputies to note that, in the case of those public servants retiring up to the end of February 2012, the measure will apply to pensions calculated by reference to the pre-1 January 2010 arrangements, that is, higher or pre-cut pay rates. This is what has been called the grace period protection of pension provided for under the Financial Emergency Measures in the Public Interest (No 2) Act 2009. I will make an order using the powers of section 3 of that Act to extend the grace period from 31 December 2011 to the end of February 2012.
The Bill provides that the pension reduction will not apply to anyone who retires or whose preserved benefits come into effect after the end of February 2012 when the grace period ends. Instead, their pensions will be calculated on the basis of salaries which have been reduced by an average pay cut of some 7%, as the 1 January 2010 pay reduction will apply to the calculation of their pensionable pay.
In short, the pensions of public servants retiring before the end of the grace period at the end of February 2012 will be reduced by about 4% on average and the pensions of those who retire after that date will be reduced by about 7% on average, in line with the reduction in pay following the measures of January 2010.
The proposed extension in the grace period to the end of February 2012 is to avoid the effect of a spike in pension lump sums costs in 2011 caused by public servants bringing forward their decision to retire. The extension will help to spread this cost over 2011 and 2012. It may be argued that someone who has worked in the public service for many years and has paid for his or her pension should not be affected by the financial emergency. However, in a pay-as-you-go pension system, the fact is that an active member's contributions typically pay the pensions of those who have already retired. There is no continuing fund on which the member relies on in retirement. This is the essence of a pension scheme of this type. There is a widening gap between the burden being borne by those in public service employment and retired public service pensioners. Account must be taken of the fact that the pension-related deduction and the pay adjustment have not yet affected those in retirement, leading to, at least, a 10% to 15% difference between a public servant on a pre-cut pay level of about €40,000 and a former public servant on a pension of the same amount.
The proposed reduction in public service pensions must be also seen against the background of the general reduction in prices. Prices have fallen and the CPI is now at 2007 levels. On the other hand, public service pensioners received general round increases of 2% in June 2007, 2.5% in March 2008 and 2.5% in September 2008, which is an increase of around 7%. These changes have conferred very significant real increases in income on public service pensions of which the Government had to take account in framing a budget which was fair for all sections of our community.
In contrast to the position in the public service, the majority of private sector workers have no occupational pension and, for those who do have some provision, the prospects are not good as many pension funds are in deficit. For those pension scheme members who have defined contribution arrangements or personal retirement savings accounts — PRSAs — negative market returns will have seriously undermined their pension savings. Many who have accrued defined benefits face the prospect of not receiving all they have been promised.
Above all, the Government has to consider the longer-term sustainability of the Exchequer and the public service pension system. While the public service pay bill has been reduced since 2009, public service pension costs are increasing significantly. Pensions now account for almost 15% of the total public service pay and pension bill. The cost of public service pensions paid by the Exchequer has increased from €l,433 million in 2006 to more than €2,235 million, an increase of 56%. In fact, the rate of increase in pension costs has been more marked since 2008 and this is mainly attributable to an increase in retirements in 2009.
Faced with cost increases on this scale, costs which are clearly going to rise with the ageing of the public service and the additional number of retirements now in prospect, the Government has to act in the public interest. We must be clear that a pension regime which is not sustainable in the long run is of benefit to no-one, either existing or future pensioners or the Irish economy.
The Bill makes further reductions in the pay of the Taoiseach, the Tánaiste and Ministers. At the beginning of this year, like all public servants, the Taoiseach, the Tánaiste and other members of the Government accepted a substantial reduction in their rates of pay. The reductions applied were in accordance with the recommendations of the review body on higher remuneration in the public sector, which was established in the 1960s to make recommendations to Government on the levels of remuneration appropriate to senior public service posts. For the purposes of this new exercise, it benchmarked the rates of pay of the Taoiseach and Ministers against their equivalents in a number of countries and recommended reductions of 20% in the case of the Taoiseach and 15% in the case of Ministers. These reductions, which were the highest applied in the public service, were accepted and implemented in full by this Government. The reductions reflected the fact that, in good times, pay rates in the public service had jumped ahead of what we can now afford. The reductions to public service pay generally which were introduced in the budget of 2010 brought pay levels back to a more reasonable and affordable level. By accepting a higher level of reduction, the Taoiseach and Ministers showed they were fully prepared to shoulder an additional burden.
There seems to be the view abroad in this country, promoted in some — but not all — sections of the print and electronic media, that no public servant, including office holders, should be paid a salary that reflects the burdens of their offices. This is often linked to the very short-sighted view that talented people should somehow take up the responsibilities of public office on a voluntary basis. Let me be clear. Governing this country, as we all know in this House, is a difficult and complex job, both in good times and in the very bad times we are experiencing now. Those who carry out these tasks in the public interest should have an appropriate payment for it.
Why then has the Government decided to reduce their own pay again? Quite simply, it is the strong view of the Government that they should take a further reduction in their pay because we are asking so much of others in this budget. It is the strong view of the Government that they should take a further reduction in their pay because we are asking so much of others in this budget. Under section 7 of the Bill the Taoiseach's gross pay will, therefore, be reduced again by over €14,000, the Tánaiste's by more than €11,000 and Ministers by more than €10,000. The announcement has been greeted with a deal of begrudgery and I cannot allow this to go unchallenged. Those who choose to criticise the Government cannot simply ignore the significant pay reductions that have gone before. The fact is that with the changes being introduced in the Bill, the overall reduction in the pay of the Taoiseach since 2008 is now 25% in gross pay or over €90,000 when the pension levy is included. It is 19.5% in the case of Ministers or over €60,000 when taking account of the pension levy. There can hardly be any clearer or better evidence to show that the Government has taken an appropriate adjustment that reflects the reduced circumstances of the country. The combined changes reflected in the Bill, which amends section 2 of the Financial Emergency Measures in the Public Interest (No. 2) Act 2009, by substituting the increased reduction for those applied on 1 January this year. The reduced pay rates will have effect from 1 January 2011.
I wish to put it on the record of the House that those Secretaries General, whose salary would otherwise have exceeded the Taoiseach's, have volunteered to take an additional reduction in their salaries to bring them in line with the reduced salary of the Taoiseach. I have agreed to this and I am sure Deputies will join with me in acknowledging this significant, public-spirited contribution.
The Bill also changes the national minimum wage. Given the serious economic challenges Ireland now confronts, it is essential that obstacles to growth and employment creation are removed. In view of the high levels of unemployment within the economy, job creation must be the main focus of Government policy. We must move to maintain existing jobs and the policy action that the Government has taken over the past two years has allowed us to regain much of the competitiveness which will provide an essential basis for future growth. I am glad to say there is now clear evidence that wage and other costs are adjusting throughout the economy. The fall in the live register in each of the last three months is a welcome sign that these changes are bearing fruit. The Government, however, has decided that we must do more to widen and deepen this process of adjustment, in particular, by ensuring that the labour market works as efficiently as possible
Where a national minimum wage is imposed at an excessively high level, unemployment will be higher than it need be. This is especially so in the case of younger persons who can be denied the opportunity to work by the existence of a high national minimum wage. Independent research on the employment effects of minimum wage rates, cited in a recent Forfás report, found that a majority of international studies clearly showed up their negative effect on employment. The conclusion was that, in certain cases, there was evidence that a 10% increase in the minimum wage could reduce employment by up to 5%.
While it is the case that 20 EU member states have legislation setting a statutory minimum wage, it is very striking that Ireland's minimum wage is the second highest in absolute terms and the sixth highest when expressed in purchasing power terms. These facts alone tell us a lot about the loss of competitiveness that must now be recovered.
Since our national minimum wage is high by international standards there is a risk, as the OECD economic survey observed last year, that it can restrict employment opportunities for low-skilled workers as wages fall. The OECD recommended that the national minimum wage be reduced in line with falling pay. While the large fall in domestic consumer demand which has affected the Irish economy has played a role in reducing employment levels, it is also striking that the sectors and occupations where the greatest job losses have occurred are generally those most affected by wage-setting legislation. Ireland's minimum wage has been increased six times since its introduction in 2000 and is currently 55% higher than its original level. By contrast, it is forecast that the consumer price index will have increased by approximately 28% since 2001. The national minimum wage was introduced during a period where we lost sight of the need to maintain competitiveness. The changed circumstances of the Irish economy make it imperative that we take immediate steps to repair the damage done and secure more soundly based economic growth.
The Government has, therefore, decided that a reduction in the minimum wage is needed from €8.65 an hour to €7.65 to remove any possible barriers to job creation. Section 13 of this Bill gives the Minister for Enterprise, Trade and Innovation the powers required to make this very necessary change. I understand the Minister will deal with this aspect of the legislation as it proceeds through the House.
I want to challenge the idea that persons already employed on the minimum wage will see their income drop automatically. Anyone already working under a contract of employment that sets wages at or above the national minimum wage is entitled to continue to be paid those wages unless otherwise agreed between both the employer and the employee concerned. The Government decided that the pay of the Taoiseach and Ministers should be cut again. When combined with the changes in taxation and PRSI in the budget, their pay will drop by an equivalent percentage amount, although by a vast or greater sum in cash figures, to the reduction applied to the minimum wage.
Ireland needs growth and the jobs such growth can provide. For this to happen, all parts of the economy must be competitive. In particular, sectors such as wholesale and retail, hotels and restaurants, and other services which have real potential for employment creation, must be put in a position to expand employment. The Government's action to reduce the national minimum wage is complemented by the action it is taking under the national recovery plan to review the wider framework of statutory sectoral minima within a period of three months. I am confident that the steps the Government is taking on the minimum wage will remove many of the barriers which now prevent this from happening.
I will outline the main provisions of the Bill. It is important that the House notes that the Bill has a preamble and recitals similar to those used in the Financial Emergency Measures in the Public Interest Acts 2009. These introductory parts of the Bill explain the policy background to the Government's decisions and place each of the measures very clearly in the context of the severe economic and fiscal crisis affecting the State. I will not speak in detail here but I ask Deputies to examine them very carefully before they make their final assessment of the measures in the Bill. The preamble and recitals not only make clear beyond any doubt the nature and scale of the budgetary problems Ireland must now confront, but they also record the fact that the Government has taken account of the generally favourable pension terms available in the public service and of the pay reductions imposed on serving staff.
Section 1 defines a "pensioner" as a person who is entitled to a public service pension payable under a public service pension scheme, or has a preserved benefit in a public service pension scheme in respect of which the preserved pension age of the person falls on or before the relevant date. "Public service body" means the Civil Service, the Garda Síochána, the Permanent Defence Force, local authorities, the National Treasury Management Agency, the Health Service Executive, the Central Bank of Ireland, vocational educational committees, the Economic and Social Research Institute, the Institute of Public Administration, primary and secondary schools, third level institutions and the non-commercial semi-state bodies where a public service pension scheme exists or may be made. The term "officeholder" includes the President, members of the Judiciary, Members of either House of the Oireachtas, members of the European Parliament and qualifying officeholders such as Ministers, the Attorney-General, the chairman and deputy chairmanof the Dáil and Ministers of State. "Public servants" are defined as officeholders or employees of public service bodies.
Section 2 deals with rates of pension reduction. This section requires a reduction be made to the annualised public service pension payable to a pensioner or someone who becomes a pensioner before the relevant date.
Section 3 deals with the calculation of public service pensions not affected. The section provides that the calculation of the public service pension is not affected by the reduction measure, which was applied after the pension is calculated in the normal way.
Sections 4 and 5 are technical provisions. Section 6 gives the Minister power of discretion where inequities arise. Section 7 contains the reduction in the pay of the Taoiseach, the Tánaiste and Ministers. Section 8 deals with preserved pensions. Section 9 restricts the scope of ministerial direction. Sections 10 to 12, inclusive, deal with an annual review of the operation of the measures, powers to make regulation and the removal of doubts. Section 13 deals with changes to the National Minimum Wage Act 2000.
The budget I announced on Tuesday began the process of implementing the national recovery plan with a wide range of taxation and expenditure measures designed to secure the budgetary position and to put the economy on course to recovery. The preamble and recitals to the Bill show the scale of the difficulties Ireland faces. The future of the country is at stake and we must move at once to put in place the necessary policy response. This is why the Government decided to introduce this legislation to the House immediately. We do not have time to delay. The changes to the national minimum wage show that we are determined to support employment creation and to restore competitiveness to our economy.
It is entirely reasonable that some retired public service pensioners make a fair and proportionate contribution to the required adjustments in light of the generally favourable terms of public service pensions and the fact that, up to now, no adjustment of any kind has been made to those pensions. This was not an easy decision. No one changes the retirement provision for thousands of retired pensioners and their survivors and dependants, including Members of this House and former Members of the Oireachtas and their survivors, without the most careful debate and consideration. With the pay reductions in this Bill, the Government has shown yet again it is prepared to shoulder the burden and demonstrate that it will lead by example.
I referred to the discussion which took place today about banking bonuses. I reiterate that it is intended in the finance legislation to ensure that bonuses will be taxable at 90% in any guaranteed institution.
The Government cannot and will not ask those in public service employment to bear a significant additional burden or to ask the community as a whole to accept tax increases or expenditure reductions while nothing is asked of those pensioners who can afford to do so to make a reasonable contribution.
The measures in the Bill are a central, vital part of the Government's response to the economic crisis and I commend them to the House.