Expenditure on pensions, at approximately €7.3 billion, is the largest block of expenditure in my Department, representing some 37% of its expenditure. Demographic change alone will increase this by over €220 million this year. Maintaining the rate of the State pension is critical to protecting older people from poverty.
State pension (contributory) is an entitlement built up through PRSI contributions, and is not impacted upon by the means of the pensioner. It is one of three pensions paid by the Department of Social Protection to those over 66, and its rate of payment is related to contributions made over the years into the Social Insurance Fund, which fund the scheme on a ‘Pay As You Go’ basis. As such, those who have paid more into that fund are more likely to be paid under that scheme.
There are two State pensions related to reaching state pension age. Firstly, the State pension (non-contributory) is a means tested pension and is funded by general taxation. Secondly, the State pension (contributory) is not means tested and is paid from the Social Insurance Fund.
In Ireland, as in other countries, the contributory pension is primarily aimed at people with sustained contributions towards the Social Insurance Fund which finances it, on a pay as you go basis, and rewards such contributions with greater entitlements and coverage for a range of benefits, including contributory pension entitlements. It is important to ensure that those qualifying for a contributory pension have made a sustained contribution to the Social Insurance Fund over their working lives. To ensure that the individual can maximise their entitlement to a State pension (contributory), all contributions paid or credited over their working life from when they first enter insurable employment until pension age are taken into account when assessing their entitlement and the level of that entitlement.
The home-makers scheme makes qualification for a higher rate of State pension (contributory) easier for those who take time out of the workforce for caring duties. The scheme, which was introduced in and took effect for periods from 1994, allows up to 20 years spent caring for children under 12 years of age (or caring for incapacitated people over that age) to be disregarded in the calculation of the pensioners yearly average. This may have the effect of increasing the yearly average of the pensioner, which is used to set the rate of their pension, and may in turn qualify them for a higher rate of payment. The disregard does not involve the award of credits, and entitlements are still subject to the standard qualifying conditions for State pension contributory also being satisfied, including a minimum of 520 paid contributions being paid before reaching pension age.
This scheme was not introduced retrospectively for periods prior to its introduction. My Department has estimated that the annual cost of extending the Homemakers scheme to allow people to avail of the full 20 years currently allowed under the scheme, encompassing periods prior to 1994, could cost some €290m in 2017, and this figure would rise at a faster rate than the rate of the overall cost of State pensions. This is a very significant cost, and the main beneficiaries would be people who already have significant household means, and who do not therefore qualify for an alternative means-tested payment.
Where someone does not qualify for a full rate contributory pension, they may qualify for an alternative payment. If their spouse has a contributory pension, they may qualify for an Increase for a Qualified Adult amounting up to 90% of a full rate pension. Alternatively, they may qualify for a State pension (non-contributory), which amounts up to 95% of the maximum contributory rate.
For example, a person with a yearly average of 20 contributions paid or credited per year may qualify for a reduced rate SPC of €202.80. However, they can instead be paid a higher amount through the non-contributory pension, unless their means are over €52.50 per week (or €105 for a married couple), at a minimum payment rate of €204.50 (maximum rate is €227), which would bring their total personal means (including their pension) to over €257 per week. Their household means test ignores their spouse’s state pension, the capital value of their home, and has generous income and capital asset disregards, where applicable. This minimum of €257 doesn’t include rent allowance, household benefits or fuel allowance. It is also higher than the €238.30 received by a person solely dependent upon a maximum rate State pension (contributory), who would receive no benefit from any change to the method of calculation of contributory pension entitlements, and they would experience a loss if such a change was financed by reducing the core rate of the State pension, or by moderating increases in the future.
The Actuarial Review of the Fund in 2012 confirmed that the Fund provides better value to female rather than male contributors, due to the redistributive nature of the Fund.
The National Pensions Framework (2010) proposed that a “Total Contributions Approach” (TCA) should replace the yearly average approach for new pensioners from 2020. The aim of this approach is to make the rate of contributory pension more closely match contributions made by a person. Officials of my Department are currently working on the detailed development of the TCA with a view to making proposals for consideration later in the year. This is a very significant reform with considerable legal, administrative, and technical elements in its implementation. An important element in the final design of the scheme will be the position of people who have gaps in their contribution records for various reasons, and this factor is being considered very carefully in developing this reform.
I hope this clarifies the matter for the Deputy.
