State Pension Reform and Its Implications on Contribution Calculation
The State Contributory Pension Reform focuses on the abolishment of the Yearly Average Method (YAM) for calculating entitlements, aiming to address disparities in payment rates and strengthen the link between contributions and benefits. The existing banding approach has been criticized for creating significant discrepancies in weekly payments, emphasizing the need for a more equitable system. The Government's commitment to pension reform, as outlined in the Pensions Commission recommendations, highlights the ongoing efforts towards a more sustainable and fair pension system in Ireland.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. Download presentation by click this link. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
E N D
Presentation Transcript
Budget Perspectives 2025 DATE 13th June 2024 VENUE ESRI www.esri.ie @ESRIDublin @ESRIDublin #ESRIevents #ESRIevents #ESRIpublications www.esri.ie #ESRIpublications
State Contributory Pension Reform: Winners and Losers Theano Kakoulidou Claire Keane Simona S ndorov Budget Perspectives 2025 13th June 2024 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie
Background Up to 2018 State Pension (Contributory) rates were calculated using the Yearly Average Method (YAM): Homemaker s Scheme - disregard years spent caring for up to a max. of 20 years BUT excludes periods pre-1994 Those with a min. of 520 paid contributions qualify 48+ average receive the max SPC Those below this are placed into bands and receive a lower rate www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 3 17 September 2024
State Con. Pension Bands Yearly average PRSI contributions % SPC max 48+ 100 40-47 98 30-39 90 20-29 85 15-19 65 10-14 40 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 4 17 September 2024
Background Banding approach creates a cliff edge and means that people on similar average contributions could receive very different weekly rates of payments The use of the number of years between the date of entry into insurable employment in Ireland and their SPC drawdown date penalises those without a consistent employment history and weakens the link between total number of contributions and rate received www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 5 17 September 2024
Background YAM was criticised: Complex and non-transparent way of linking pensions to the contributions workers make that result in inequitable treatment for people who have contributed for the same amount of time . (OECD, 2014) Excludes pre-1994 caring periods (cost) - (Bassett, 2017) Government s Roadmap for Pensions Reform (Government of Ireland, 2019) committed to reforming the system for calculating State Pension entitlements. Pensions Commission, set up in 2020 to examine the sustainability of State Pensions, along with eligibility issues, recommended that the YAM should be abolished. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 6 17 September 2024
Total Contributions Approach (TCA) Introduced in 2018 to try remove anomalies associated with YAM 520 paid contributions minimum Cap on credited contributions & caring periods (combined cap of 1,040/20 years) 2,080 contributions (40 years)=max rate Pro-rata rate (TC/2,080) if < 2,080. By 2034 all SPC entitlements will use the TCA. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 7 17 September 2024
What will be the likely impacts? Those retiring after TCA was introduced had the choice of YAM or TCA most favourable. Caring gender aspect + Cap on credited contributions under TCA - Impact by educational attainment entry into employment? + Generosity of banded approach - www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 8 17 September 2024
Generosity of banded approach Yearly Average Contributions YAM 48 + 277.30 40 47 271.90 30 39 249.30 20 29 236.10 15 19 180.70 10 14 110.80 ** based on 40 years of contributions. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 9 17 September 2024
Generosity of banded approach Yearly Average Contributions Equivalent TCA rate** % Difference TCA v YAM YAM 48 + 277.30 255.97 - 277.3 0%/-8% 40 47 271.90 213.31 - 250.64 -8%/-22% 30 39 249.30 159.98 - 207.98 -17%/-36% 20 29 236.10 106.65 - 154.65 -34%/-55% 15 19 180.70 79.99 - 101.32 -44%/-56% 10 14 110.80 53.33 - 74.66 -33%/-52% ** based on 40 years of contributions. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 10 17 September 2024
Generosity of banded approach Yearly Average Contributions Equivalent TCA rate** % Difference TCA v YAM YAM 48 + 277.30 255.97 - 277.3 0%/-8% 40 47 271.90 213.31 - 250.64 -8%/-22% 30 39 249.30 159.98 - 207.98 -17%/-36% 20 29 236.10 106.65 - 154.65 -34%/-55% 15 19 180.70 79.99 - 101.32 -44%/-56% 10 14 110.80 53.33 - 74.66 -33%/-52% ** based on 40 years of contributions. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 11 17 September 2024
Examples: Person enters employment aged 56. Works for 10 years paying PRSI. YAM: TCA: 520/10=52 yearly average SPC= 277.30 (max) 520/2080 * 277.30 SPC= 70.68 (25% of maximum) Person starts work at 16. Works for 10 years, cares for children for 20 years (pre-1994), returns to work for 20 years. YAM: 30*52=(1560/50)= 31 yearly average SPC= 249.30 (90% of max) TCA: 30*52+20*52=2600 TC>2080 SPC= 277.30 (max) www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 12 17 September 2024
Data Survey data from The Irish Longitudinal Study on Ageing (TILDA) Wave 1 (2010) Study of individuals aged 50+ living in Ireland, and their spouses Individuals born 1955-1960 Wave 1 sample 8,504 individuals Final sample - 1832 individuals. We exclude: Individuals outside the cohort Individuals with missing employment history Individuals only eligible for State Pension (Non- Contributory) www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 13 17 September 2024
Modified TRIAM TILDA Retirement Income Adequacy Model (Beirne et al. 2020) Estimating PRSI contributions: Paid contributions based on employment history Credited contributions - based on periods of unemployment and illness (minimum 520 paid to be eligible) Caring contributions different treatment under YAM (Home Maker s Scheme) and TCA (HomeCaring Periods Scheme) Projected until SPA based on current status Calculate pension entitlements using respective formulae Estimating supplementary pensions Assumptions on continued contributions and earnings growth www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 14 17 September 2024
Descriptives Total Male Female Age at first job 17.4 17.3 17.5 Employment/Self-employment (years) 38.4 42.1 34.0 Credited (years) under YAM 3.4 3.7 3.1 Credited (years) under TCA 2.4 2.5 2.2 Caring (years) - YAM 2.6 0.4 5.0 Caring (years) - TCA 4.5 0.5 9.1 Proportion with private pension 43% 51% 34% Average weekly private pension at SPA (excl. 0) 139 152 118 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 15 17 September 2024
Descriptives Total Male Female Age at first job 17.4 17.3 17.5 Employment/Self-employment (years) 38.4 42.1 34.0 Credited (years) under YAM 3.4 3.7 3.1 Credited (years) under TCA 2.4 2.5 2.2 Caring (years) - YAM 2.6 0.4 5.0 Caring (years) - TCA 4.5 0.5 9.1 Proportion with private pension 43% 51% 34% Average weekly private pension at SPA (excl. 0) 139 152 118 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 16 17 September 2024
Descriptives Total Male Female Age at first job 17.4 17.3 17.5 Employment/Self-employment (years) 38.4 42.1 34.0 Credited (years) under YAM 3.4 3.7 3.1 Credited (years) under TCA 2.4 2.5 2.2 Caring (years) - YAM 2.6 0.4 5.0 Caring (years) - TCA 4.5 0.5 9.1 Proportion with private pension 43% 51% 34% Average weekly private pension at SPA (excl. 0) 139 152 118 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 17 17 September 2024
Descriptives Total Male Female Age at first job 17.4 17.3 17.5 Employment/Self-employment (years) 38.4 42.1 34.0 Credited (years) under YAM 3.4 3.7 3.1 Credited (years) under TCA 2.4 2.5 2.2 Caring (years) - YAM 2.6 0.4 5.0 Caring (years) - TCA 4.5 0.5 9.1 Proportion with private pension 43% 51% 34% Average weekly private pension at SPA (excl. 0) 139 152 118 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 18 17 September 2024
Descriptives Total Male Female Age at first job 17.4 17.3 17.5 Employment/Self-employment (years) 38.4 42.1 34.0 Credited (years) under YAM 3.4 3.7 3.1 Credited (years) under TCA 2.4 2.5 2.2 Caring (years) - YAM 2.6 0.4 5.0 Caring (years) - TCA 4.5 0.5 9.1 Proportion with private pension 43% 51% 34% Average weekly private pension at SPA (excl. 0) 139 152 118 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 19 17 September 2024
RESULTS www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 20 17 September 2024
Pension entitlement Average SPC entitlement YAM TCA Male 245 241 Female 229 229 Total 237 235 Maximum SPC by gender YAM Male TCA Male Overall Female Overall Female Maximum rate 69% 86% 54% 80% 86% 75% < Maximum rate 31% 14% 46% 20% 14% 25% www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 21 17 September 2024
Impact on pension entitlement by gender FIGURE 1 : CHANGE IN STATE PENSION ENTITLEMENT (AS % OF STATE PENSION) FIGURE 2 : CHANGE IN STATE PENSION ENTITLEMENT (AS % OF STATE PENSION), COUPLE LEVEL 90.0% 90.0% 80.0% 80.0% 70.0% 70.0% 60.0% 60.0% 50.0% 50.0% 40.0% 40.0% 30.0% 30.0% 20.0% 20.0% 10.0% 10.0% 0.0% 0.0% -10%+ -1% - -10% No change +1% - +10% +10%+ -10%+ -1% - -10% No change +1% - +10% +10%+ Male Female Total Male Female Total www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 22 17 September 2024
Impact on pension entitlement by education FIGURE 3 : CHANGE IN STATE PENSION ENTITLEMENT (AS % OF STATE PENSION) 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10%+ -1% - -10% No change +1% - +10% +10%+ Primary Lower sec. Upper sec. Tertiary Total www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 23 17 September 2024
Impact by income Quintile FIGURE 4 : CHANGE IN STATE PENSION ENTITLEMENT (AS % OF STATE PENSION AND TOTAL PENSIONS), QUINTILES OF TOTAL HOUSEHOLD INCOME IN 2021 0.5 0.0 -0.5 -1.0 -1.5 -2.0 1 2 3 4 5 Income Quintile SCP only Total Pension income www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 24 17 September 2024
Conclusions Small fall in average SPC rates ( 2 per week/<1%) No change in the % of men getting the max SPC Significant increase in the % of women qualifying for the max. 1994 caring restriction No strong concentration of losses at couple level. Losses for those qualifying for < max/higher loss for lowest quintile: monitoring of elderly poverty rates Cohort analysed less likely for effects to continue for later cohorts Gender pension gap impact? www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 25 17 September 2024
Conclusions Other pension reforms ongoing: -Long-term carers scheme -Ability to defer SPC & accumulate PRSI contributions to qualify for higher rate -Autoenrolment www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 26 17 September 2024
QUESTIONS? www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 27 17 September 2024
Additional Slides www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 28 17 September 2024
Impact on pension entitlement by gender, private pensions FIGURE 5 : CHANGE IN STATE PENSION ENTITLEMENT (AS % OF TOTAL PENSIONS) FIGURE 6 : CHANGE IN STATE PENSION ENTITLEMENT (AS % OF TOTAL PENSIONS), COUPLE LEVEL 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% -10%+ -1% - -10% No change +1% - +10% +10%+ -10%+ -1% - -10% No change +1% - +10% +10%+ Male Female Total Male Female Total www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 29 17 September 2024
Status in Wave 5 FIGURE 7 : STATUS CHANGES WAVE 1 TO WAVE 5 Status in Wave 5 In education/training Self-employed Looking after sick/disabled Permanently home/family Unemployed % of Sample Employed Retired Other Status in Wave 1 Retired Employed Self-employed Unemployed Permanently sick/disabled Looking after home/family In education/ training Other 65% 22% 6% 18% 13% 61% 17% 30% 8% 6% 68% 8% 0% 2% 2% 20% 8% 4% 2% 10% 5% 3% 5% 11% 0% 0% 0% 2% 3% 1% 1% 0% 3% 54% 17% 8% 18% 3% 3% 5% 53% 16% 0% 3% 6% 9% 10% 10% 4% 7% 58% 1% 2% 10% 36% 50% 0% 0% 7% 7% 0% 0% 1% 7% 27% 7% 7% 20% 33% 0% 0% 1% www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 30 17 September 2024
