As the Deputy will be well aware, there is an important context to the changes to State pension provision under the pensions reform programme.
Firstly, there is the fiscal context. Given the scale of the fiscal crisis and because spending on social protection accounts for nearly 40% of current Government expenditure, you will appreciate that savings have to be found in the social welfare system.
The change to State pension rate bands means that pension payments made, will reflect PRSI payments made over a working life. Before the rate band changes where introduced in September 2012 a person with an average of 20-47 PRSI contributions per year over their working life receives a weekly State pension of only €4.50 less than a person with a yearly average of 48 or more PRSI contributions. That was neither fair nor equitable. From September 2012, a lower pension is payable to new applicants for State pension who have a yearly average of less than 48 PRSI contributions which better relates to their PRSI record. This measure introduces additional rates bands for State pension to more fairly reflect the proportionality of attachment to the workforce by the claimant.
The maximum rate will remain unchanged and the rate payable to people with an average of between 40 and 47 contributions per year will also remain unchanged.
However, those who have fewer contributions will receive a lower rate of pension but it should be noted that while expectations may need to be adjusted, a rate of pension will be still be payable. Claimants with an income need, may, following a means test, qualify for a State pension (non-contributory). The maximum rate of the (State pension non-contributory) is €219.00 per week.
This change to rate bands introduced in September 2012, moves somewhat closer to a ‘total contribution approach’ where those who pay more, benefit more. The ‘total contributions approach’ to State pension will be adopted to replace the current averaging system. The current proposed date for its introduction is 2020. Under this system, 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.
The current arrangement was announced in Budget 2012 and came into effect in September 2012. At that time it was estimated that savings in 2012 would be in the region of €0.5m, €2.8m in 2013, €5.5m in 2014 and €8.2m in 2015. These estimated costs factor in those who will avail of other social welfare schemes. Detailed savings by year for the period in question are not available at this stage.
Numbers affected:
Average weekly recipients in 2012, 1,100
Average weekly recipients in 2013, 3,650
Average weekly recipients 2014, 7,200
Average weekly recipients 2015, 10,750.
There is also an important long-term policy context for the proposed changes to State pension as the challenges facing the Irish pension system are significant. The recently published review of the Social Insurance Fund identified that in the medium to long term, pension related expenditure will account for an increasing proportion of the Social Insurance Fund expenditure - rising from 57% in 2011 to 85% in 2066.
The pensioner support ratio is projected to decline from 5.3 workers for every individual over pension age in 2010 to 3.9 workers by 2020 and to 2.1 workers by 2060 People aged 65 years and over will account for a greater proportion of the population while the proportion of working age is expected to decline. People are living longer with healthier lives and growing numbers of people want to work, or may need to work beyond State pension age. Therefore, the task of financing increasing pensions will fall to a diminishing share of the population. This has obvious and significant implications in relation to the future costs of State pension provision.
In terms of value for money the Actuarial Review of the Social Insurance Fund identified that for those who take time out of the workforce, the report confirms that social insurance benefits offer excellent value for money for those:
- on the lower part of the income distribution,
- those with shorter contribution histories, mostly women
- and the self-employed.
Notwithstanding the changes in the contribution rules and associated rates of payment which were introduced in September 2012, those with lower earnings and those with shorter contribution histories, will continue to obtain the best value for money from the Fund. This can be of particular benefit to women.
The State pension is the bedrock of the Irish pension system, and these reforms are essential to address the challenges of increasing life expectancy and to ensure its sustainability. The Government’s priority is to secure economic recovery, promote growth and employment. To this end, the State must pursue a determined deficit reduction strategy and the pension reform measures underway contribute significantly to this strategy.
