Brian Lenihan Jnr (Dublin West, Fianna Fail)

The reductions range from 5% to 8% in the case of salaries of public servants of up to €125,000. The pay of Members of these Houses will be reduced in line with that of the equivalent public service grades. Provision for these reductions will be included in legislation that I will publish shortly.

In order to avoid a destabilising rate of retirement among older public servants, the pension entitlements of those retiring in 2010 will not be affected. I accept the recommendation of the Commission on Taxation that pension lump sums below €200,000 should not be taxed. The treatment of sums above this level and the tax treatment of pensions, including the consolidated 33% rate of relief, will be considered in the Government's national pensions framework to be published shortly by the Minister for Social and Family Affairs.

Public Service Pension Reform

Exchequer spending on public service pensions will be over €2 billion in 2010. As life expectancy improves and the population ages, this cost is set to rise. The State's pensions bill will grow from approximately 5% to 13% of GDP by 2050, with two thirds of the increase in spending going on social welfare pensions and the remainder on public service pensions. Cost increases on this scale cannot be ignored by any responsible Government determined to secure our economic future. The Government has decided to introduce a new single pension scheme for all new entrants to the public service. The legislation will be introduced in 2010 and the scheme will be in place by the end of the year. The new scheme will bring public service pension terms more in line with private sector norms. Among other things, it will change the calculation of benefits so that pensions are based on career average earnings rather than final salary on retirement as at present. This will be more equitable than the present system, which favours those with higher earnings later in their careers. The minimum pension age for new public servants will also be increased from 65 to 66 and then linked to increases in the State pension age. More details of the main elements of the new scheme are given in the summary of budget measures.

The link to earnings or pay parity basis for post-retirement pension increases is a feature of Irish public service schemes. The recent special report by the Comptroller and Auditor General estimated that the present actuarial cost of these pensions is €108 billion. A change to a CPI basis for post-retirement increases would reduce that cost to €87 billion, a reduction of 20%. On average, pay increases have been significantly greater than increases in the consumer price index. As part of the reform of public service pension arrangements, I will review the current arrangements and consider linking pensions to increases in the cost of living. Pending that review, I do not intend to apply the pay cuts I have already outlined to existing public service pensioners. These are significant changes. The Government is determined to meet the immediate fiscal problems Ireland faces and, at the same time, to make far-reaching reforms for the future.

ADJUSTMENTS IN SOCIAL WELFARE

The Government is proud of its unrivalled record in increasing the level of social welfare payments. Over the past 12 years, we have increased pension rates by approximately 120%, unemployment benefits by almost 130% and child benefit payments by over 330%. The cost of living has increased by about 40% over the same period. We extended coverage, removed barriers, and increased entitlements such that the level and extent of social support payments has been transformed beyond recognition.

We are determined, where possible, to maintain that progress in inflation-adjusted terms but we can either safeguard the generous system we have by making these savings now or we can put it all at risk by extending it beyond what resources will allow. We did not reduce welfare rates in April's supplementary budget but I signalled that rates of payment might be reduced if the cost of living fell. The overall cost of living has fallen by about 6.5% over the past 12 months, including very sharp declines in the prices of the basic necessities of food, clothing and accommodation.

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