Why there's a push to take pensions decisions out of the hands of politicians

AH THE BUDGET ‘giveaway’, a staple of Irish current affairs discourse. Every year there is endless hype, speculation and leaks about who the ‘winners and losers’ will be.

Pensioners are perceived as being one of the groups which most often gets a ‘win’ – annual increases to weekly state pension payments of about €5 – €10 have become something of a staple.

But the fact that pension payments are included at all in the annual teeth gnashing that is budget negotiations makes Ireland an outlier in Europe.

In almost all countries on the continent, state pension payments have some kind of benchmark link. For example, they are set at 30% of wages. Then, if wages go up by 5%, the state pension rises by the same percentage points.

Last week, a new campaign was launched pushing for the government to do the same here. The ‘Pension Promise Campaign’ – involving a spread of groups such as Siptu, the National Women’s Council and Age Action – has said state pension payments should be set at 34% of average earnings. At current rates, that would mean raising payments by €45 per week, from €265 to €310.

After the surge in inflation over the last year, it’s argued that this is needed to make sure people relying on the state pension don’t face falling living standards.

It would also have the benefit of taking the decision making out of the hands of politicians, where figures – a €5 increase? €12? – can sometimes seem completely arbitrary.

The main benefit of benchmarking would be that it would make the decisions based on something more concrete than political machinations.

It would also allow those receiving the state pension to plan their finances much better, rather than remain at the whims of politicians.

This cost is the main concern for benchmarking – in 2021 it was estimated that setting the state pension at 34% of wages would cost the state an extra €1.1 billion a year. This figure has grown since then, and will continue to rise as the population ages.

This comes as Ireland is already set to struggle with surging pension costs, even if there is no change to the system.

The government has been slow to tackle this, such as rowing back on a move to raise the state pension age, despite not yet firmly committing to a way of funding this with an older population.

Despite the cost concerns, benchmarking is in place almost everywhere else in Europe. 

A study by the European Central Bank published in August looking at pensions in the 19 euro area countries found Ireland was the only one where pension payments are decided as part of the annual budget cycle.

In all other 18 countries, there is a clear benchmark which gives pension payments something concrete to be measured against.

In some – including Spain and Italy – the process is automatic, meaning that pensions go up steadily in line with wages or inflation.

In others, such as Germany, the link is somewhat weaker, with the government having more flexibility around the exact scale of increases.

Several countries have some sort of fallback in place which means the government can override the benchmark if needed.

Something similar recently happened in the UK, which has a ‘triple lock’ system. Under this, pensions go up every year by whichever is the highest out of three measures – earnings, inflation or a flat 2.5% rate.

This ended up being suspended in 2021 after an unexpected 8% jump in earnings during Covid meant maintaining the ‘triple lock’ would have meant a surge in pension costs.

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In Ireland, the move towards benchmarking has been planned for years. But, like many areas of pension reform, the job of actually doing it has been extremely slow.

It was suggested seriously all the way back in 1998, when the Pensions Authority proposed a measure which might look slightly familiar – setting payments at 34% of average earnings.

Over the last two decades or so the idea has repeatedly been thrown around by various state bodies and think tanks, including by the Economic and Social Research Institute (ESRI) back in 2001.

More recently, the government itself committed to benchmarking in 2018, promising a process to follow through on this would be ready by the end of the year.

This is where the ‘Pension Promise’ comes back in – the campaign is focused on getting the government to finally follow through on this.

Following on from this, Social Protection minister Heather Humphreys said the government will introduce a form of benchmarking this year. But there is a catch – pensions won’t automatically be set at 34% of wages.

Instead, that figure will be “an input to the annual budget process”, Humphreys said, as will the rate of inflation.

It looks set to be a delicate balancing act. While largely taking pensions payments out of the hands of politicians is the standard in Europe, and would let pensioners plan their finances, benchmarking would mean big payment rises in the short term.

This is at a time when bodies such as the Irish Fiscal Advisory Council have said, over and over again, that the state has to make the pension system more sustainable (ie, less money going out).

So, some hard decisions coming up. And when it comes to pensions, these aren’t something the government has been very quick to make.