Taoiseach Micheál Martin committed his party and, presumably, the Government to a hugely significant policy switch last week. The age at which old age pensions become payable is to remain indefinitely at 66.

Prior to the last general election in February 2020, it had been the Government’s intention to increase the pension age gradually, to offset the persistent improvements in life expectancy which have been evident for decades and which are gradually altering the age composition of the population.

Opposition parties made an election issue of the plan and the incoming Government set up a commission to review the issue. Its report recommended that the pension age should indeed be increased and the decision, it would appear, is that the commission’s advice will be ignored.

Some opposition politicians, including Sinn Féin, argued that the pension age should actually be reduced, notwithstanding the inexorable upward trend in the numbers of retired older people in the population. This development is regularly described as the “ageing crisis” or as the “pensions time bomb”.

Good news story

The fact that people live longer and healthier lives is a good news story if ever there was one. It has been converted into a headache because the retirement income system is a mess and pensions policy needs systematic reform. Delaying the planned State pension age increase is an evasion.

There are two good reasons why the pension age should rise as life expectancy improves. The first is that State pensions must be financed, and somebody has to pay. Under the Irish system this would mean higher direct payroll taxes on the labour force. An Taoiseach acknowledged that higher PRSI, for employers and employees, will now have to be levied.

But there is a second reason regardless of the mechanics of financing the payouts. In any society, the supply of goods and services from the efforts of the employed workforce is distributed in part to non-workers. This group consists of children, the retired and those in the working age groups unable to work for various reasons, including infirmity.

Balance shift

The effect of the Government’s unwillingness to increase the State pension age is to permit the balance between these groups to shift further to the disadvantage of the employed. People who survive longer, beyond the age of 65 for example, include many who are fit to work, since advancing age no longer implies physical decline as it used to do in earlier generations.

The decision effectively means the expansion of the available labour force, through higher participation rates in the older age groups, is being discouraged as a matter of public policy. It will happen nonetheless and indeed is already happening, since many people are happy to work a bit longer after entitlement to State or other pension income kicks in. Data from the CSO’s Labour Force Survey shows that participation rates among over-65s have begun to rise, albeit from low levels.

State contributory pensions are financed through a fiction called the Social Insurance Fund. It does not exist – there is no fund – and any surpluses or deficits must come from the general Exchequer.

PRSI is just another form of taxation on earned income whether paid by employer or employee and most workers regard it, correctly, as an add-on to income tax. The commission on financing the State pension recommended that payment would be delayed to age 67 for nine years until 2031 and to 68 eight years later in 2039.

Those in the prime working age groups are known to have poor occupational pension coverage and have been less able to save through home-ownership and the repayment of mortgages

This mild progression is well behind the curve: life expectancy improvements would more than eat up the expenditure saving from delayed entitlement and the commission calculated that PRSI increases would be needed even if their advice had been followed. It has been rejected, so the increases will be even larger, or there will be a call on the Exchequer, which means higher income tax or VAT as well as higher PRSI.

The greater cost comes in the form of discouraging higher participation. For males in the 65 to 74 age group, participation in the first quarter of 2022 was 27.6%, for females just 13.1%.

Scope for improvement

The generations coming behind have stronger educational and skill endowments in both cases and there is plentiful scope for improvement.

Those in the prime working age groups are known to have poor occupational pension coverage and have been less able to save through home-ownership and the repayment of mortgages. They will now face higher tax bills on earned income to fund pensions for earlier generations which they will not be enjoying themselves, since unaffordable rents will force many to stay on in the workforce regardless.

The beneficiaries of the latest postponement will be those lucky enough to have secured adequate retirement income without this needless pandering to populism.