Immediate action needed to deal with cost of keeping State pension age at 66, watchdog warns

Immediate action is required if the State is to mitigate the cost of keeping the State pension age at 66, according to the Irish Fiscal Advisory Council (IFAC).

In a report published on Thursday, the Government spending watchdog calls for a stand-alone State Pension Fund, protected from plundering by governments on the basis of short-term economic and political pressures, and with a credible long-term funding plan based on an increase in PRSI rates and the use of windfall corporation tax receipts.

“The risk is that [financial] assessments of pension challenges continue to be ignored and desirable policies that impose immediate costs are not implemented,” say the report’s authors.

Introducing such a fund with a suitably long-term approach would reduce the tax pressure on future generations but require more immediate increases in PRSI rates, authors Killian Carroll and IFAC chairman Sebastian Barnes say.

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The alternative, it argues, is a need for much higher PRSI rates down the line as a smaller number of workers support a larger group of pensions who, in their working life, benefited from a lower tax burden, a move it says could create issues for intergenerational equity.

The paper follows the Government decision to keep the State pension age at 66 despite recommendations to the contrary in the report of the Pensions Commission, and to have it funded largely through higher PRSI contributions.

It notes that the number of people hitting the State pension age will be 50 per cent higher in 2050, and, using Eurostat population estimates, says the ratio of pensioners to the working age population will rise beyond that right up to 2100, the outer limit of its projections.

Modelling a range of scenarios, it says its proposal would require a jump of around 3.5 per cent in the long-term combined PRSI contribution of workers and employers.

This would be around half the 7 per cent increase envisaged by the Pensions Commission which only looks out to 2070. IFAC says the Pensions Commission scenario rates would have to rise further between that point and 2100.

The difference is that IFAC proposes the PRSI increases be phased in between this year and 2027. That would mean higher PRSI rates up to 2040, with current workers in the bulge baby boomer bracket paying more towards cost of their retirement but noticeably lower rates than those envisaged by the Pensions Commission, thereafter easing the pressure on younger workers when the State pensions bill rises sharply from 2040 onwards.

Investing the surpluses that would arise over the next 20 years or so as well as putting current windfall corporation tax receipts into the fund would also help support future pension payments.

The State pension is currently funded from the Social Insurance Fund into which PRSI payments are lodged. It works on a pay-as-you-go basis so today’s PRSI-paying workers are funding those over the age of 66 in receipt of the State pension. Other welfare payments are also financed from the fund, not just State pensions.

The report argues that a separate State Pension Fund to fund pensions should be designed to take into the account the predictable long-term variation between the number of people paying PRSI contributions and the number of people claiming pensions. Other benefits would continue to be paid out of the Social Insurance Fund.

The report notes that, although actuarial assessments of the Social Insurance Fund are carried out every five years, there is no obligation on governments to address funding shortfalls that these reviews highlight.

And while the Government did indicate when it opted not to increase the State pension age that this would involve PRSI increases in the future, it did not give hard figures on their scale or timing, “obscuring the trade-off between a lower retirement age today and future costs”.

The report also takes issue with a Government plan for a 10-year ahead roadmap on social insurance contributions rates to be published in the first half of this year, arguing that such an exercise does not look far enough forward to “take into account the predictable ageing of the population in the coming decades”.

A State Pension Fund should be required to consider economic and demographic projections over a 75 to 100-year timeline, as happens in Canada, the report says.

Moving to a separate properly-funded State Pension Fund with proper long-term planning in line with known demographic pressures would, the report says, have significant implications for how the Irish pension system works.

“It may lead to the creation of significant pension reserves if demographic variations are smoothed by requiring current generations to contribute more and limiting the increase in PRSI rates for future generations,” the authors say, essentially moving from a fully-pay-as-you-go model to one that is partially funded in advance of known liabilities.