Defined benefit pension schemes, which guaranteed an income after retirement based on final salary and years of service, are disappearing fast, leaving employees with more risky defined contribution arrangements.
About 900,000 workers in the private sector have no pension arrangement at all to look forward to on retirement, other than the contributory State pension.
This currently pays out about €12,000 per year, but, as the Department of Public Expenditure and Reform analysis shows, even the future sustainability of the State pension is uncertain.
In essence, the State pension is facing the same pressures as private schemes; the number of older people is rising fast and they are living longer.
The Department of Public Expenditure and Reform warned that under a “no change” scenario, the State faces having to pay out estimated annual increases of nearly €200 million on pensions up to 2026.
It said as new EU rules would put greater controls on what member states were allowed to spend, these demographic pressures were likely to have to be addressed by means of structural reforms.
“Pension expenditure has to be considered as a priority area for reform in the coming years,” it warned.
However, any such “structural reforms” would inevitably prove to be highly controversial as, more than likely, they would result in people getting less than they had anticipated previously.
In addition to contributory and non-contributory pension payments, the Government also currently pays out €500 million in supplementary benefits, such as free travel for older people and the household package of financial supports for electricity, gas and water payments.
The Department of Public Expenditure and Reform clearly dislikes the universal nature of many of these supplementary benefits and would like to see reforms.
“The universality of many of the supplementary benefits is an obvious concern. It means that resources are not as tightly focused on the most vulnerable as they could be and this raises valid value-for-money concerns for the State.
“Furthermore, there are sustainability concerns, given that the population is expected to rise so markedly in the medium term. At this time, any proposal to remove universal entitlement to such payments must be considered. The supplementary benefits must also be considered as viable options to offset demographic pressures building in the area of pensions expenditure generally.”
Spectrum of options The Department of Public Expenditure and Reform in its economic analysis paper said there was a spectrum of options for improving the sustainability of the State pension system and related benefits.
It said that in terms of fundamental reform the OECD had set out two options for longterm reform, either a universal basic pension scheme or a single means -tested pension. However, it said the OECD had not included estimates of possible savings.
The department said another option would be to bring forward the scheduled dates for raising the age for State pension eligibility, possibly by three years. At present, this is set to rise to age 67 in 2021 and 68 in 2028.
It also suggested that cutting basic State pension rates should be considered, as well as discontinuing the additional €10 per week paid to those over 80. The department said that even if this top-up remained in place for those currently in receipt of the money, but not for anyone else in the future, “the saving would ramp up over time” given there were 3,800 new claimants annually.
And it also suggested that the means test for fuel allowance – which is set at €100 above the rate of the weekly contributory State pension – could be applied to the household package of supplementary benefits. It said this could save €127 million, but would affect 191,000 people.
Free TV licence The department also suggested that it “may be timely” to abolish the free TV licence element of the household package. It said this could save €54 million. And the gas/electricity subsidy could be limited to six months of the year – a saving of €87 million.
The department also said there were strong arguments for abolishing the spousal and companion passes for those aged over 66 who have free travel. It said, at present, a spousal pass may be provided regardless of the spouse’s age or financial position.
Alternatively, it said, the fuel allowance means test could be applied to the free travel provision or an annual charge of €50 could be introduced.
It said one alternative to reducing spending on State pensions would be to increase PSRI contributions to the social insurance fund.
It said the latest actuarial review estimated that if the social insurance fund was to be self-funded to 2018, PSRI revenue would need to be 128 per cent of the present figure. It said this would involve increasing short term employee (employer) PSRI rates to 5.1 per cent (13.8 per cent) to fund the social insurance fund out to 2018. In the longer term, larger increases would be required.
The expenditure review paper of the State pension and related schemes said the views expressed were not the official views of the Minister or the department.
