Willie Penrose (Longford-Westmeath, Labour)
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232. To ask the Minister for Social Protection if he will restore the average PRSI contributions required to qualify for the contributory old age pension to the levels applicable prior to the financial crisis and whereby such a move would be in line with the restoration of wages and salaries under the Haddington Road agreement; and if he will make a statement on the matter. [38476/16]

Leo Varadkar (Dublin West, Fine Gael)
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The overall concern in recent years has been to protect the value of weekly social welfare rates. Expenditure on pensions, at approximately €7 billion each year, is the largest block of expenditure in my Department in the Estimate for 2016, representing approximately 35% of overall expenditure. Due to demographic changes, my Department’s spending on older people is increasing year on year. Maintaining the rate of the State pension and other payments is critical in protecting people from poverty.

There are three main pensions paid by my Department to people aged 66 and over, namely the State pension contributory (which is based on PRSI contributions), the State pension non-contributory (which is based on means), and the Widows/Widowers/Surviving Civil Partners Contributory pension (which is based on PRSI contributions, and is also payable at a lower rate before 66).

The State pension contributory (previously called the Old Age Contributory Pension) was introduced in 1961, and is funded by PRSI contributions, on a pay-as-you go basis. Since its introduction, the rate of payment has been based on the ‘yearly average’ test.

These rates are banded, and those bands have been amended from time to time, most recently in 2012. There have been no changes in the structure of the bands since then, aside from increases in the rates, which are passed on pro-rata to the reduced rates.

As provided for in Budget 2012, from September 2012, new rate bands for State pension (contributory) were introduced. This resulted in one of bands (in respect of those with a yearly average of 20-47 contributions), being replaced with three bands (in respect of yearly averages of 40-47, 30-39, and 20-29 respectively). The changes did not impact upon whether someone qualified for a pension, nor whether they would qualify for the full rate. These additional bands more accurately reflect the social insurance history of a person and ensure that those who contribute more during a working life are likely to benefit more in retirement than those with lesser contributions.

Prior to these changes, in the period from 2000-2012, someone with a yearly average of 47 contributions qualified for the same rate of payment (98% of the maximum rate) as someone with a yearly average of 20 contributions, despite generally their much more significant PRSI record, and this was regardless of their means. A person with an average of 48-52 PRSI contributions per year over their working life received a weekly State pension of only €4.50 more than someone with a yearly average of 20 PRSI contributions. Aside from the lack of equity involved, this was a significant disincentive to longer working, as in most cases, contributions paid by people in their sixties had no impact upon the rate of their State pension upon retirement.

The principle that the rate of a State pension contributory should reflect the PRSI contributions paid over a working life needs to be adhered to so that we can fund such pensions into the future. Given the requirement to make savings in recent years, it was considered more equitable to address this disparity, than to reduce the rate of payment for all pensioners by an across the board cut in payment rates. Such a cut would not just have penalised those who had paid into the system over the course of their lives, but it would also have reduced the incomes of the most vulnerable pensioners, who do not generally receive reduced rate contributory pensions, but rather receive a non-contributory pension, or a maximum rate contributory pension if they have the required contributions.

For those with insufficient contributions to meet the requirements for a full rate State pension (contributory), they may qualify for a means tested State pension (non-contributory) which has a maximum personal rate of €222, or just over 95% of the maximum rate of the State pension (contributory). Alternatively, if a person’s spouse or civil partner is in receipt of a State pension (contributory) they may instead qualify for an Increase for a Qualified Adult of up to €209, which is just less than 90% of the maximum personal rate of the State pension (contributory).

It is estimated that the cost of reverting to the rate-bands which existed between 2000 and 2012 would be over €50 million in 2017, and that this will rise at a rate of some €10 m annually.

In 2008, the maximum personal rate of the contributory pensions was €223.30, and the maximum rate for the non-contributory pension was €212. Despite negative inflation in the intervening period, these payments have already been increased by €10, before taking into account a further €5 increase next year. While reverting to the 2008 rates of payments would be of benefit to pensioners who have significant other means and who contributed less to the Social Insurance Fund, it would be of no benefit to those who contributed to the system all their lives, nor would it be to that half of our elderly who rely solely on the State pension for their income. I am satisfied that the across the board increases, which benefit everyone, have been a more appropriate approach in Budget 2017.

I hope this clarifies the matter for the Deputy.