Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
Link to this: Individually | In context | Oireachtas source

272. To ask the Minister for Social Protection if he will review the legislation for calculating PRSI contributions in relation to contributory pensions to disregard short-term or summer employment at the time of entry into the system in which it causes a large gap in contributions and hence lowering the yearly average of contributions; and if he will make a statement on the matter. [28215/16]

Leo Varadkar (Dublin West, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The State pension (contributory) SPC is a very valuable benefit and is the bedrock of the Irish pension system. Therefore, it is important to ensure that those qualifying have made a sustained contribution to the Social Insurance Fund over their working lives. To ensure that the individual can maximise their entitlement to a State pension, all contributions paid or credited over their working life from when they first enter insurable employment until pension age are taken into account when assessing their entitlement and the level of that entitlement. Since 1961, when contributory pensions were introduced, the average contributions test has been used in calculating pension entitlement. Once over 16 years of age, the date a person enters into insurable employment is the date used for averaging purposes. In this context, even if someone has only 10 years (520 weeks) of paid reckonable contributions between their 16th and 66th birthdays, they may qualify for a State pension (contributory), although the rate payable would vary depending on their circumstances. A yearly average of 48-52 weeks contributions is required to qualify for a 100% rate pension of €233.30, and banded payments apply for those with lower yearly averages. For example, where someone entered insurable employment aged 16 and had 2,000 weekly contributions (38.5 years) paid and/or credited, they would have a yearly average of 40, and would receive a pension at 98% of the full rate (for those in the 40-47 band). People who qualify for lower band rates may, if they satisfy the means-test, qualify for the State pension (non-contributory), the maximum rate of which is 95% that of the State pension (contributory).

It is worth noting that the most recent Actuarial Review of the Social Insurance Fund found that those with lower earnings and those with shorter contribution histories still obtain the best value from their contributions.

If the yearly averaging system was amended to allow people choose to have certain contributions disregarded, the effect could be expected, in most cases, to result in a full rate pension, even where people had contributed significantly less into the Social Insurance Fund, and where they had significant means. This would carry a significant cost to the Social Insurance Fund, and would have to be funded by higher PRSI contribution rates, lower rates of payment, or greater subvention to the system from the Exchequer, funded by higher taxes and/or lower spending elsewhere.

Work is underway to replace the ‘yearly average’ system with a ‘total contributions approach’. Under this approach, the number of contributions recorded over a working life will be more closely reflected in 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 around 2020. This is a very significant reform with considerable legal, administrative, and technical components to be put in place prior its implementation. The position of people who have gaps in their contribution records for various reasons will be considered very carefully in developing this reform.

I hope this clarifies the matter for the Deputy.