Should we raise the pension age to 70?

While Ireland remains one of Europe's youngest countries, the 2022 Census results confirm a pattern of change: the average age of the population is rising. There was a massive 26% increase in the number of people aged over 70, but a fall in the number aged between 25 and 39.

As the number of older and retired people grows, and the number of people at work falls, Michael Taft, Research officer with SIPTU, and Tony Foley, Emeritus Associate Professor of Economics at DCU, joined RTÉ Radio 1's Today with Claire Byrne to discuss what this means for Ireland's economic future and the funding of pensions and social care. (This piece includes excerpts from the conversation which have been edited for length and clarity - you can hear the discussion in full above).

How do we continue to pay the pensions of our aging population?

"That's the big issue," says Foley. "If you go back to 2018 we had population projections up to 2051 which identified this problem. The government has been concerned with pensions for years and in 2019 issued its road map for pension reform, so the issue has been around for a long time and the headline discussion point tends to be the age of the state pension. But there's a lot of other things besides state pension. For example, you've got the the notion of auto-enrolment, trying to increase the number of people who save for pensions.

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Currently we have five workers per 65+ person, in about 25 or 30 years we'll have two workers per 65+ person, says Foley. "At the moment a lot of the funding for the state pension is through the PRSI. So we have five PRSIs paying for one pension and eventually we'll have two PRSIs paying for one pension. So the issue is how do we deal with that and there's a range of options."

Increasing the pension age, taxes and PRSI contributions

"One of the options is you increase the age at which you get the pension. Of course the government has already done that - in 2014 we introduced that 65 to 66 change in the pension. There's been a lot of resistance to any further increases in the age," he says. "You could argue that we have choices and the choices are, we increase taxes and we just pay for increased numbers of pensions from tax, whether it's on workers, whether it's on rich people, whether it's a wealth tax, or whatever. Secondly, we just increase PRSI payments: so we increase the amount of money each worker pays to go into the pension fund. Thirdly, we go the other way and we reduce the entitlement to pension to 70 or 68."

Foley argues we have to do some of those things and that an increase in the pension age "must" happen. "The discussion point is how do we deal with this and how do we finance it. I would argue that one of the options which must be introduced - and my basis for that would be the change in lifestyle of people, the change of health of people - is that the age would increase at which you're entitled to the state pension, to 70."

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"At the moment the public service retirement age has been increased to 70 and and we are arguing particularly that people should not necessarily be forced to go at 65. Now, maybe we'll have flexibility and options - you can go at 60 at 3/4 of a pension, you can go at 65 at 80% - and you get the full pension at 70. But I think increasing the age level is one of the things that we will have to do," says Foley.

Something has to be done, Taft agrees, because we know that the number of pensioners will increase pension expenditure. But, he argues, when it comes to upping the pension age, the issue in the first instance is, how much would that actually save? "From the submissions made by the Department of Finance, the fiscal council, to the pensions Commission, it showed that it actually would save, at the end of the day, very little: it would save something like 15% of the total pension expenditure rise out to 2050. It's a very small amount. Actually, the Department of Social protection produced data which showed it would increase even less," says Taft.

Allowing people to work beyond 65 if they want to

Taft argues there's three broad approaches to be considered. The first is allowing people to work beyond the age which they're currently legally required to retire. "There are lots of people who want to work beyond the age of 66, but they're legally prevented from doing so. The Pension Commission proposed a reform that would achieve that. Tony [Foley] mentioned in the public sector people have the right to remain until the age of 70 in their work, that should be done throughout the economy," he says. This could lead to innovations where people might work beyond 66, but at reduced hours, for example. "That keeps people in the labour force, that increases pensions."

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"There's a lot of people who actually derive social benefit from staying in the workforce, it's a social issue. For a lot of people it certainly is an income issue: people over the age of 50 who are still in the workforce, 20% of them are low paid. We have high levels of deprivation among older people, so there's an economic incentive for them to stay, but for a lot of people it's a social reason. So instead of coming in with this hammer saying, 'you must only retire at age 70', why don't we first start with saying, actually, 'you are allowed to work until the age of 70. So you give a positive incentive to people," he says.

Increasing pension contributions for employers

The second approach relates to PRSI contributions from employers. "Under any scenario, even with pension age increases, PRSI has to increase. Therefore, we should start with the two outliers which the Commission on Pensions identified: start increasing PRSI contributions from employers, who have a very low level of PRSI rate compared to other European employers, and the self-employed. But to start to do fractional increases over a 20 year period - fractional so that people don't actually feel it from year to year, but which can overtime accumulate," says Taft.

The third approach is "the elephant in the room," he says. "All of these projections put forward by the Department of Finance and the Fiscal Council are done against the backdrop of an economic drought that is going to start in 2030, where the economy essentially stagnates at 1% annual growth. All commentators have said, if we could even push up that annual growth rate by even a small percentage, that would give the economy a greater ability to generate the revenue to pay for pensions."

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The economy needs to earn more money and we should be taking the policy steps that will enable enable the economy to do that, he says. But not by increasing PRSI for workers, "because actually as it stands now, Irish employees pay a higher level of income tax and PRSI than the EU average. They're not the outliers, the outliers are employers and the self-employed," says Taft.

Foley is "not convinced with the argument" that any of the options can be excluded. Referring to the potential savings for pensions expenditures from increasing the pension age to 70, he says "10 to 15% of a big amount of money is not to be sneezed at. The absence of that 10 to 15% imposes extra burdens on the others."

"And of course it would be great if we could have continuing growth rate at much higher than 1%, but the more optimistic scenario you take for the future the less need there is to do these particular things. So I think you have to be a little bit more, I suppose, pessimistic about the prospects, so that you're not shocked when those issues arise." He adds that Taft has, "naturally enough coming from the union perspective", excluded the idea of increasing PRSI contribution for workers, but only for employers.

"I would think we have to do everything," he says. "I could see taxes having to go up, I could see PRSI having to go up, and I see that the pension age will have to go up. Now, it's not going to be nice politically to increase the pension age and that might be the reason why it won't happen. but, in anything if you ignore one of the options the burden gets stronger on the rest. And the easiest solution to anything is to say the other crowd should carry the burden."

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