Parliamentary Question addressed to the Minister for Social Protection

To ask the Minister for Social Protection the changes in criteria proposed to qualify for a contributory State pension under the National Framework planned for 2020; and if she will make a statement on the matter?

Reply

The challenges facing the Irish pension system are significant. There are currently six people of working age for every pensioner and this ratio is expected to decrease to approximately two to one by 2050. In addition, those aged over 65 will account for a greater proportion of the population while the proportion who are of working age is expected to decline. With increases in life expectancy, more people are living to pension age and living longer in retirement. The period for which an average pension will be paid will be greater than the period for which a pension is paid at present. This has obvious and significant implications in relation to the future costs of State pension provision.
The amount of pension paid has always been calculated based on the person’s contribution to the PRSI system over a working life. This needs to be adhered to if we are to be able to fund pensions into the future. The upcoming change to the PRSI contribution bands for State pension (contributory) supports this policy objective. Currently a person with an average of 20-47 PRSI contributions per year over their working life receives a weekly State pension of only €4.50 less than a person with a yearly average of 48 or more PRSI contributions. This situation is neither fair, equitable nor sustainable.

With effect from September 2012, the rate band of between 20 and 47 yearly average contributions will be replaced with new rate bands of between:
(i) 40 and 47 yearly average contributions
(ii) 30 and 39 yearly average contribution and
(iii) 20 and 29 yearly average contributions.

Therefore, the rate of State pension paid to new applicants will be appropriate to the average number of contributions paid. Those who have fewer contributions will receive a lower rate of pension. The maximum rate is unchanged as is the rate for those with yearly average contributions between 40 and 47. Claimants who qualify for a reduced rate of State pension (contributory) will have the option to qualify for a higher rate of State pension (non-contributory) if they have an income need. As part of the deliberative process for Budget 2012, my Department analysed, in so far as possible, the distributive and poverty impact of possible welfare changes, prior to the finalisation of the Budget. In the welfare package presented in Budget 2012, I sought to minimise the impact of the necessary adjustments in my Department’s welfare expenditure on groups vulnerable to poverty and social exclusion. My Department has prepared an analysis of the distributive and poverty impacts on families of the Budget 2012 tax and welfare package, in conjunction with the Department of Finance. This analysis is currently being finalised and will shortly be considered by the Cabinet Committee on Social Policy. I will arrange for the analysis to be published on the Department’s website in March 2012, in line with the arrangements I put in place last year.
 

As part of a series of planned reforms to pensions to address these issues, it is also planned to adopt a ‘total contributions approach’ to State pension to replace the current averaging system. The current date for the proposed introduction of this approach is 2020. The level of pension paid will be directly proportionate to the number of social insurance contributions made by a person over his or her working life. This change reflects the potential that people now have to accumulate contributions as a result of the comprehensive nature of social insurance coverage which has been in place for 20 years, and the growth in the labour force over that period. Accordingly, a total contributions requirement of 30 years contributions for a maximum pension will be introduced. Under the new approach, a minimum rate of State pension (contributory) will be payable at one third (10/30ths) of the maximum rate, which will be 30/30ths.

These measures support the social contract between the State and the individual whereby those who pay most in a working life benefit most in retirement.
ENDS