I welcome the Minister for Social Protection, Deputy Joan Burton.
OECD Review of Irish Pensions System: Statements
I thank the Acting Chairman and the Seanad for the invitation to speak about the OECD pensions report and give Senators some background information on it.
Secure and adequate finances are one of the fundamental components of a happy and active retirement. The sustainability of the pensions system is a particular concern. The demographics, or population bonuses, Ireland has mean we have many more older people living a lot longer. In recent years the social welfare budget has gone up by €200 million to €300 million per annum in respect of an increase in the number of older people qualifying for retirement payments against the background of a deterioration in the public finance.
In the future the task of financing increased pension spending will fall to a diminishing share of the population. Currently, there are 5.3 people at work to one retired person, but by 2060 the figure will decline to 2.1 working adults to one older person. Life expectancy in Ireland is increasing and while this is a very welcome development, it also presents very real and obvious public policy challenges as to how we provide for the retirement people would like to enjoy. It was in that context and the context of the financial crash the country had suffered, that in April 2012 I commissioned the OECD to review long-term pension policy in Ireland. I launched the completed review of the pensions system jointly with the OECD on 22 April. It is informed by the extensive consultation undertaken by the OECD in Ireland but also internationally as part of its work. It takes account of the considerable body of work already completed in Ireland on the analysis of the pensions system and the different proposals for reform brought forward in recent years. It provides excellent comparative data between the pension arrangements in Ireland and those in OECD countries with comparable systems. It draws on international experience and examples in the recommendations and options proposed for reform. It looks at critical issues, that is, the sustainability of the pensions system in the light of population and investment challenges; adequacy and coverage levels in order to ensure an adequate income in retirement, with a particular focus on the lower and middle income group; the modernity of pension systems to ensure flexibility in the labour market and supporting mechanisms for longer working; and equity within the pensions system.
During its visits to Ireland the OECD team met the representatives of a broad range of sectoral organisations, including representatives of older people, the pensions industry, employer and trade union groups, and academic, social and economic policy experts.
It worked closely with my own officials and those in other Departments. In addition, I hosted a very successful consultation forum, including all relevant stakeholders, at Farmleigh House in September 2012 when the OECD was presenting a preliminary assessment of its thoughts on pensions in Ireland. The good news is that Ireland is in a relatively favourable position compared with most OECD countries with regard to pension spending and the adequacy of retirement income provision. Most importantly, the economic situation of pensioners in Ireland is comparatively good with respect to other age groups in the population and international comparators. The report also shows that recent decisions which have been made are in line with the roadmap needed for pensions reform. Compared to the rest of the population, older people have the lowest poverty rates at 1.9% and are least likely to be at risk of poverty, which points to the adequacy of the State pension. This highlights why it has been important to protect core pension and welfare rates, which I have been able to do in recent budgets. However, the report also raises question marks about aspects of the Irish pensions system. This is precisely why we asked an independent, respected body like the OECD to give us its objective perspective. We must ensure that the State pension remains sustainable in light of demographic changes and that the public finances can support these changes.
I have introduced a number of significant reforms to pensions in recent years. In 2014, the State pension age will be standardised at 66. The State pension age will then be increased over time to 67 in 2021 and 68 in 2028. In September 2012, a number of changes to the State pension rate bands came into effect for new customers. In order to simplify the State pension, a move to a total-contributions approach to determining eligibility for the State pension is already planned in 2020 to replace the current averaging system. This is a measure which is supported by the OECD. These reforms will ensure that the level of pension paid will be directly proportionate to the number of social insurance contributions made by a person over his or her working life. Aligning the rate of pension paid with the contribution made ensures that those who contribute more during a working life will benefit more in retirement. It also makes the State pension system more transparent. The overall objective of the pension system in Ireland is to provide an adequate and sustainable basic standard of living through direct State supports and to encourage people through generous tax reliefs to make supplementary pension provision so that they may have an adequate income replacement rate when they retire from work.
While the State pension is expected to provide sufficient retirement income for the lowest paid workers, many people retiring from work will have a significant income gap if they do not have supplementary private pension provision. However, only 51% of people in employment aged 20 to 69 have pension coverage. This relatively low rate of pension coverage is a key concern of the Government. This is why the programme for Government includes a commitment to reforming the pension system to progressively achieve universal coverage, with particular focus on lower-paid workers. We are talking, for instance, about women, many of whom have varied working patterns due to family commitments at different stages in their lives, and about atypical workers. Many employers with zero-hour contracts offer relatively small employment hours and the people on such contracts often rely on two or three days social welfare per week to bring their incomes up to an adequate level. It is for this reason that we are looking at an auto-enrolment system. Such schemes are a very positive way to increase supplementary pension coverage. As well as giving a pension to people who may never have received one, the scale of a single pensions system would bring benefits in terms of lower charges.
I issued the report on charges in the Irish pensions system a few months ago. While the report identified that charges in Ireland can be very high, particularly for very small schemes, overall many of the charges for the larger schemes are broadly in line with international levels. I recognise, however, that the introduction of an auto-enrolment system would be best supported by a more favourable economic environment than currently exists. An auto-enrolment scheme is something I would look to introduce when the economy is in better shape and people's incomes have recovered. In that context, the findings and recommendations of the OECD report are not prescriptive. I note that the OECD did not do costings on all of the recommendations it made. The recommendations are more indicative of a broad roadmap of what the country requires if it aims to have a sustainable pensions system which meets people's expectations, particularly younger and middle-aged people who come to retire in 20 to 30 years time.
The report provides a wide choice of measures for consideration which involve a number of Departments. None of the structural options put forward has been costed and detailed analysis of some of these options will be required before decisions can be brought to Government. The report is being examined in detail and I will bring a response to Government for decision setting out a roadmap for long-term pensions policy in Ireland. We must recognise that there are costs involved in providing for good retirement incomes and that the earlier we can bring forward reform, the better. My aim is to ensure that we engage actively in this process to ensure that all older people have a safe and secure retirement with an income which is capable of meeting the expectations they have for their retirement.
I welcome the Minister to the House. I could not help but reflect while listening to her contribution that the much-maligned Fianna Fáil Administration of 2002 to 2007 had an enduring legacy in the vision of the then Minister for Finance, Charlie McCreevy, in setting up the National Pensions Reserve Fund. It was unique. As subsequent events were to prove, it was a very useful pot into which the last Government and current Administration have been able to dip for reasons other than those for which it was established. The Minister will remember clearly the buzzwords when the fund was established, including the reference to a pensions "time bomb". The issue of a pensions time bomb has become more rather than less acute in the intervening years due to the changing demographic profile of the Irish population. I have no doubt that it will continue to actively concern the Government and its successors. I hope we do not ever reach a point where the non-productive element of the population starts to outstrip the productive element and that one person will be working to supplement the income of two who are retired. That is what the pensions time bomb means.
The report is logical. It recognises the importance of greater security for those approaching retirement and of ensuring fairness for younger workers saving for retirement. It acknowledges that anomalies have built up which must be addressed. The basic conclusion of the report is that the current system is disjointed and inconsistent in its coverage of and outcomes for public and private-sector workers and State pensioners. The Minister addressed these issues to a great extent in her contribution. There are certain figures in the report which suggest rather starkly the challenge faced by the Government. According to the Pensions Board, only 54% of people in the workforce have pension coverage. While the public service coverage is in excess of 90%, coverage in other areas is exceptionally low. In the hotel and restaurants sector, coverage is only 23%. In the wholesale and retail trade, coverage is only 25%. These are stark figures which present the reality of the challenges the Government faces in squaring the circle.
An interesting aspect of the debate is that employers are obliged by law to offer employees access to a pension.
Only 43% of those interviewed had not been offered access. Of those, 93% had never asked an employer about access to a pension. I am sure the Minister will have some comments on that. The other aspect of the statistics concerns awareness of the tax relief on pension contributions. While it is high, at 73%, the majority of people did not know or had incorrectly understood the amount of tax relief that applies. Perhaps this is something the Department of Social Protection, in terms of knowledge and communications, could examine.
Some consideration has been given to mandatory pensions but the Minister has not touched upon it. I can understand why because it is a thorny issue. The State must grapple with the issue in years to come. An interesting comparator is the Australian style of a compulsory 9% superannuation. While attractive in the short-term, it would be politically unacceptable for any party in government in light of the continuing demands on the Irish electorate in terms of widening the tax base. Of the OECD countries, only Ireland and New Zealand do not have compulsory pensions saving. I am not suggesting the Minister should fly a kite because it is a political timebomb. Any Government would shy away from it in the current tax environment. The OECD report states that mandatory contributions to pensions may be perceived as a tax, discouraging people from working.
On the tax treatment of pension contributions, the OECD report has unequivocally concluded that the Government system of tax incentives disproportionately benefits higher income groups. For those who have incomes too low to pay income tax and credits, the OECD proposes a Government subsidy or a matching contribution in an individual's retirement savings. I refer to the Administration from 2002 to 2007. One legacy, now long forgotten and consigned to history, is the SSIA scheme that encouraged people to save. It was a runaway success. It worked well in that case and perhaps, in the context of the Government providing a matching contribution or subsidy to an individual's saving scheme, it may be worth examining. The Fianna Fáil Party recognises that pension tax relief is a significant cost to the State. Our most recent budget proposals envisage a reduction in the annual earnings limit.
One of the persistent criticisms of the private pension industry is that it is designed to make vast sums of money for the pensions manufacturers, fund managers, administrators and intermediaries. I can never get my head around it. It is often described as opaque, confusing and offering mediocre to poor value for the pension holders. The Department of Social Protection issued a report last year showing the impact of high charges, particularly in the case of small schemes. Perhaps the Minister will comment in this respect. We are encouraging people to take out pensions in their 20s. The report showed that in the case of someone who saved €250 a month from the age of 35, after 30 years of saving, and without any charges, the pension would amount to €10,000 in retirement. With an average charge of 2.18% per year, it reduces the fund by €62,000 leaving a sum of €6,900. This is a scandal. The pension industry has much to be answerable for and I am sure the Minister, being the determined Minister she is, will have some issues in this regard.
I welcome the Minister to the House. As she is one of the star performers in Cabinet and is no shrinking violet by any stretch of the imagination, I have no doubt the future of pensions is in good hands. She will work diligently and determinedly to put together a template based on the recommendations of the OECD report referred to by Senator Paschal Mooney.
I agree with much of the commentary of Senator Mooney. It is interesting to reflect on the time of Charlie McCreevy and the concept of the National Pensions Reserve Fund. It is an awful shame they did not get more things right. If they had, perhaps we would be in a better position to fund pensions. It is important to acknowledge where good things were done and I am happy to do so. The OECD report provides a template of best practice and the ideal scenario. We must tailor that according to our needs. We must implement a timeframe according to our economic recovery and tailor it in a way that suits our population.
It is a positive development that the health of the nation has improved to such a degree that we are dealing with the problem. The idea that two adults will work to sustain one elderly person is why we invest in health services. That is due to the advent of modern technology and improvements in medicine. It leads us to the situation and is reflected internationally. With that in mind, it is important to plan in the long term. It is important to ensure the foundation is put in place during this Administration to ensure the problem is adequately dealt with.
The pension age will increase incrementally between now and 2022. That is reflective of an ageing population. It is important and critical that we get this right. It is not a party political issue but it is a political issue. It is not a political football because we are dealing with the future of every citizen in this country. We need cross-party and cross-political consensus as far as it is achievable to ensure an effective, proper structured framework is in place so that when people come of age and move into their late 60s and early 70s, they have the comfort and security of being financially independent during good healthy years.
A couple of other issues have also been referred to, including the scandalous behaviour of pension companies. This country has seen the devastation caused by the reckless and inadequately regulated banking industry. We need tighter regulation in terms of pensions. I commend the Minister for what she said in this regard. I have no doubt it will be dealt with adequately. The figures quoted by Senator Mooney, whereby €3,100 is lost per annum in the case of someone who saves €250 per week, is shocking and extremely worrying. It is the greed of the private sector, which led this country into the state we are in. It is the greed of right-wing economics. The idea of light touch regulation did not work, as clearly demonstrated throughout the world. Let us regulate it. If necessary, I have no problem with overregulation as it is protecting the future of our people. The notion of survival right-wing politics, philosophy and economics has totally failed throughout the whole world. It will not resolve the challenges we face. I was asked to speak on this topic at a late hour but I commend the Minister and I wish her well in an extremely important task for the future of our nation.
I welcome the Minister to the House. When the Minister has the opportunity, I look forward to her publishing and discussing her planned roadmap for long-term pensions policy in Ireland. This debate shows the interest we have in the policy.
As time is limited, I wish to share my initial thoughts on the OECD review. I have two major concerns regarding the manner in which the pensions system is operating - our ageing population and the State's reliance on current expenditure to cover pension costs. I will address the latter first.
Private companies fund their pension schemes through future liabilities, but the State uses current expenditure. In the private sector many pension schemes have been adjusted, modified or even closed to new entrants and it has been necessary to cut entitlements. While I am not happy about any of this, it is the reality of what is happening. However, there is a real generational issue and the current generation is set to lose out. The ESRI report published yesterday shows clearly that those who are in their 40s or under are bearing the brunt of the recession. The national pensions framework published in March 2010 showed that there were six workers to each pensioner. However, that figure will be halved by 2032 to a ratio of 3:1 and by 2050 there will only be two workers to each pensioner. Moreover, that is not guesswork but mathematics.
The ratio in the public sector is more startling and has been exacerbated by early retirements and the recruitment moratorium. The same generation that is disproportionately affected by the recession through high unemployment, mortgage arrears and negative equity will also be obliged to pay the price of a pensions shortfall unless the issue is dealt with. By the time this generation retires, there will be nothing left in the pot. There is a social insurance fund deficit of €1.5 billion per year. According to KPMG, the deficit will reach €324 billion in the next 55 years unless action is taken now. This sum of €324 billion is a phenomenal amount. It is nearly twice the national debt and more than twice Ireland's GDP in 2011. Consequently, we really must get serious about talking about solutions and not simply talking about the ageing population. There must be discussions on whether benefits will be reduced or whether PRSI contributions will be increased. It has been estimated that PRSI contributions would need to be raised by three quarters from now, were that bill to be met over 55 years. That is an indication of how serious this matter is. Consideration must be given to providing an incentive for employers and employees to invest. Senator Paschal Mooney mentioned the position in Australia, but I note the Labor Party Government there introduced that scheme in 1992 with a 3% contribution. Thereafter, over a 15 year period, the Australian authorities raised the figure to 9%. Perhaps there is an opportunity to start at a figure of 1% or 2% at a low age and then to raise it. I do not suggest this is the answer, but the figures are dramatic and drastic and this is not a problem out of which one can hope the economy will naturally lift Ireland.
It is known that the earlier one starts to invest in one's pension, the better. As the Minister stated, the basic State pension in Ireland is relatively generous when compared with that in other OECD countries, but I note retirees in other countries often receive bigger pensions overall because they contribute to mandatory pension schemes. That is their culture and the system. I also note the recent European Union White Paper, An Agenda for Adequate, Safe and Sustainable Pensions, concluded the financial pressure of an ageing population inevitably would lead to longer working lives and the need for private pension funding to fill the gap left by reductions in public pensions. One need only consider the situation in Waterford Crystal regarding its defined benefit scheme. One worker retires and receives 100%, but six months later the next one retires and receives between 18% and 20%. Is that fair or equitable?
I will move on briefly to the issue of the ageing population. Everyone is aware that in common with the rest of Europe, Ireland has an ageing population. A total of 781,000 people, or approximately 7% of the population, are aged 60 years and over. This figure is expected to double by 2050, when it will account for 29% of the population. An ageing population will have serious consequences for Ireland, including longer working lives, lower economic growth, labour shortages, reduced consumption, considerable pressure on women to fill the gaps in the labour market, alongside caring for children and elderly relatives, and a considerable reduction in the social insurance fund and the National Pensions Reserve Fund. However, Ireland does have something in its favour - its birthrate. One cannot consider these issues in isolation and Ireland must invest in children. It is our collective responsibility, given that in economic terms, children are a merit good. Children have value to others beyond their family as future taxpayers and workers whose contributions will help to fund State pensions. I will sum it up in one line from the English MP, Mr. Frank Field, who said, "I may not have children; but I need someone to have them if my pension is to be paid." Therefore, let us invest in children also.
I thank the Senator for her interesting conclusion.
I assure the Senator I will not be doing that, grandchildren perhaps but not children.
I welcome the Minister who, as always, is welcome. The report which all Members have read suggests all citizens should take out a private pension policy to supplement their State pension in years to come. This, of course, is because people are living longer which is most welcome, but the flipside is that there is greater demand on the pensions pot. I also came in armed with statistics and figures, but there is no need for me to reiterate them because everyone has articulated them well. Consequently, I will not go into that side of things. However, I will observe that the level of participation in the labour force drops dramatically at 65 years of age and that State spending on pensions will rise from 7% to more than 11% of GDP by 2060. While I appreciate that Members will not be around to see this happen, it is incumbent on them to govern and ensure the seeds are sown today that can be reaped in the years ahead. They must ensure there is enough in the pot to go around to ensure the children of today will not face poverty in their golden years.
One must not lose sight of the fact, however, that all workers in Ireland today and probably for a number of years to come are under financial pressure and strain. People are cutting out things they feel they can do without simply to meet their everyday financial commitments. I refer to items such as medical insurance, family holidays or even Sky packages. My fear is that most such persons will perceive a private pension to be an unnecessary priority, being something from which they would benefit in 30 or 40 years time because they simply do not have the money. I refer, in particular, to low and middle-income earners. One cannot underestimate the impact of the economic downturn and the effect it has had on people's lives. While planning for the future is commendable, people will not perceive it to be a priority. I welcome the Minister's statement that she does not envisage the introduction of automatic enrolment until the economy recovers, which is good news.
The report also states charges for private pensions and small schemes, in particular, are extremely expensive. It notes their unevenness and the need to address this issue. A further finding is that older people in Ireland are better off socio-economically than in other countries. I commend the Minister because her retention of the core social welfare rates for the present has kept it like this. While one must acknowledge the household benefit package for the elderly has been cut somewhat, at least the core social welfare payments have been kept intact, I hope permanently but at least for now.
As for the main recommendations, the report indicates that the two best options for the State pension in the future are a means-tested basic pension and a universal basic pension. I have problems with both options and will outline the reasons. On the means-tested payments, workers who have worked all their lives in this country, who have saved a little to put something aside for a rainy day and who have contributed tax, PRSI, the universal social charge and health levies to mention but a few items would be penalised in their old age by a means-tested payment because their savings will come against them as capital, which would be grossly unfair. As for the other proposal for a basic scheme for the entire population, I also have a problem with this. In theory, a person could start work at 16 years of age and work until he or she was 26. Thereafter, having satisfied the 520 pay contributions, such a person literally could be in receipt of social welfare payments for the next 40 years without having contributed much. However, a person who had worked 50 years of his or her life, contributed to the economy and the State in a huge way, would only receive the same pension. There is something wrong in that regard and it would not be right.
As I note my time is up, I ask the Acting Chairman for one minute in which to conclude.
Half a minute.
Self-employed persons cannot even access credited contributions. I believe the Minister will address this issue because she has stated they will be in receipt of a reduced pension on foot of this fact. I must skip much of what I intended to say because, as Senator Jillian van Turnhout noted, this is only a five minute contribution.
We need a longer debate on this issue. I have much to say but the Acting Chairman is looking down at me smiling.
I look forward to the Senator's next episode on some other day.
I ask the Minister to return to the House as quickly as possible. Let us have a long debate on this issue. I hope she will be able to put time aside in her diary to discuss the subject in the House. We really need to debate it in full.
I welcome the Minister. I was delighted that Senator van Turnhout quoted Mr. Frank Field, who has really interesting thoughts on the whole area of social expenditure. He is a most valuable member of parliament on the neighbouring island. I thank the Minister for bringing the OECD report to us. This is a problem we have been neglecting. The late Minister, Mr. Séamus Brennan tried on several occasions to start a pensions debate but he did not succeed. As other Senators have said, the fund former Minister, Mr. Charlie McCreevy, set up has been substantially raided. There is hardly anything in it at this stage because of the performance of our banks and other institutions.
We must consider seriously raising the retirement age. The Minister saw the report last week on what is happening to young people. Approximately 10% of them are in secure employment while the other 90% are dependent. The latter do not contribute until their mid-20s or even later given the high incidence of unemployment among young people. Entering the labour force at 28 or 30 and leaving it at 65 to live on the pension until 85 is just not fundable by any standard. We should actually grasp the nettle and raise the retirement age, even by more than the OECD recommends. In the OECD report, it is stated that we should examine mechanisms by which people can combine half a wage and half a pension when they reach retirement age.
We need to regulate the pension funds. There are so many trustees of pension funds who, until recently, were giving out added years like snuff at a wake. The schemes are broke. Governor Honohan is taking on board how we treat people who trade when insolvent. Many private-sector defined-benefit schemes actually went bankrupt while the trustees were adding years. Perhaps we should consider much stricter control over those.
I agree with what Senator Mooney said on charges. This is mentioned by the OECD. The case for a compulsory deduction for a pension is well made. It implies a lower cost. We all tend to put off thinking about it. It is a matter of setting a contribution aside, starting small, as the Senator said, such that the money will be available when needed.
There is a recommendation on the household benefits package in respect of the travel and the energy. It concerns the transfer into cash. That sounds well to economists but I can imagine the resistance one would encounter among people who like those perks. It is a suggestion that the OECD has made. We appear to have a larger provision of those benefits.
One might ask about all the PRSI that was paid and the universal social charge. Can one get for pensions an earmarked part of that money? People could legitimately say they have been paying to the State for years and question whether there should be a top-up payment to get a pension. I acknowledge there will be transition arrangements. On our being allowed to examine social fund expenditure, some will wonder whether we give too much in child benefit at the top end. The Minister shares the concern that too many disability and invalidity benefits were counter-productive, such that the social fund might have been more productively spent funding people's pensions. During the boom period, many children were brought up in households where nobody was working and who were instead registered as having a disability or invalidity.
The analysis of what social welfare is for and what it can be used for - a cause dear to the Minister's heart - is important. We must encourage people to save in addition to receiving the State pension. One regrets that so many chose to save by buying bank shares. Pensioners were destroyed by that system.
Like other Senators, I welcome, as always, the Minister to the House. There is much to discuss and I wish her well. I hope we do not put pensions on the long finger again and that we engage with the Minister in this discussion.
The final speaker will be Senator Harte, who is to be preceded by Senator Brennan.
Word has come down to me that I may be the most appropriate person in the House to talk about pensions. I was born in the early 1950s and married in the early 1970s. The Minister may do the calculations in this regard. When I was married, women gave up work to look after the house. We had three children, one after another, and my wife ceased to work. As far as I am concerned, nobody works harder than the housewife in any house. Many retire from work to rear their families and many return to work in later years when their children have grown up. Some never return to work, not even on a part-time basis.
The Minister mentioned mandatory pension contributions in her speech. I had to pay them, at a rate of 7% of my salary, when employed by a semi-State organisation. Over the years, having had two or three children in university at the same time, I would have felt well off if I had the 7% I was paying mandatorily towards my pension. It was a major struggle but we got through it. Colleagues of mine were in the same position. Mandatory contributions will be difficult.
My father died when he was 92 and started work at the age of 14. He was paying a small amount of tax on his pension at 92, as was his father before him. The Minister may not agree with my belief that a man or woman who works continuously for 50 years, from the age of 18 or perhaps 23 or 24 if educated, pays a significant amount of tax to the benefit of the economy and merits his or her entitlements. When I think of the abuse of the social welfare system and the difficulty people encounter in trying to obtain entitlements after 50 years, I realise people are entitled to what they deserve at that stage.
I made a slight error in my time allocation. We have just enough time for a contribution from Senator Harte, who might share an extended period of five minutes with Senator Reilly.
I have just spoken to the Minister. We may be able to facilitate an extra five minutes to facilitate Senator Reilly.
I second that.
We did not commence this debate until almost 3.10 p.m. One hour has been set aside.
The tradition is that if there is an hour, we speak for that hour.
I have a commitment at 4 p.m. with a deputation. I am happy to stay for the extra five minutes, but I was here at the time the debate was due to start.
I propose an amendment to the Order of Business: "That we extend the time allocated for this debate by five minutes."
Is that agreed? Agreed. The final ten minutes speaking time will be for Senator Harte, Senator Reilly and the Minister. I thank Members for their co-operation.
I welcome the Minister. The pension problem is one of the biggest issues facing this country. I recall as a young man looking at the pension model when I started in the insurance business. It showed that when one started earlier one was on a bicycle on a slope, but the longer one waited, the steeper the climb on the slope became. Nobody realises how difficult it will be for this country to sustain the pensions of a population that is getting older and living longer.
The first pensions regime was set up by Otto von Bismarck in the late 19th century to stop German labourers going to America to earn money. At that stage, however, average life expectancy was 50 to 55 years. It was probably envisaged that people would not have to get a pension. Things have moved on a great deal since then. There is also the issue of public service pensions and private pensions. They are very different. People who were contributing to a private pension in the last few years have seen their funds slashed enormously. In addition, many people in business cannot afford to set aside the €1,000 to €1,500 per month that they were putting into their pension previously and have stopped contributing. Their fund could be growing or dropping by now. It is a time bomb waiting to go off, even if it is a cliché to say that.
This country is in a slightly better position than other countries. We have a younger population which might be able to sustain the pensions for some time, but in European countries, particularly in Germany, the population will become more weighted towards the older age groups and the younger age groups might not be able to sustain their pensions. We must protect the pensions of people with private pension funds. In a court case last year the banks tried to grab the pension fund of an individual because the person was in massive debt. Happily, the court ruled against that. The banks would love to be able to call on people's pension funds so I am glad the decision went that way. However, there is always the fear that they could try again and succeed. The protection of the pension fund is critical for people in business and for people who wish to invest in a pension.
I do not believe we have really grasped the enormity of the problem there will be 25 or 30 years hence in terms of who will fund the public pensions. As has been said, there are people who, for their own reasons, have not worked and they will get the same pension as people who have contributed throughout their working lives. It is only fair that the latter group be given preferential treatment, even if it was a small lump sum when they retire, as one gets with a private pension or public service pension. The ordinary old age pension for many people is just a continuation of their earnings or, perhaps, a reduction. Perhaps some type of incentive should be given for people in that position.
The other issue is that the pensions industry is keen that some of the pension fund could be released before pension age, depending on whether it is a company pension or a private pension. At present, if one has a private pension and one reaches the age of 65 years, one can withdraw a quarter of the pension fund as a tax free lump sum. We should consider some type of mechanism whereby five years before retirement age a part of the lump sum could be drawn down. Many people could clear their mortgages. It has been shown that many people in the 40 to 65 year age bracket are suffering more than we thought with mortgages that should never have been allowed to extend beyond the 65th birthday. There are people who could use some of their lump sum towards ending their mortgages a few years earlier than retirement age. I do not believe they would spend it on a yacht or holidays around the world. It could be designed so that it could only be released for the purpose of clearing a stressed mortgage. It would help the people concerned and give them an incentive to save in the meantime because there are generous tax allowances for pension contributions.
I welcome the Minister and I thank the Chair and other Senators for facilitating my contribution to the debate.
I welcome the Minister's initiative in commissioning the OECD report on our pensions system. When the report was released it received very little attention even though the issue it deals with is of huge importance not just for the Government but for society in general. Pensions policy not only affects people in receipt of pensions but every person. It has a huge bearing on our economy. This report is a valuable contribution to the ongoing debate about pension reform. One in ten pensioners live at risk of poverty and if the State pension was removed, 88% of pensioners would be living in poverty. Only half of the current workforce is covered by private and occupational pensions, and many of these schemes, particularly defined benefit schemes, are in deficit. Some of them are close to collapse.
The pensions protection system is almost non-existent, as we saw with the Waterford Crystal case. While there is no simple solution to the collapse of a pension fund, the decision that was made to resist confronting the obligations of the Government under EU law was disappointing. The regulation of the private pension industry is also a major problem. Not only are the charges opaque, as has been mentioned, but they are often very expensive. The high risk business of investing in private pension funds is in need of urgent regulation. Currently, much of the policy surrounding pensions is based on tax breaks to incentivise people to invest in private schemes, yet the 2009 ESRI report on pension tax reliefs shows that this is highly questionable. A total of 80% of the pension tax relief goes to the top 20% of earners, and everybody suggests that these savings would happen anyway.
The question is what we should do. Obviously, radical pension reform is required but that will not happen overnight or with the wave of a magic wand. It requires a great deal of calm, considered discussion and debate. We should explore ideas such as increasing the State pension to 40% of average industrial earnings and universalising it to ensure that no pensioner lives in poverty. We need a mandatory public pension system for all workers not in private schemes to ensure that people have a real chance to provide the additional savings required to give them some measure of comfort in their later years. We must also examine the pension tax relief system. There must be tighter regulation of private pension funds to limit the levels of risk involved.
I have two questions for the Minister. When will the structural options of the OECD be costed and when will that analysis be carried out? What timeframe does the Minister have in mind before she brings a response to the Government?
I thank the Senators for their thoughtful and incisive contributions. I wish to stress that the OECD report is quite positive about Ireland, in the sense that we have quite a good and strong universal retirement pension system through the State. One of the features of it is that if somebody has made contributions, they qualify. However, as Senator Moloney said, very often people have a short contribution history. Many of them would be self-employed people coming into the system to pay contributions relatively late in their working lives, and the Social Insurance Fund shows that it is such people who get the highest contribution from the State pension. The non-contributory, means-tested State pension was brought up to the same level as the contributory pension during the boom.
Many of the reforms which are under way at present were agreed by the troika in November 2010.
We are, for example, raising the age of pension eligibility over a period of time in accordance with that agreement. This partly reflects demographics, as well as the financial and economic situation in which the country finds itself.
In regard to the various options available, the OECD has indicated in its report that its first preference is a mandatory scheme because it would be simpler and cheaper to operate, with its second preference being automatic enrolment, whereby people would be automatically enrolled but could opt out. My view is that the latter option which has worked very well in New Zealand might be more appropriate in our case. As it was adopted in the United Kingdom in recent times, we do not yet have outcomes from that jurisdiction in terms of take-up. The experience in other countries is that there tends to be a very high opt-in level under such schemes.
One of the difficulties is that we have critical groups of people, particularly women and middle-income and low-paid workers, who can find, at the end of their working life, that their pension entitlement is seriously inadequate. Unless they are contributing to their pension fund over their entire working life, the chances are that their expectations of what they can look forward to in retirement will not be met. This is especially the case for women who often move in and out of paid employment at different times to accommodate child-rearing duties. In that sense, the State pension, through the PRSI and means-tested system, provides a minimum level of income in retirement. That income will probably feel adequate to people who were previously on a low income or in receipt of social welfare benefit. In fact, the State pension will provide for an increase in income for persons who are entirely dependent on social welfare prior to reaching retirement age. For middle-income earners, however, it might come as a shock to have to survive on a pension of €12,000, or up to €14,000 if one includes the benefits package, in contrast to those who are looking at a pension in retirement of €25,000 or so.
Several Senators referred to the cost of tax reliefs and urged that they be geared more to people on middle and low incomes. Our position in this regard is reflected in the inclusion in the programme for Government of the undertaking to confine the subsidisation of pensions through tax reliefs to workers whose total fund will yield a pension of no more than €60,000 per annum in retirement. That is a very handsome pension for most. Moreover, Members should note that the first efforts to impose restrictions on the pension pots of very wealthy individuals and a cap on the total permissible fund were initiated as recently as 2005. I was party to that debate, having conducted a great deal of research. It subsequently emerged that certain people had pension pots of €20 million to €30 million, which meant there was a very large allocation in tax relief in their direction. The programme for Government and the associated commitment given by the Minister for Finance reflect our determination to address that issue.
A number of Senators referred to public versus private sector pensions. It is important to bear in mind that public sector workers are subject to a levy contribution of 7% in respect of their pensions. Senator Sean D. Barrett referred to the USC. When the ESRI produced the original paper on that levy, it was described as a universal social "contribution". In the heat of the economic crisis, however, it morphed out of the arms of the Department of Finance as a universal social "charge". As we look towards automatic enrolment or a mandatory system in the future, as the economy recovers, there will be scope to earmark some of the levy for the purposes of a defined pension provision in subsequent years. In this regard, we should be mindful of what happened to the National Pensions Reserve Fund, as referred to by Senator Paschal Mooney. The purpose of the fund which had built up to a very significant level before the economic crisis was to provide for public service and social welfare pensions from 2025 onwards. Whatever system we develop, whether it be automatic enrolment or a mandatory system, we must be able to provide future contributors with reassurance to a very high level that it will be in their name and that the Department of Finance will not dip into it at some future time, as happened with the reserve fund.
That is a very difficult commitment to fulfil in an economic downturn.
Yes, but we must anticipate it as part of the architecture of the scheme. The former Minister, Mr. Charlie McCreevy, allocated part of the then economic surplus to annual transfers to the National Pensions Reserve Fund, which is one way of approaching the matter. However, if people contribute individually, they must have confidence that their contribution is being invested very long term in the economy - the National Treasury Management Agency has been doing some work in this regard - with a modest but safe rate of return. That is what we should be working towards.
I thank the Minister for her co-operation and assistance.
Sitting suspended at 4.05 p.m. and resumed at 4.30 p.m.