Mattie McGrath (Tipperary South, Independent)
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47. To ask the Tánaiste and Minister for Social Protection the reason the year that a person turns 66 years of age is not included in the calculations for the yearly average contribution condition for the State pension; the reason a person is charged contributions during this year when they are not reckonable for the State pension; in the event that someone has paid contributions to their 66th birthday which cannot be taken into account, if they can be refunded; whether these contributions can be taken into account where a person requires them to qualify under the yearly average condition; and if she will make a statement on the matter. [32383/15]

Joan Burton (Dublin West, Labour)
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State pension (contributory) entitlement is calculated by the ‘yearly average’ system, where the total number of contributions paid or credited are divided by the number of years of the person’s insurance record. The maximum rate of pension is payable where a person has a yearly average of at least 48, and there are banded entitlements below that.

In calculating the yearly average, the number of full-rate contributions paid and/or credited are counted up to the end of the tax year before reaching pension age (66), and this total is divided by the number of years in their record up to that point. For example, if someone’s record was from 1971, and they turned 66 on 1 July 2015, it would be the contributions they paid or were credited in the period to 31 December 2014, divided by 44 years (i.e. every year from 1971 to 2014). Taking the subsequent period into account to calculate the yearly average could only increase their contributions by a maximum of 26 contributions, and if their yearly average was already higher than that, this would have the effect of reducing their yearly average, rather than increase it, as the amended total would be divided by 45. Given the fact that in most cases, this would result in a lower rather than a higher yearly average, it is to most people’s advantage that the rule should apply as it does now. However, the contributions can still be used to satisfy other contribution conditions (notably the 'contributions paid' rule in State pension contributory).

It should be remembered that PRSI does not just fund the State pension contributory and enable people to qualify for that payment, but also working age benefits before they retire. The PRSI system does not make refunds in respect of contributions which do not end up being used to qualify for various payments. To do so would reduce the sustainability of the PRSI system, and require an increase in the rate of contributions, and/or a reduction in the level of payments it funds.

Work is under way to replace the ‘yearly average’ system with a ‘total contributions approach’. Under this approach, the number of contributions recorded over a work life will more closely reflect the rate of pension payment received. It is expected that the total contributions approach to pension qualification will replace the current average contributions test for State pension (contributory) for new pensioners from 2020, although that date is subject to change, as this is a very significant reform with considerable legal, administrative, and technical challenges to be overcome in its implementation. When proposals are agreed, legislation will be brought forward to underpin the necessary changes.