Pension reform – a fresh proposal

It is good news to hear the Social Solidarity Minister say the new government is setting up a task force to ensure the sustainability of pensions. It was also mentioned that it was planning to introduce the third-pillar pension giving workers (who can afford it), the possibility of putting money aside to complement their pension income.

While the introduction of the third-pillar pension is commendable, what is definitely urgently required is a reassessment of the adequacy of the first-pillar pension, especially for those future pensioners who are totally excluded from the previous government’s pension reforms.

As readers may be aware, the maximum pension for persons born before 1962 is currently two-thirds of €339 a week, that is, €226 weekly or €11,752 per annum. This works out at €904 every four weeks, which is simply inadequate for a retired couple to live decently in 2013 let alone some 10 or 15 years from now!

The fact is that these persons currently do not pay National Insurance contributions on their weekly earnings above the current maximum threshold of €339 and consequently should not fairly expect to get a two-thirds pension on the earnings above this figure.

In brief, what is being proposed, for persons born before 1962, is that the current maximum threshold of €339 on which NI is currently paid is increased by a certain amount per week for a consequent number of years so that when these persons retire, they would get a two-thirds pension on the increased figure.

For example, if this maximum threshold of €339 is increased by €25 per week each year for five years (with the person and his employer making a 10 per cent contribution of €2.50 each per week each year for five years), the threshold would rise to €464 per week (exclusive of COLA increases).

Thus the two-thirds pension of the current earnings of €339 per week (€226 per week or €11,752 per annum) would rise to two-thirds of €464 (€309 per week or €16,083 per annum) – a massive improvement of 37 per cent.

While still below what is considered adequate for a decent living, this increase goes a long way to rectify the inadequacy problem. And what is most important in this proposal is that the NI increases requested from persons and employers are contained.

It is also recommended that these increased NI contributions are ring-fenced to ensure that this money goes towards payments of these increased pensions. Moreover, an actuarial study would ensure the sustainability of the proposal.

While this proposal does not solve either the problem of the present pensioners’ on the current maximum pension or indeed the problem of pensions which are lower than the current maximum, it goes some way towards addressing the adequacy of future maximum first-pillar pensions.