The Pension Commission Report

In 2018, the government published its Pensions Roadmap. We wrote about it at the time. In the 3.5 years since it was published, none of the recommendations have been implemented. There was however an election in 2020 and the age for receiving the State pension was due to be increased to 67, so it became an election issue. In the Programme for Government, they promised to establish a Commission on Pensions. That commission has now published its 245 page report. Lucky for me, they also published a 24 page executive summary.

The report tells us nothing that we didn't know already and is just a repeat of all the numerous other reports that have been issued on the looming pension crises in this country. The trouble is, pensions is a can that can be easily kicked down the road, making it someone else's problem. So what did this new report tell us?

How bad is it?

• The cost of the Contributory State pension will increase by 65% by 2030.
• By 2040, expenditure of the Contributory State pension will consume the entire social insurance fund if there are no changes.
• There are currently 4.5 working people for every pensioner. By 2031, this is projected to fall to 3.5 working people and to 2.3 working people by 2051.

Solutions

In the first meeting of the Commission, the Minister for Social Protection, Heather Humphreys made it clear that the government would not reduce the rate of the State pension payment. Afterall, who wins votes by reducing the State pension? In fact, in Wednesday's Budget 2022, the pension was increased by a further €5 a week.

With reducing the pension off the table, the Commission's options are:

• Increase the money available to pay for the pensions i.e. more tax
• Reduce the expected pay out term of the pension

More Tax

Currently, the self employed and company directors pay 4% PRSI on all their income. As they work for themselves, there is no employer contribution. The Commission propose that those paying Class S PRSI contributions pay more. The propose an increase from the current 4% rate to 10% by 2030, then to higher Class A (employee) rate. This would see a further 2.4% increase by 2040 and 0.1% increase by 2050. Under current taxation, self employed earning over €100,000 pay a top rate of tax of 55%. If these recommendations are adopted, they will pay a top rate of 63.5%.

Employees and employers will see a marginal increase, with no increase required by 2030 and a 1.35% increase by 2040 and a final 0.1% increase by 2050.

The Commission also recommends removing the exemption from PRSI from those aged 66 or over. This will not only apply to those who are still working past 66 but to those already retired and receiving an income from a private pension. It is in effect a 4% tax increase for those with private pensions.

Increase Retirement Age

Increasing the retirement age was due to have started already until it became an election issue. And the Commission did not avoid making similar recommendation, albeit on a much gentler basis. Their recommendations are:

1. Pension age increase from 2028 by three months each year, reaching 67 in 2031.
2. Further increases of 3 months every 2 years from 2033, reaching 68 in 2039.

There was legislation in place to increase retirement age to 68 by 2028. What is the cost of stretching this out to 2039?

Total Contributions Approach

The Commission also recommends a gradual movement to the Total Contributions Approach. Under the current system, we have a "best of" system between Total Contributions Approach and the Yearly Average approach. This has lead to situations where people who have worked less and contributed less get a bigger pension than those who have started working younger and paid more over their lifetime.

The Total Contributions Approach is what is seems to be, the total of number of PRSI contributions paid over your working lifetime is taken into account instead of the average paid each year since you first started making PRSI contributions. This is much more equitable and the move was recommended in 2018 but still not implemented.

Reading through this report, it would appear to be political suicide to implement these recommendations. There are 291,000 business enterprises in Ireland. Increasing tax for all of those business owners by 6% in the next 9 years is a sure fire way of finding yourself on the opposition benches.

This report will join all the others, sitting on a shelf, gathering dust.

Steven Barrett

18 October 2021