Gary Gannon (Dublin Central, Social Democrats) | Oireachtas source

I am grateful for the opportunity to make some points on this Bill and our pension system more generally. I do not want to come across as if I am suggesting that auto-enrolment is without benefit. Many hardworking people with no pension savings will be saving for the first time and will be better off as a result.

Overall, however, I wonder about the repercussions. How does this contribute to things like a decent income for all older people, alleviating poverty for our elderly or financial sustainability for the State? The debate should not be just about the effect for a few individuals who stand to gain a bit from being enrolled in a pension scheme but for all our society. There are plenty of positives in how the Minister and the Department are planning to structure this that we did not expect to be the case when we started this initiative. The central process and authority that will manage contributions have the potential to provide better value and the potential for better long-term returns than would be the case if some firm from the pension industry had been given the job of managing the system for what would no doubt have been a very substantial fee. That is really positive to see.

There are also some problems, some of which have been raised. I will highlight my concerns with them. For people on low incomes, is there any need to be making pension savings given that the State pension will replace a large portion of their income? Is there any sense in trying to enrol someone earning €25,000, for example? Why are the newly enrolled or auto-enrolment people being given more favourable support than some people already in the system? Certainly, having two parallel systems of pension tax relief is not equitable. Different taxpayers get different benefits, and for some taxpayers this new system may be more beneficial than their current workplace pension scheme. The Commission on Taxation and Welfare recommended equalisation of tax relief for pension contributions for reasons of equity, but instead a third rate is being added. This complicates matters unnecessarily. Add to that the fact that the earnings threshold for auto-enrolment of €80,000 is different from the current system's €115,000. I think €115,000 is far too high but, again, I do not see the justification for two different rates.

For drawdown at retirement, some account could be taken of some employees who may have arduous or hazardous jobs. A proportion of the fund should be made available at an earlier age for people who, for example, may be in their 50s but have spent their whole lives being blocklayers. I would also have liked the option of a public investment fund to act as a registered provider. The NTMA could have provided a public investment fund in which members could choose to invest some of their contributions or, perhaps, all of the State's top-up contributions could have been allocated for this fund. This could be used to invest on a commercial basis in a way that supports economic activity and employment in the State, perhaps in the area of green energy or housing projects, that is, things that would make this a better country to live in long into the future. Other countries have mechanisms to direct savings towards investments with social gains. We need to look at this too. I also see a need for the ongoing monitoring of employees and how they adapt to the new scheme. From an employer perspective, the increased cost of auto-enrolment could be an incentive to encourage employees to become self-employed or encourage them to opt out of the system. Those are some of the concerns I have.

I have a few things to say about the whole principle of auto-enrolment and, more generally, the principle of how we support pension savings and why. What are we getting from this? What do we want to achieve with this big new departure in our pension scheme? Typically, the argument in favour of auto-enrolment revolves around the need to encourage retirement savings. The arguments most often given as to why we would want to incentivise pension savings usually involve two ideas. They are the need for people to have a reasonable continuation of their standard of living once they retire and the need to reduce the long-term financial burden on the State. I will look at each of these two ideas in turn. First is the idea that auto-enrolment is needed to help maintain living standards in retirement. Of course, this sounds like a fine idea and is very difficult to argue against. The idea that people do not want to see a big drop in their incomes when they retire or that they want to maintain a relatively consistent level of spending in old age is not a new one. There are all these policy initiatives and expensive tax reliefs aimed at getting people saving in order that they can get a certain percentage of their income while they are working. However, annuities are expensive, as we know, and the vast majority, even those saving loads, never manage to save enough in a defined contribution scheme to get close to half of their pre-retirement income. For the majority, the State pension will always be their main source of income in retirement. Meanwhile, research by TILDA, which does longitudinal ageing studies in Trinity College Dublin, suggests that "Retirement income replacement rates are [generally] not associated with quality of life [after] retirement." Instead, it found that it was actual income in retirement, not the proportionate change in someone's income when retired, that affected quality of life the most. TILDA found that all aspects of quality of life, including control, autonomy, self-realisation and pleasure, all increased consistently with household income. The emphasis I need to make again is that it is actual income that is important, not the proportion of your pre-retirement income. The proportion of your pre-retirement income no doubt has some effect but does not seem to be the most important thing for most people. This suggests to me that policies aimed at achieving a certain rate of replacement of pre-retirement income should not be given as much priority as policies looking to achieve a minimum income floor for retirees. That minimum floor is something the State pension, not private pension savings, is best positioned to provide.

The other argument given on the need for auto-enrolment is the need to reduce the long-term financial burden on the State. This is the argument most often given in its favour and also in favour of other incentives to increase private pension savings. We have heard it in a multitude of different forms but it usually sounds something like the following. First, the number of older people in our society is increasing. Second, the ratio of workers to pensioners is going to fall significantly in the coming decades. Third, as a result, the cost of the State pension will become unsustainable and, fourth, automatic enrolment is part of the strategy for reducing this burden on the State and is the best way to ensure people save for their retirements. It all sounds very logical until we examine it further and go deeper. A feature of the Irish State pension is its connectivity to the labour market. Eligibility for a pension from the State is based on either social insurance contributions, or PRSI, or else on means-testing. In other words, you qualify for a State pension based on your labour market history and payment of PRSI over several decades or you qualify based on a means test that shows you do not have enough to provide for yourself in retirement. So, yes, in theory, encouraging people to save for retirement helps to reduce their reliance on the State and the financial burden on the Exchequer of paying these pensions will be reduced. However, once we go deeper, saving for a pension is really expensive. As a rough rule of thumb, every €20 saved will buy a pension of about €1 a year for a man aged 66. That will be a flat pension, not one that increases, even though we know the cost of living increases over time. People who can afford to save enough over a long period to buy themselves a decent pension almost always have been in the labour force for several decades and almost always are the very same people who will qualify for a full State contributory pension based on their PRSI history. By the time they retire, they will have received thousands or even tens of thousands of euro in tax relief. This is allegedly with a view to saving the State money when they reach retirement but the fact that they may have saved a good pension for themselves will not reduce the cost to the State. On the contrary, these same people likely now also qualify for a full State pension. The individuals involved will be better off than if they had not saved. They will have saved their State pension and whatever money they receive from their private pension, which, incidentally is a pension semi-funded by Irish taxpayers through the generous system of tax relief that we have. Let us be clear; the savings to the State are exactly zero.

How about those who receive a means-tested pension, known as a non-contributory pension? By definition, they have not qualified for a contributory pension because they have not made enough PRSI payments and they do not have the money to achieve a decent standard of living in retirement themselves. Based on such a PRSI history, it is safe to assume their connectivity to the labour market over previous decades has not been strong, for a variety of reasons. They would not then have been in a position to avail of the tax-based incentives currently in operation or the joint pension schemes as part of the auto-enrolment process. Again, there is no saving for the State among this group either. There may be situations in which those people can contribute sporadically to auto-enrolment schemes over the period during which they are in employment. However, research would suggest that people with such a precarious link to the labour force tend to be in low-paid employment and so are prime candidates to opt out of auto-enrolment for very obvious reasons. Meanwhile, what little money they may be able to save might even end up being counted against them when it comes to taking the means test for non-contributory pensions. Perhaps, in that specific case, there would be a saving to the State but it would be minimal and would come at the expense of some of Ireland's poorest. We already know that the cost of tax relief for private pensions runs not into the hundreds of millions but into the billions of euro. That is the case every single year. Auto-enrolment will increase that by hundreds of millions of euro each year. We also know that more than 70% of pension relief goes to the top 20% of earners. For the most part, tax relief for private pension schemes are an expensive means of subsidising retirement savings for the better off in society, with little or no financial benefit to the State. The cost to the State will only continue to increase with the implementation of auto-enrolment at a time when about 20,000 extra people qualify for the State pension every year. The Minister for Finance is denying those in receipt of the State pension any more than an extra €12 quid a week in the midst of a cost-of-living crisis.

There is little to no fiscal benefit to the Exchequer in either the short or long term unless the eventual aim is to slowly erode the value of the State pension over time and to force people to rely on their private pension savings instead. That is something which my party, the Social Democrats, will strongly oppose. As I said at the outset, I am not saying that auto-enrolment is without benefit. Many hardworking people with no pension savings will be saving for the first time and will end up better off as a result, which is welcome. I am trying to look at this issue in the round, not just at some individuals but all of society and how auto-enrolment might fit into a more equal Ireland free from deprivation and poverty. A better use of some of the resources being earmarked for auto-enrolment would be to direct them towards funding the State pension to a level that would guarantee that older people can retire with enough money and income to live a life of dignity and to retire without the prospect of exposure to poverty in their retirement.

This is especially important given some other developments around the State pension. Last year, I drew the Minister's attention in this Chamber to the possible effects on pensioner poverty of the proposed total contributions approach for calculating State pension benefit. The approach gives payments on an automatic pro ratabasis to people who do not qualify for the maximum pension. That is very different from the bands used under the current system, which increases the payments people receive if they do not qualify for the maximum pension.

At the time I asked the Minister what analysis of the effects of this change she or her Department did. What I got was a scripted answer that did not directly address my questions, but suggested the answer was none.

The State pension is the single greatest reliever of old-age poverty in Irish society. We can agree on that across the Chamber. As recently as 2019, the CSO estimated that 85% of people aged over 65 would be living below the poverty line if it were not for our social welfare system. In 2003, pensioner poverty was an incredible 40%. It had fallen below 10% by 2010, driven almost solely by the doubling of the State pension rate over the course of a decade. As the importance of a State pension in relieving poverty was never clearer, I am hugely concerned by the implications of the total contributions approach, TCA. The likely implications are worrying. The new TCA will lead to much lower pensions for a huge number of retirees, most of whom have no idea that this change is on the way.

Under the old system, pensioners get the maximum rate of State pension if they average at least 48 weekly PRSI contributions per year over the course of their working lives. Those falling short of 48 weeks get a lower pension, but, as I said a moment ago, the good news for them is that the reduction is not proportionate. For example, for people who have an average of only 40 PRSI contributions, and not 48, the pension falls by just €5. That is a drop of just 2% and not the 16% that would be expected of a pro ratasystem. Some 30 PRSI contributions is 62.5% of what is needed for the maximum pension, but the €250 such pensioners would receive is 90% of the full amount. This generous tieringreflects an understanding that a heavy penalty for falling short of PRSI contributions could have severe repercussions for workers for whom the State pension may be the only income in retirement. The new TCA is not nearly as understanding. The TCA calculations are based on total PRSI contributions, not averages. People who have 40 full years of contributions get the full rate of the pension and those who have fewer than 40 get a reduced amount. However, under the TCA the much more moderate reductions are gone and pension calculations are strictly pro rata. This will create huge differences for many people.

For example, under the TCA, people with 20 years of PRSI contributions, that is, 1,040 weekly contributions, will get half the State pension or €139. Compare this to the current system where someone with the same 1,040 contributions over a career of 20 years would qualify for the full State pension. Someone with 1,040 contributions averaged over 30 years would qualify for €250 and someone with 1,040 contributions averaged over a 40-year career would qualify for €236. Let us compare that difference again. It is €139 under the TCA versus €236 or €250 under the current system. These are huge differences with big implications for retirees. In any society, a minimum income is needed for older people to retire with dignity and a lower State pension payment for a significant number of people will lead to more poverty among pensioners. Acknowledgment of this was presumably the motivation behind the design of the old system, where the tapering off of the level of pension is much less severe than under the new TCA.

There has been a total failure of the Government to communicate the implications of this change to the public. Many people are working on the assumption that gaps in their employment history will lead only to small reductions from the maximum pension when they retire and are totally unaware of what the TCA will do. The Government needs to consider the implications of this for thousands of people who are yet to retire. Here we are, cutting pensions for retirees using the TCA, but funnelling hundreds of billions of euro into private pensions savings. I am not saying that people who get that benefit do not need it but it seems there is a disconnect between where the money is being pushed and who is likely to need it the most. The TCA could be adjusted. We could bring it into bands, similar to the current system. If the TCA were not strictly pro rata, people who fall short of the full pension would lose out by less. That is very important.

The Government should consider the number of years of PRSI contributions that are necessary to achieve the maximum pension, as 40 years is simply not achievable for a huge number of workers with the prospect of credited contributions. The discussion around pension reform should focus more on what can be done to reduce the current rate of pensioner poverty further. Moving speedily to a new system that can only exacerbate the problem will serve Irish society and our most vulnerable citizens poorly. The funding that will be dedicated to auto-enrolment is an important factor in this regard.

I will conclude by noting that while encouraging people to save for retirement is not a bad thing at all, a few things need to be highlighted. It will increase the cost to the State and will not save money. The only way auto-enrolment decreases the pension burden on the State is if retirees are forced to rely more on their private savings through a reduction in the State pension. Auto-enrolment is a net cost to the Exchequer and to taxpayers. It is effectively yet another expensive subsidy to the private pension industry that stands to make huge additional profits from investing auto-enrolment moneys. It has lobbied strongly for this for more than a decade. Auto-enrolment simply cannot be considered a substitute for keeping the State pension at an adequate level. I urge the Minister to look closer at the TCA and the implications it might have.

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