Who should pay the bills if the State pension age stays at 66?

Posted on: 13 December 2023

Ireland is ageing, and ageing rapidly. The Central Statistics Office estimates that while there were five working-age people for every pensioner in 1991, this will fall to 3.5 by 2031 and just 2.3 by 2051.

A key reason for this is that people are living longer, healthier lives. While this is unambiguously a hugely positive outcome, it comes with it some fiscal costs.

One of these is the increased cost of State pensions. The Department of Finance forecast that this will rise from 3.8 per cent of national income in 2019 to 5 per cent by 2030, and more than doubling to 7.9 per cent by 2050 – an increase equivalent to what the Department of Education and Skills currently spends every year.

To offset these rising costs, the plan of successive governments has been to gradually raise the age at which individuals can claim the State pension to 68 by 2028. However, these increases – which had been proposed in 2010 and legislated for in 2014 – were initially delayed after they became the subject of heated debate during the 2020 general election. Following the election, the current Government set up the Pensions Commission to advise how to proceed. The commission made a very reasonable set of recommendation, including that increases to the State pension age should go ahead alongside other reforms to both State pension benefits and the way these are paid for.

Instead, earlier this year the Government said it would leave the State pension age at 66 – and even expand eligibility to some groups – with the increased cost of the state pension to be paid solely through unspecified increases to pay-related social insurance (PRSI).

This is a tax that applies to the incomes only of those under age 66, a group whose relative size is going to shrink over time. As a result, the effect of the Government’s approach is to put on younger generations the cost of letting those currently in their 50s and 60s retire earlier than planned.

It is particularly hard to see how this is fair when the scale of the demographic changes we are facing is such that it’s highly likely – if not inevitable – that the State pension age will ultimately be increased in the future. This would leave younger generations paying higher taxes over their working lives, without ever seeing the benefit of an earlier State pension age.

Even if it is unwilling to consider increasing the State pension age, the unfairness of the Government’s approach could be mitigated by adopting some of the other reforms the Pensions Commission recommended which have seemingly been kicked to touch.

These include extending PRSI to the non-State pension income of those age 66 plus, including occupational, personal and public-sector pensions. Such a change was also supported by the Commission on Taxation and Welfare, which further recommended reducing the tax-free lump sum that is available on pension drawdown at retirement.

This tax-free lump sum is currently capped at an exceptionally generous €200,000, primarily benefiting those with substantial pension wealth and encouraging the withdrawal of large lump sums on retirement, something hard to reconcile with a policy goal of encouraging individuals to ensure a regular stream of income in retirement.

As well as making the overall tax system fairer, these measures would go some way to reducing the burden on younger workers and employers by necessitating smaller increases in PRSI, with little effect on lower-income retirees (few of whom have substantial non-State pension income or take a large, tax-free lump sum).

But continuing with the current approach of keeping the State pension age at 66 and paying for this through PRSI increases on those of working age merely loads the costs of change on to future generations, something we also see with successive governments’ responses to other issues such as climate change and housing.

Barra Roantree is an assistant professor and director of the MSc in Economic Policy at Trinity College Dublin. He was part of the Government’s Commission on Taxation and Welfare from 2021 to 2022

This article was first published in The Irish Times on Dec, 12, 2023. Read the original article on the Irish Times website. 

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