Warnings of tax rises as pension bill passes €10bn for first time

The state pension bill has spiralled past €10bn for the first time as the population ages, with further pressure on the public purse inevitable in the coming years.

Further increases to the PRSI will be needed to fund the inevitable growth in the bill, experts have warned.

It has been confirmed the state pension bill reached more than €10bn for the first time in 2023, up from €6.59bn in 2014.

A report from the Department of ­Social Protection showed an annual increase in spending of 7.5pc, with the contributory state pension representing the majority (74pc) of that increase.

While spending in both 2022 and 2023 included a number of cost-of-living measures, such as Christmas bonuses and double payments, life expectancy is playing a key role in the increased spend.

The “Statistical Information on ­Social Welfare Services 2023” report reveals that the number of people over the age of 85 in receipt of the state pension increased to 47,921 that year, a rise of 6.2pc.

Figures available up to 2022 also show there has been an annual increase in the number of PRSI contributors.

The figures have been revealed after the €12 state pension increases introduced in Budget 2025 came into effect last week.

While this will inevitably increase the pension bill, both Fianna Fáil and Fine Gael also committed in their election manifestos to gradually increase the pension payment to €350 a week from the current €289.30.

The latest review of Social Insurance Fund (SIF) shows it will enter a ­deficit in 2035.

To secure the sustainability of the fund, the Government launched a four-year plan that will incrementally increase the PRSI rates up until 2028. The first rise, introduced in October last year, increased all classes of PRSI by 0.1pc.

Despite the plan, a report by the ESRI last year said further reform would be needed beyond 2028 “to ensure the continued viability of the SIF”.

According to Karina Doorley, associate research professor at the ESRI, its findings said the planned rises would “not be enough in itself to combat the future deficit in the SIF”.

“Given our ageing population, it’s natural that expenditure on pensions is rising and will continue to rise in the future. We have a limited number of options for financing this rise,” Prof Doorley said.

She added a combination of policies should be considered so that one group does not take on the burden of funding pensions into the future.

“We can increase social insurance contributions (PRSI), increase the pension age, decrease the amount we pay to pensioners or make transfers into the social insurance fund from the Exchequer,” Prof Doorley said. “Some combination of these options is probably optimal so that the burden of financing the future pension bill doesn’t fall to one cohort.”

A new national retirement savings scheme is due to start on September 30.

Workers will automatically be enrolled in the scheme – but can opt out. It will mean they do not have to depend solely on the state pension when they retire.

However, Tony Foley, emeritus associate professor of economics at DCU, said the new scheme would not solve the deficit problem completely.

“People will have more private ­pensions and less need for government. But that’s just going to ease the problem, it’s not going to make it go away. It’s here to stay and it’ll get worse,” Prof Foley said.

According to Prof Foley, changes to the pension age are unlikely to happen, because they would be politically unpopular. He also said not maintaining a good level of pension support was not an option.

“Personally, no one wants extra ­taxes, but the economy could absorb a little extra taxes to pay for social welfare payments,” Prof Foley said.

“In fact, it’s highly likely that given all the demands on the public purse and the demographic changes that tax as a percentage of GDP or GNI modified will increase over the long term.”

Prof Foley also pointed to Ireland’s total PRSI contribution, particularly the employer contribution, which is relatively small by European standards.

He suggested that if changes in the short term were to happen, that would come in the form of PRSI increases, primarily for employers.

Laura Bambrick, head of social policy and employment affairs at the Irish ­Congress of Trade Unions, said it was necessary for the SIF to be built up while Ireland was still a young population.

She added that it was also important for the Government to incentivise people to stay in work beyond retirement age.

“A lot of workers, private-sector workers, would like to continue in their job after 65. But if you have in your contract that you have to retire at 65, you are gone at 65,” Dr Bambrick said.

Neil McDonnell, chief executive of ISME, said that while Ireland was currently “enjoying a demographic bonus” due to higher rate of fertility and inward migration, this would change over the next 30 years.

“To avoid this pensions cliff, ISME proposes that all workers contribute 2pc PRSI on earnings up to €424 per week and 6pc on the remainder,” he said.

“This would reduce PRSI payments for full-time workers earning up to €848 per week, while taking in an extra €850m annually for the social fund.”

Source: Irish Independent, Tabitha Monahan and Anne-Marie Walsh, Monday 13th of January 2025.