Dáil Éireann Debate, Thursday - 22 April 2021
31. Deputy Ged Nash asked the Minister for Finance if there is specific evidence or analysis conducted by his Department that confirms that an increase in the State pension age would lead to significant long-term cost savings for the Exchequer; and if he will make a statement on the matter. [21075/21]
View answerIn March 2021, the Department of Finance made a submission to the Commission on Pensions, which is available on the Department’s website.[1] The analysis set out in the document attempts inter alia to quantify the likely budgetary costs of population ageing in order to inform the appropriate policy response. It builds on work undertaken by the Department of Finance in conjunction with other Finance Ministries in the European Union, together with the European Commission, through the EU Ageing Working Group.
While Ireland’s demographic structure is relatively favourable at present, shifting demographics in the coming decades will result in a slower pace of economic expansion and increased expenditure pressures putting significant pressure on the public finances. Recent projections from Eurostat point to Ireland having one of the most rapidly ageing populations in the EU over the coming decades. Revenue increases will not be sufficient to fund all of these additional costs. This is because growth in the productive capacity of the Irish economy is set to slow significantly, as demographic trends weigh on additional labour supply. As public revenue evolves in line with economic growth, slower revenue growth will make it more difficult for the public finances to absorb the increase in age-related spending.
Up until the passing of the Social Welfare Act 2020, the State Pension Age (SPA) was legislated to increase to 67 in 2021 and 68 in 2028. The analysis undertaken by the Department includes analysis on the projected long-term cost of this change in legislation, based on the SPA remaining at 66 years of age for the projection period. While the analysis does not refer specifically to the impact solely on the Exchequer, the analysis suggests keeping the SPA unchanged at 66 years of age will result in significant additional annual expenditure on pensions. The increasing SPA scenario estimates that annual pension expenditure would be 0.9 percentage points of GNI* lower in 2070 than the baseline with an unchanged SPA. The estimated cumulative cost of this policy decision is projected to amount to approximately €50 billion by 2070.[2]
In addition, the Department’s analysis also foresees a significant impact on the general government balance and debt-to-income ratio as a result of population ageing. In a no-policy change scenario, age-related increases in public expenditure and a slower pace of revenue growth are predicted to lead to the emergence of a significant deficit by the end of the next decade, reaching around 3 per cent of GDP (4.7 per cent of GNI*). The deficit is projected to continue to increase sharply thereafter, reaching just below 6 per cent of GDP (9.4 per cent of GNI*) by 2070, without policy intervention. As a result of these developments, the debt-to-income ratio is projected to increase by 54 percentage points of GDP, (or 86 percentage points of GNI*) to reach 112 per cent of GDP, (182 per cent of GNI*), by 2070. The Department’s analysis estimates that maintaining the SPA at 66 accounts for nearly 20 percentage points of the increase in the debt-to-GNI* ratio of 86 percentage points to 182 per cent of GNI*.
[1] https://www.gov.ie/en/publication/c199e-department-of-finance-submission-to-the-commission-on-pensions/.
[2] Assuming discount rate of 4 per cent per annum.
