A Roadmap for Pensions Reform 2018 – 2023: Reform of the State Pension
In Autumn 2018, the Department of Social Protection launched the Roadmap for Pensions Reform which contained 6 main strands of which Strands 1 is the most important for those nearing retirement age.
The reform sets a proposed target for payment of the State Pension to a level at approximately 34/35% of average earnings. It is proposed to link further increases to changes in the Consumer Price Index and to wage levels in order to ensure that the value of the State Pension is maintained.
The State Pension is premised on the principle of social rather than personal insurance and operates on a Pay as You Go (PAYG) basis meaning that today’s pensions are not funded by past contributions made by today’s pensioners but are instead funded by the taxes and social insurance contributions of today’s workers. The PAYG model works for as long as there are roughly four or more workers contributing into the Social Insurance Fund (SIF) for every pensioner drawing from it. Ireland is facing huge demographic challenges which will see the number of pensioners more than double and the ratio of people of working age to pensioners fall to about 2.3:1 over the next 40 years. This presents significant funding challenges with the SIF forecast to accumulate a potential deficit of up to €400 billion over the next 50 years.
The Total Contributions Approach (TCA)
While it will remain the bedrock of the Irish pension system into the future, the State Pension Contributory requires reform if it is to meet the needs of future generations of pensioners and deliver on the goals of sustainability and equity.
To this end, the National Pensions Framework (2010) confirmed the intention to introduce a new method for calculating entitlement to the State Pension Contributory from 2020. It proposed that the current ‘yearly average’ system, be replaced with a ‘Total Contributions Approach’ (TCA), which would make the level of pension directly proportionate to the number of social insurance contributions made by a person over his or her working life, with significant pension credits granted to people who have taken time out of the workplace to perform caring duties. The TCA will eliminate the anomalies inherent in the current averaging system whereby a person can qualify for a full pension based on a small number of years payments (currently as little as 10 years contributions required) provided they have no gaps in their record whereas a person with more than 10 years contributions, but with a significant gap in their record, might be paid a reduced rate. The arguments for implementing the TCA are strong as it is a more logical and transparent system, where the individual’s lifetime contribution will more closely match the benefit received. The TCA particularly encourages sustainability (by more directly rewarding people for working), and it offers a clearer path to adequacy for those who wish to increase their entitlements. it is intended that the TCA will offer a full State Pension to all people with a full record of 40 years social insurance contributions with pro-rata payments for people with less than 40 years of contributions. People who have to take time out of the workforce to take up caring duties will be eligible to accumulate up to 20 years credits towards meeting the full 40-year contribution record. Similarly, unemployed people and others with an entitlement will, as now, be able to get credited contributions provided that they have a minimum number of paid contributions.
State Pension Calculation post 2020 New Guidelines
As per above, a total contributions approach (TCA) will be introduced in 2020 and this will replace the current averaging system for calculation of State Pension Contributory. This will apply to those born after 1st January 1954 who will be entitled to the SPC at age 67 and/or for those born after 1st January 1962 who will be entitled to the SPC at age 68.
Post 2020 to qualify for the SPC an applicant must have at least 520 PAID Class A and/or Class S contributions which is the qualifying threshold. Once the threshold has been reached the entitlement to be paid will then be calculated on the total number of Reckonable Class A or Class S Contributions or Credits subject to a maximum of 40 years – a total of (52×40) = 2,080.
Where the applicant has 40/40ths the full amount of pension will be paid. If they have 39/40ths that amount will apply and so on down to 10/40ths. Below 10/40ths no SPC will be paid.
Note (1): In general, a maximum of 520 (52×10) Credits will be allowed in calculating entitlement to the SPC.
Note (2) For those who take time out for caring the maximum number of Credits which will be taken into consideration when calculating the SPC may be as high as 1040 (52×20).
Note (3): Rental income; income from farming or from other investments over €5000 p.a. can be considered for paying the Class S contributions on behalf of those in the self-employment category.
In addition, and if you require additional contributions in order to qualify for a State Pension, you can continue paying full-rate contributions after you reach pension age. Also, if you wish to defer claiming your pension, then an actuarial increase in the rate of payment will apply from the date you seek commencement.