Budget Perspectives 2025: ESRI publishes two new reports on Ireland’s State Pensions Reforms

The Economic and Social Research Institute (ESRI) has published two new research papers ahead of its annual Budget Perspectives conference on Thursday, 13 June 2024. These papers focus on policy issues related to the national Budget.

Increasing Pay Related Social Insurance to fund the State Pension: Incidence and Effectiveness

Key findings

This report found that the reforms proposed by the Roadmap of Increases to Pay Related Social Insurance (PRSI) will result in government revenue gains, of €1.6bn per annum by 2028. The reforms, which increase all rates of PRSI by 0.7 percentage points by 2028, are progressive, affecting high income households more than low-income households.

The Government of Ireland has committed to this Roadmap of reforms in order to retain the State Pension age at 66 years and avoid significant future shortfalls in the Social Insurance Fund (SIF), out of which the State Pension is paid. On average, households will see their annual disposable income fall by 0.6% by 2028 as a result. For the highest income-fifth of households, this fall is larger, at 0.9%. Losses may be steeper if some or all of the proposed increases to employer PRSI are passed on to employees in the form of lower wages.

Assessing the effects of the reforms by gender, the research finds that the proposed reforms affect men slightly more than women, due to their higher labour market participation. Across age cohorts, those aged 25-54 bear most of the burden with smaller income losses for those aged under 25 or between 55 and 65. The reforms will increase poverty rates slightly, particularly the child poverty rate – by 0.2–0.4% - as those in the most affected age cohort are also those most likely to have dependent children. 

Dr Karina Doorley, an author of the report and Senior Research Officer at the ESRI said: “Further reform is likely to be needed beyond 2028 to ensure the continued viability of the SIF. Some of the larger PRSI reforms recommended by the Commission on Taxation and Welfare and the Pensions Commission, such as abolishing or minimising exemptions based on age or income source and equalising the treatment of employee and self-employed income, are not included in the Roadmap. Policy makers may wish to consider these proposals to avoid unduly increasing the burden on those most affected by the current Roadmap.”

State Contributory Pension reform: Winners and losers. Evidence from the Irish Longitudinal Study of Ageing

Background

Up to 2018, a person’s State Contributory pension rate was calculated using the ‘Yearly Average Method’ (YAM). This added up a person’s PRSI lifetime contributions and divided them by the number of years between them starting work and reaching the State pension age.

This was criticised by the OECD as being a complex way to calculate pensions and resulted in ‘inequitable treatment for people who have contributed for the same amount of time’. The approach penalised those, often women, who took time out of the labour market. While consideration could be given to years spent caring for others, time spent caring before 1994 was not accounted for. Those with an average of 48-52 contributions per year  receive the maximum State pension rate while those below this are placed into bands and receive a lower amount.

In 2018 a new, arguably more straightforward and fairer approach was introduced called the Total Contributions Approach (TCA). This simply counted all PRSI contributions, along with time spent caring for others. Those with 40 years’ worth of contributions (including credits for caring) qualify for the maximum State pension while those with less receive a proportion of the full rate.

This report looks at who will gain/lose due to this move.

Key findings

• For 83% of men and 56% of women, there will be no change in their State pension entitlement.
• The main difference is a large increase in the proportion of women qualifying for the maximum pension rate, from 54% to 75%.
• Around 13% of men and women will be worse off, mainly because the YAM was more favourable to those getting below the maximum rate.
• Losses are, however, very low on average, less than 0.7% of State pension income.

Dr Claire Keane, an author of the report and Associate Research Professor at the ESRI stated: “The Yearly Average Method penalised those with time out of the workforce so that those with the same total number of PRSI contributions over their lifetime could end up receiving different State Pension rates. The new Total Contributions Approach will see more women qualifying for the maximum rate”.