THE STATE PENSION should be legally linked to an indicator such as the minimum wage to ensure its value isn’t ‘eroded’, several government TDs have said.
The Oireachtas Committee on Social Protection last week published a report on the proposed auto-enrolment pension system. One of the recommendations was: “The State Pension should either be statutorily linked to the Consumer Price Index or a percentage of the Living Wage to ensure the real value of the State pension is not eroded as auto-enrolment is rolled out.”
Several prominent figures from government parties Fianna Fáil and the Green Party have said the value of the state pension must not drop.
Fianna Fáil TD Éamon Ó Cuív said he is concerned that the auto-enrolment scheme, aimed at ensuring more people are saving for retirement, could be used as an excuse to allow the real value of the state pension to fall.
“What I am afraid of is that if people get an auto-enrolment pension, then in times of pressured finances the state pension would be allowed to dwindle in real terms,” he told The Journal.
“[My concern] is based on 33 years in the Oireachtas and what I have seen happen. Of course you can undo legislation, but you can’t do it on the QT – it makes it that bit harder to undo it.
“You’re already paying PRSI for the state pension – auto-enrolment is meant to be a top-up, not a replacement.”
Marc Ó Cathasaigh, the Green Party Social Protection spokesman, said the government should link the state pension payments to an indicator such as the Living Wage, which is due to replace the minimum wage in the coming years.
“I have spoken repeatedly in the Dáil on my belief that state benefits should be benchmarked against an external criterion to prevent the erosion of the value of those payments in real terms over time,” he said.
Dr Laura Bambrick, social policy officer at the Irish Congress of Trade Unions (ICTU) said a legal link to an indicator such as the minimum wage would be positive, as the value of the pension would be less vulnerable to the whims of politicians.
“Ireland is unusual for not having a form to determine welfare increases – it’s in the gift of the government to determine if it will be [a rise of] €5, €10, or whatever,” she told The Journal.
Bambrick said “in almost every other European country” a formula is used, where the state pension is set at a certain percent of something such as the minimum wage. Therefore, if the minimum wage rises by 5% in a year, so too does the state pension.
Under the proposed auto-enrolment scheme, which the government has pledged to introduce next year, almost all employees would automatically start contributing to a pension as soon as they start work.
It’s aimed mostly at the private sector, where it’s estimated roughly just a third of workers have a pension. This means they will be wholly reliant on the state pension when they retire, and could face significant financial difficulties once they stop earning.
Currently, there is no obligation for private firms to pay into their workers pensions. Under auto-enrolment, all three of the company, the worker and the state would contribute to the fund.
Several stare bodies have said this is aimed at ensuring people don’t have a sudden sharp drop in their standard of living after retirement.
However, Ó Cuív and several other figures have said they fear that once private pension coverage is more common, the government will be less inclined to raise state pension payments. If the state pension payments remained static, their value would fall over time due to inflation.
This is a particular concern as the cost of the state pension is already expected to rise significantly in the coming decades as the population ages.
Bambrick said preserving the value of the state pension would work in two ways – benchmarking and indexation.
Benchmarking is when the state pension is set at a certain value – the most commonly cited one is 34% of average weekly earnings. Once it is set at this level, then ‘indexation’ happens. This is where the payment is linked to an index – such as the Consumer Price Index or the Living Wage – and periodically rises along with it.
Bambrick said: “At the minute the state pension is worth €265 per week. If there was a benchmark to 34% of the average weekly wage, it would be €310 per week.
“Once you get to that, then every year after you index it so that it increases in line with wages or with the Consumer Price Index, whichever has the highest increase.”
Bambrick said workers should see auto-enrolment as something positive, as it means private employers will now be obliged to contribute to their employees pensions.
“The reason we brought the state pension into the discussion – and why there should be benchmarking and indexation – is we don’t want people to see auto-enrolment as a Trojan horse for the dilution of the state pension.
“The two pensions have two different objectives. The state pension is just for poverty alleviation. Auto enrolment is about ensuring that you can keep the standard of living you had while working.”
However, the Department of Social Protection said: “A smoothed earnings method to calculate a benchmarked/indexed rate of State Pension payments will be introduced to Government in September and considered as part of Budget 2024.”
Ciarán Lawler, Assistant Secretary at the Department, told the Social Protection committee in March that the benchmark rate would be 34% of regular earnings.
He said that it would be introduced “as an annual input to the budgetary process every year”.
The government has previously said it will ensure the state pension payments remain stable by increasing the rate of PRSI paid by workers.
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