Ireland needs to make its pension system simpler and fairer so that everyone gets sufficient income for a decent standard of living in retirement, according to a new OECD report.
The OECD Review of the Irish Pension System which was commissioned to the OECD by Ms Joan Burton, the Minister for Social Protection, last March, recommends that the government puts in place either a universal basic pension scheme or a single means-tested pension, both topped up with a compulsory private pension.
The report found that Ireland spends considerably less than the majority European countries on public pensions, at 7.5 per cent of GDP compared with an EU27 average of 11.3 per cent. Ireland, however, has a higher effective retirement age, but despite this the report says our ageing population will push up spending to 11.7 per cent by 2060, closer to the EU average of 12.9 per cent.
The basic State pension, which many pensioners rely on solely, is “relatively generous compared with other OECD countries”, at around 35 per cent of average wages, and second only to New Zealand.
This according to the OECD accounts partly for Ireland’s low pensioner poverty rate of 10 per cent, the same as in Sweden, and well below the OECD average of 15 per cent.
Overall, retirees in other OECD countries receive much bigger pensions because unlike Ireland (and New Zealand) they pay into additional mandatory earnings-related pillar either private and or public schemes during their working lives.
“Ireland needs to make its pension system more affordable in the long-term. With public finances under pressure and to avoid a rise in pensioner poverty, private pension coverage needs to be increased urgently,” said Mr John Martin, OECD Director of Employment, Labour and Social Affairs, while launching the report in Dublin.
“The simplest, least costly and most efficient way of reaching high and even coverage rates across all income groups is compulsion, says the OECD. Auto-enrolment, whereby workers are enrolled automatically by their employer in a private pension scheme unless they explicitly decide to opt out, would be a second-best option that requires careful design and may be costly.”
Other recommendations such as linking the retirement age to life expectancy after 2028 when it is scheduled to rise to 68 allowing retirees to combine work and pension income, were mentioned.
It was also noted that the existing tax deferral structure in Ireland provides higher incentives to save for retirement to high incomes as the incentives work through the marginal tax rates. Also, there is unequal treatment of public and private sector workers due to the prevalence of defined-benefit (DB) plans in the public sector and defined-contribution (DC) plans in the private sector.
Other differences between public and private sectors were that the State pension system lacks transparency, both with respect to the calculation of benefit entitlements and to the interplay of the contributory and non-contributory pensions.
The link between contributions and benefits in the Irish State pension scheme is very weak and could be modernised to encourage working longer in line with the prevailing international trend.
