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 willsee 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) was mooted in the Pensions Reform Roadmap. Note: This reform of Calculation was subsequently deferred and is now the subject of further consideration by the current Pensions Commission (established in October 2020).
This leaves the current averaging system of calculating the State Pension in place.
At present this pension becomes payable at age 66 to Class A and Class S contributors. In order to qualify you must:
- be in insurance before age 56
- have 520 PAID contributions.
Entitlement for the State Pension Contributory is calculated on an average of Paid and Credited contributions. within a broad range of bands:
Average per annum
Pension rate %
48 or more
This benefit is NOT means tested but if you do not qualify, an alternative Non-Contributory State Pension, which is means tested is available. Further information as regard this benefit may be obtained from Social Welfare leaflet SW 118.
Once you have made the 520 PAID contributions at any time in your life your credits and contributions come into play in calculating what you will get by way of the weekly Contributory State Pension. So you simply add all Paid Contributions and all your Credited Contributions – let’s call this you TC (Total Contributions).
To get your average you now divide your TC by the number of years from 1979. If this average is 48 or more then you are entitled to the full State Pension for the rest of your life.
Caution: If when you do this you are short of the 48 (or more) you have to recalculate as follows:
You work out your full working life in years from when your Record shows you entered the workforce. This generally can be as high as say 50 years – let’s call this your TWL (Total Working Life).
Now to get your average you divide TC (above) by your TWL and that will give you the average, Refer to the above scale and see what percentage of the State Pension you will get for the rest of your life.
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 and income from investments (classified as unearned income) provided it can be included with other income from a trade or profession including farming earning over €5000 (net) 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