The Government has been urged by budgetary watchdog the Irish Fiscal Advisory Council to take steps now to ensure State and public sector pensions are funded into the future.

IFAC warns that otherwise tensions will arise when a smaller, younger, working population will have to pay more to fund a larger retired population.

It recommends setting up a State pension fund and using windfall receipts of Corporation Tax.

IFAC has long warned the Government of the looming costs of funding pensions as the proportion of retired people to the working age population is set to double by 2050.

Last year, the Government ruled out raising the age when workers are entitled to receive the State Pension from the current age of 66.

It indicated PRSI contributions will have to go up, but stopped short of saying by how much or who would be expected to pay.

IFAC says this 'obscured the trade-off between a lower retirement age today and future costs.'

It says if PRSI rates were raised by 3.5% now, so-called baby boomers would pay more towards their pensions while they’re still working rather than loading younger workers with even higher rates of PRSI in the future.

It also suggests setting aside some of the windfall receipts of Corporation Tax which might lower the overall cost of pensions.

It says governments should be required to put in place credible plans on financing pensions on a long-term basis.

Today, there are approximately four people of working age for every retired person in the State.

However by 2050 that is set to dramatically change to a society where there just under two working age people for every retired person.

That means, under the current PRSI model, there will be far fewer working people paying into the pension system through their contributions than there will be retired people receiving pension payments.

One of the proposals tabled by IFAC is to raise PRSI contributions now to smooth out the required increases in PRSI over time.

This, it argues, would avoid the scale of steep increases needed in the future and would share that burden more equally across the generations.

Otherwise, younger workers today will be expected to pay much more into the system in the future.

It also suggests using some of the windfall receipts from Corporation Tax in recent years which would defray some of the expected costs of future pensions.

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In a statement, the Minister for Finance Michael McGrath said he intends to seek Government approval in the coming weeks for a "longer-term fund" which "could be drawn down over time as age-related and other structural pressures arise in the future".

The Minister was responding to a report from the Irish Fiscal Advisory Council (IFAC) today urging the Government to take steps now to ensure state and public sector pensions are funded into the future.

The Minister's statement goes on to say officials at the Department of Finance are working on proposals for a longer-term fund to underpin the public finances.

He says he is conscious "of the need to put windfall corporate tax receipts to good use" and that this requires new structures.

The Government has already placed €6 billion into the National Reserve Fund.

The Minister says this serves a purpose in the short term but he believes a new fund is needed "to meet the costs of an ageing population and other pressures that we know will arise in the future."

The Chairman of the Irish Fiscal Advisory Council says the current pension scheme will come under a lot of pressure as the population ages and there is a historic opportunity - now - to improve the scheme for future generations.

Speaking on RTÉ's Morning Ireland, Sebastian Barnes said Ireland has a younger population which allows time to prepare a credible and fair way to finance pensions into the future.

He said that currently we are trying to match PRSI contributions to the cost of pensions, and this means that PRSI contributions will have to increase as the population grows older.

Mr Barnes said increasing PRSI contributions now - to a flat rate - would see contributions increase by around 3%.

This is less than half the level of contributions that will be needed in the future, but it needs to be done now, he added.

He also told Morning Ireland that using windfall receipts from corporation tax should be used to boost the pension pot.

'PRSI contributions will have to go up in time'

Taoiseach Leo Varadkar said that as the Government has decided not to increase the pension age, PRSI contributions will have to go up in time.

Mr Varadkar was responding to advice from the budgetary watchdog, the Irish Fiscal Advisory Council, suggesting it take steps now to ensure the State and public sector pensions are funded into the future.

He said the advice from IFAC was welcome in the public debate around this, but said a decision might not be taken in time for this year's Budget:

"It's already the case that we're putting aside some of the windfall corporation tax receipts, the €6 billion set aside already," he said.

"And we'll use some to pay down the debt as well this year, which is important because we can't assume that those corporation tax receipts will be there forever," he added.

The Taoiseach said that at the moment, the Social Insurance Fund was in surplus and that Cabinet had received a report during the week, projecting that it will stay in surplus until the middle of the next decade.

"We don't think it'll even start going into deficit until 2030," he said.

He said this gave the Government time to make a decision in advance of the next budget as to whether changes were needed now or in a future budget.