Pensions reform should be high on everyone’s political agenda

Pensions have became the unexpected issue of the election. And just for once, it is not the gray vote but the graying vote that has set political parties a-jitter. Tens of thousands of people in their 50s and early 60s suddenly became aware that when they retired from employment they would have to wait up to two years to start receiving their weekly State pension.

It is a particularly acute issue for the four in 10 private sector workers who have no private pension savings and who will rely entirely on the State pension for their retirement income.

But how did it come to this?

At first sight, it would seem that everyone was taken by surprise by a sudden unannounced change – the “news” that the qualifying age for State pension will rise to 67 in 2021 and 68 in 2028, with a jobseeker’s payment for those who retire now at 65 to take them to age 66 when the pension kicks in.

But, in fact, the rules on the State pension changed as far back as 2011. And the first stage of what is seen as a three-step process to change the rules on pensions kicked off in 2014.

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At that stage, the transition retirement pension (a year-long payment from age 65 equal to the State pension) disappeared and people retiring at 65 had to apply for jobseeker’s benefit to bridge the gap to the pension – and, in the process, make themselves available for work, although it seems this was largely ignored by welfare.

Presumably anyone eligible for the State pension would qualify for jobseeker’s benefit. The problem with jobseeker’s is that it lasts for only nine months: after that, applicants are subject to a means test.

Apart from the potential loss of income, many people who have not relied on welfare during their working lives objected to having to go, as they saw it, cap in hand to the State when they had contributed to their pension for 40 years or more.

In 2021, the situation gets worse with the gap moving from one year to two and people relying on means-tested allowance for even longer.

So why was nothing done?

It’s not quite true to say that nothing was done. Successive governments have planned all manner of reform of the State pension. The key word here is planned. There have been myriad reports, several public consultations and many, many promises of action. Unfortunately none of it has yet got on the statute books and become law.

The problem for the politicians who would vote reforms through is the same as it is for ordinary workers and savers: no one cares to look far enough ahead to consider pensions a priority. Governments work in five-year cycles – at best. And there are very few votes in pensions – or at least, there were until now. One of the main reasons for this is that to solve what all reasonable analysis foresees as the looming pensions crisis, we have three choices: to work longer; pay more Pay Related Social Insurance (PRSI); or accept a lower, or even a means-tested State pension.

None is an easy sell to voters.

Basically, State pensions are paid from the Social Insurance Fund. PRSI payments go into this fund and welfare payments, including the State pension, are drawn from it.

While the fund has recently returned to surplus – largely on the surge in employment in recent post-crash years – every actuarial analysis of the fund says that the increasing number of older people as a proportion of the population means that the fund will be nursing deficits of hundreds of billions of euro as the century proceeds.

As former pensions ombudsman Paul Kenny explained recently, the rationale for raising the pension age was increased life expectancy – those who reach age 65 in 2020 are likely on average to survive 50 per cent longer than those who hit 65 in 1970.

And where in 2018, there were five workers (paying tax and PRSI) for every retiree, by 2050, that figure will be two workers per retiree.

Kenny notes that we’re far from alone in this dilemma. Other countries, including France and Britain, are experiencing similar issues and raising pension ages.

Ultimately that will mean higher taxes on the smaller proportion of the population that is actually working for lower, if any, State pensions. Doing nothing is not really an option.

“Any policy response that does not raise the age at which we receive the State pension will be very costly,” Kenny said, writing in this newspaper, adding: “If we want decent pensions, we must pay for them.”

And those, such as Sinn Féin and People Before Profit, who are clamouring for a return of the pension age to 65 should bear in mind that, in Ireland anyway, this age is only a fairly recent trigger point. As Ictu social policy officer Dr Laura Bambrick has noted, the State pension age in Ireland was 70 until it was lowered in the 1970s. Ironically, that was under a Fine Gael-led government in a coalition with The Labour Party.

What now then?

Recent Government policy has focused on two areas. The first is to make the State pension itself fairer. In very basic terms, this means those who work longer get a higher pension.

The second is to “encourage” everyone to start saving towards their retirement income needs. This is known in Ireland as “auto-enrolment”.

There has been broad political accord behind both initiatives, although there are certainly variations in policy and detail. The outgoing Government committed to having auto-enrolment in place by 2022. However, by the time the Taoiseach called the election, Minister for Social Protection Regina Doherty had not yet got around to bringing the measure before Cabinet.

Auto-enrolment essentially involves automatically enrolling workers into a pension scheme if they are not already part of one. This is primarily an issue for the close to 600,000 private sector workers who are not part of a private work-based, or occupational, pension scheme.

As envisaged by the outgoing Government, all workers between the ages of 23 and 60 earning more than €20,000 per annum would be enrolled in the scheme unless they are already members of an occupational scheme.

Initially they would pay 1 per cent of their gross income into the scheme, rising over time to 6 per cent and this would be matched by the employer. The State would also make a contribution – this was suggested at €1 for every €3 contributed into the scheme. That raised concerns in some quarters, given that the State contributes more than that for most workers in traditional occupational schemes.

A second bone of contention was the period over which the system would be phased in. The department originally proposed a six-year phasing-in timeline with contributions rising by 1 per cent of gross salary each year. That was opposed, particularly by employers wary of incurring additional costs.

As a result, it has most recently been suggested that the scheme would be phased in over 10 years. The problem here is that this is essentially a quarter of a working person’s life before they are fully up and running. Given the concern people have about adequate income in retirement, it seems a strange way of going about it.

In the auto-enrolment scheme there is a provision for workers to choose proactively to opt out at a point within the first year of membership. The thinking is that most people, once they are in, will simply stay in. But, if not, the proposal is that they will be re-enrolled at a later point when, possibly they will be more mature and more open to the concept of pension saving.

Workers will have a choice of investment funds, albeit a fairly select one: if they don’t make a choice, their money goes to a default fund. The pension they get on retirement will be determined by how much they contribute and how good the investment fund performance is.

The assumption is that after the election any new government will return to the plan to introduce such a scheme, possibly with minor amendments.

State pension

Auto-enrolment should mean that people are not left waiting for the State pension – or nothing – when they retire. But what about the State pension itself?

Changes introduced in 2012 made it more difficult for people to claim the State pension. They needed a higher number of weekly PRSI contributions to do so – essentially 19 years’ worth – and this mitigated against people who took breaks from the workforce to raise a family or care for elderly or sick relatives. Society being what it has been, at least until very recently, it was almost inevitably women who were disadvantaged.

A second disadvantage of the system was what was called “the averaging rule”. In order to get a full State pension, a worker had to average 48 or more PRSI contributions every year from the time they started working until they retired.

Again, people, especially women, who took time out from the workforce suffered, ending up with lower pensions. So too did those, often less well-off people, who started work in their teens rather than after college.

At the other end of the scale, someone who came to Ireland in their mid-50s and worked for 10 years to retirement could secure a maximum pension on the back of just 10 years’ social insurance contributions.

The answer: a new system for assessing entitlement to the State pension. This was called the Total Contributions Approach. Gone is averaging. In its place, a straightforward target to secure a full pension.

The original proposal back in 2010 under the National Pensions Framework was that 30 years of contributions would secure a full pension. However, when the Government issued its consultation on the issue, that had mysteriously morphed into 40 years.

The Government also proposed new Homecaring Credits. These would allow people to count up to 20 years spent taking care of their family as part of the 40 years’ pensionable service needed for a full State pension.

These credits are similar to the Homemakers’ Scheme, which was introduced in 1994 allowing women or men to receive PRSI credits for up to 20 years taken out of the workforce to care for children, but only under the age of 12 or any ill or disabled person of any age.

The plan was to have this new scheme in place for this year – and in fact it was rolled out in 2018 for people who have already retired, since the eligibility rules were tightened in September 2012 – but again the Government fell with the Minister still promising to bring the measure to Cabinet imminently.

Whoever wins in Saturday’s poll, it is likely that this – or a slightly amended reform of the State pension – will be on the table again shortly.

One thing seems certain. The graying vote has rattled all the main political parties, all of which rushed in with some pretty ill-judged promises. When the new government does eventually take office, after years of waiting we are finally likely to see some real action on pension reform.