Increasing the state pension qualification age, pension system reform and the impact of austerity: Ireland in context
Mairéad Considine
Paper to be presented at the ESPAnet Conference 2012
Stream 15 ‘Increasing the Normal Retirement Age – A Difficult Exercise?’
September 6th – September 8th, University of Edinburgh
First draft – please do not quote
Introduction
Pension system reform is widely recognised as a fraught policy endeavour which isfrequently regarded as complicated, politically ‘risky’ and unpopular, but necessary.The pace and type of reform has varied widely across Europe but attention to changing demographics and the ‘ageing of populations’ provides a powerful impetus to justify the need for reform and to increase the retirement age as a core element of longer term pension sustainability. Focus on pension adequacy has been eclipsed by increasing attention to system sustainability, particularly in the context of rising fiscal deficits and the wider pressure problems which the recent financial and European debt crises have precipitated. Welfare literature notesthe path dependency legacies thatmay influence the direction and scope of pension system reform (Bonoli, 2003; Pierson, 2001) andthe politics of welfare states and the role of institutions, interests and ideas remain important in capturing distinct pension reform dynamics and their effects over time. This paper also draws on the explanatory value ofideationalinstitutionalism and the manner in which policies are framed (Cox, 2001; Schmidt, 2003) particularly at times of crisis, in an effort to situate and explore the recent Irish experience of raising the pension age and account for the relative political ease with which the legislation has been passed.
The Irish government presented its blueprint for the future of the pension system, the National Pensions Framework (Government of Ireland, 2010a), in 2010. It contained a number of significant policy reform proposals, including increasing the state pension qualification age from the current age of 65 (for the ‘transition’ pension paid to those with adequate social insurance contributions) to 66 years for all state pensions in 2014, to 67 years in 2021 and to age 68 in 2028. The National Pensions Framework (NPF) was the outcome of a process of consultation and policy deliberation, although it was clearby the time of its publication that economic circumstances had changed radically since the review of the system was initiated with the publication of a Green Paper on Pensions in 2007 (Government of Ireland, 2007). Announced by the previous Fianna Fáil/Green coalition government, the increase in the state pension age subsequently became part of the conditions set out in the EU/IMF loan agreement. The Social Welfare and Pensions Bill 2011 was passed through the Houses of the Oireachtas (Irish Parliament) by the new Fine Gael/Labour coalition government within their first six months in office, meeting the EU/IMF Q2 2011 completion deadline.
This paper outlines the main features of the Irish pension system and considers the politics of pension reform with reference to the institutions, interests and ideas of influence on the policy agenda in recent decades. The paper then sets out the context in which the state pension age was increased; it outlines the overarching policy influences in the lead up to the legislation which gives effect to this significant reform. Attention is also given to other limiting factors that may have contributed to nullifying a more robust response to this particular reform, including the possibility that increasing the retirement age was not the most unpopular of policy reforms underway. The broader scale of welfare retrenchment in progress at that timemost likely acted as a buffer against the viability of more sustained resistance about a ‘future reform’ in a climate of insecurity about the present. The paper concludes that the capacity for mobilisation against ‘non-immediate’ welfare retrenchment in liberal oriented welfare states in times of crisis can becaught in a double bind of reduced expectations in the present making way for lower welfare expectations for the future.
Background characterisation and the politics of Irish pension system reform
The Irish pension system may be broadly characterised as a multi-pillar Beveridge style one, displaying features of a liberal welfare regime, with a basic state pension and voluntary supplementary pensions.The state administers a basic state pension on a contributory (social insurance) or means-tested (social assistance) basis, payable at 66 years. The transition pension, currently payable to those aged 65 with sufficient social insurance contributions and retired from work is to be abolished in 2014. Paid employment is permitted for those in receipt of a State (contributory) pension from age 66 years; in other words there is no formal impediment to paid work beyond age 66 and earned income is taxable in the normal way. It has, however, been common practice for employees to be contract bound to retire from their employment on reaching 65 years.
Social insurance (contributory)state pensions and social assistance (non-contributory)state pensions are flat rate payments, currently paid at full rates of €230 and €219 per week respectively. There is no established rule regarding indexation of payments; state pensions generally increased in line with government policy during the 2000s, but have been ‘frozen’ since 2009 and are not set to increase as per the conditions of the EU/IMF loan agreement. The current state (contributory) pension payment is equivalent to 34.14% of average earnings, within one per cent of the 35% national target (Department of Social Protection, 2011a). Thispension provides a comparatively low replacement rate (OECD, 2011) although it is the primary source of income for this age cohort, representing two-thirds of the gross income of the over 65s in Ireland (O’Sullivan and Layte, 2011), thus making old age poverty rates very sensitive to policy decisions in this area.
Policy discussions around the possibility of introducing a second tier state sponsored earnings related pension took place in the 1970s but these were not advanced beyond a Green Paper. The question was again considered in the early 1990s but the National Pensions Board ‘did not agree that there should be a state income related pension’ (McCashin, 2004: 269).Proponents came mainly from the union side butit was rejected by business and employer interests ‘under any circumstances’(National Pensions Board, 1993, in ibid.). Reservations were subsequently re-stated even though it remains a proposal advocated (Tasc, 2010; Hughes and Stewart, 2011) by those highlighting the long-standing shortcomings in the Irish pension system.
A ‘latecomer’ in Myles and Pierson’s (2001) terms, the Irish pension system never ‘developed’ to a classic European one, with a long-standing policy preference observed to limit the role of the state in direct provision/citizen security in this area. Characterised by Ebbinghaus (2011a: 4) as occupying a group of ‘mature multi-pillar pension systems’ (alongside Britain, the Netherlands and Switzerland), Ireland is noted for the ‘long tradition of occupational pensions’ (ibid.: 7). An extensive and expensive system of subsidy has grown up around voluntary second pillar pension arrangements with employer/employee and individual tax reliefs in place to incentivise retirement saving. Despite this, just over half (51%) of the total workforce age 20-69 years have a supplementary pension, with the coverage rate showing no sustained increase in over 30 years. Voluntary second pillar pensions may be taken up in the form of occupational and personal pension plans. Supplementary (occupational) pension coverage is highest in the public sector, with very patchy coverage across the private sector.The coverage rate has fallen further since the onset of the economic crisis, particularly for the self-employed (from 47% Q1 2008 to 36% Q4 2009) and part-time workers (32% Q1 2008 to 24% Q4 2009) (CSO, 2011).
In terms of social spending, expenditure on state pensions actually declined as a percentage of GNP between 1985 and 1999 in Ireland, while the cost of pension tax expenditures grew sharply over the same period (Hughes and Stewart, 2011). This increased cost however did not translate into significantly greater coverage rates; the occupational pension coverage rate in 2009 (just under 45%) was broadly similar to that of 1985 (ibid.). The distribution of pension tax relief has been the subject of more extensive analysis over the 2000s; a number of studies (Callan, Keane and Walsh, 2009; Commission on Taxation, 2009) highlighted severe inequities in the pension tax benefit structure, as illustrated by the finding that over 80% of pension tax benefits accrue to the top 20% of earners. High income earners are much more likely to have supplementary pension cover, make higher contributions and benefit from the tax relief paid at the marginal tax rate (41%), while lower earners are less likely to benefit from this tax expenditure at all, raising the prospect of ‘the reproduction of market income inequalities in old age – at least above the level of public basic security’ (Ebbinghaus, 2011a: 14).
In addition to disparities in supplementary pension coverage and the debate about the use and efficacy of tax benefits in this area, significant problems exist with Defined Benefit (DB) schemes, where underfunding has become a particular pressure problem. These schemes have declined in number in recent years, in common with other countries, where the shift to Defined Contribution (DC) schemes has continued. It is estimated that70% of the DB schemes in Ireland are in actuarial deficit at present (Pensions Board, 2012).The vulnerability of the Irish variant of the multi-pillar system, and in particular the over-reliance on the market for the provision of adequate incomes for older people and the risks to which they are exposed, has been brought into sharper focus by the recent financial crisis. Other issues currently of note include concern that contribution levels to many DC pensions and PRSAs are insufficient, the lack of transparency/clarity around charges applied to private pensions and the impact of pension fund losses (Stewart, 2011). Calls (Bonnet, Ehmke and Hagemejer, 2010; Burtless, 2012; Hughes and Stewart, 2011) to learn from past mistakes in the design of pension systems have particular salience in the Irish case, although as of yet other elements of the crisis and their impact continue to dominate the policy agenda.
Where public debate on pensionshas been generated since the onset of the crisis, some consideration has been given to the problems outlined above although ithas been marked by a particular focuson certain pension inequities, such as the significant pension entitlements of politicians and senior civil servants when austerity measures were being imposed on other sections of society. The escalating costs of public service pensions alongside what are viewed as thecomparatively secure pension rights of public sector workers, especially when contrasted with the more precarious pension position of many private sector employees, has also been a focal point for discussion. These inequities demand attention although in many instances discussion of current disparities has led to polarised public versus private sector worker interpretation of the inequities which has tended to narrow the scope of discussion detracting from an examination of wider policy options which could improve the pension position of all workers and citizens. Experiences of and attitudes to the patterns of distribution that shape the Irish welfare state may also play a role in this regard and this is an issue returned to later in the paper.
Contextualising the politics of Irish pension policy making
Whilst impossible to quantify, the significance of ‘international emulation’ and the global ‘diffusion of policy ideas’ to which Orenstein (2003) refers, would seem to be reflected in the manner in which the dominant conceptual frames around cost and sustainability are re-iterated in national pension policy discourse. However, Murphy’s (2006 cited in Kirby and Murphy, 2011: 154) examination of the influence of international actors on Irish social security policy found World Bank influence on pensions policy although overall ‘none influences policy discourse as powerfully as might be expected in such a globalised state’. Kirby and Murphy (ibid.) suggest that instead there is a tendency to ‘selectively filter its engagement with international social security discourse, ensuring always that Irish policymakers are in control’. The influence of the EU and the Open Method of Co-ordination is equally difficult to gauge; it has been recognised for its policy learning, particularly for civil society actors, in holding governments to account and lobbying for change (ibid.). However, the extent to which the re-enforcing of the parameters of the Stability and Growth Pact post the onset of the Eurozone crisis come to bear on pensions policy remains to be seen. The fact that pensions is included in the section ‘enhancing the sustainability of public finances’ of the Euro Plus Pact agreed in 2011 suggests that its influence is likely to be more explicit and direct in future.
Irish politics has historically been dominated by the two opposing centre-right leaning political parties, Fianna Fáil and Fine Gael, one of whom has been the lead political party in every administration since the 1930s. TheLabour Party, despite its long history in Irish politics, and its’ role in many coalition governments,has been unable to make an electoral breakthrough to alter this status quo. While left leaning politicians made important contributions to welfare discourse in Ireland over many years, they rarely enjoyed coherence of political ‘voice’ in terms of a unified political platform or party. In short, social democratic ideals have not, in contrast to many other countries, been an over-riding influence onIrish discourses of welfare. The delayed development of the welfare state is often accounted for in part by late industrialisation and an uneven and less than adequate economic performance for most of the twentieth century. The influence of Catholic social teaching forms part of the historical backdrop too as it shaped a mainly conservative and reticent political approach, reluctant to develop acomprehensive welfare framework. At the same time there is evidence of significant policy departure at pivotal points in its evolutionwhich illustrates the difficulty in locating Ireland in welfare regime typologies. More recently,it is the contradictory neo-liberalinfluences on economic and social policy matters that have come to bear most on the polity of the Irish state. Particularly since the 1990s Ireland’s approach to economic globalisation came to be affirmed for its ‘success’ as a high achieving globalised economy,during which time the preference for a low-tax and low-end welfare entitlement became more embedded. What is noted less frequently in this regard is the dualism that has been re-enforced in key aspects of welfare arrangements, including pensions, and the preference for administration of fiscal benefits which are subject to much less public scrutiny than those of state services and direct welfare provision.
National level policy concertation involving social partners became the institutionalised norm of the 1990s and much of the 2000s. Social partnership agreementsbecame more broad-ranging in their scope, as illustrated by the diversity of economic and social policy objectives they contained. Assessments of the degree of influence and differential benefits derived from social partnership remain contested; in crude terms, the argument splits along two lines, one that it served as a facilitator of amore neo-liberal approach to economic and social policy development (Allen, 2000; Kirby, 2002), to those who contend that as social partnership evolved its influence was allowed to drift from being part of the solution to the economic crisis of the 1980s (Mac Sharry and White, 2000) to being part of the problem (Wright, 2011) in the emergence of the crisis in the late 2000s. Nevertheless, pensions policy continues to be mediated through social partnership processes as evidenced both by references to it in various partnership agreements but also in the composition of the Pensions Board, the statutory body charged with regulatingoccupational pension schemes, retirement annuity contracts and personal retirement savings accounts and with advising the Minister for Social Protection in respect of pensions policy generally. Membersof the Board are appointed by the Minister and must be drawn from across the social partners (trade unions, employers, the Government, the pensions industry, member trustees and professional groups involved with occupational schemes). Itscomposition, however, has been the subject of some debate; Ó Cinnéide (2009: 6) for example noted that a majority of its members are derived from business and the private insurance sectors and the balance is often ‘regarded as biased in favour of the promotion of private pensions as distinct from public provisions’. Wider questions about the legislative capacity and level of influence of the Board have also been raised (Weston, 2011) and it would seem that its legislative mandate is not sufficiently broad or robust to cover all of the regulatory and oversight requirements that might be assumed of such an agency although these questions are beyond the scope of discussion here. The Pensions Board is a core part of the institutional architecture that has grown up around the pension system in the last two decades; it issues advice to the Minister for Social Protection in respect of policy matters and the ‘dividing lines’ between the social partners can often be seen in reports produced by it. In addition, the pension system is effectively managed by three government departments; the Department of Social Protection oversees the state pension and related entitlements, the Department of Finance manages the tax code that determines pension tax benefits/reliefs and pension levies while the newly established Department of Public Expenditure and Reform has responsibility for public service pensions. How or in what ways these factors transpose on or influence the dynamics of pension system reform is difficult to discern but mounting problem pressures in this policy area present considerable challenges that have still to be confronted, despite the reform endeavours of the last two decades, to which we now turn.