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Ireland’s young people need guarantees the state pension isn't about to get cut

The government needs to ensure auto-enrolment won’t be used as an excuse to ultimately cut the state pension, writes Paul O’Donoghue.

FINALLY. Ultimately. Pain-stakingly.

However you want to say it, Ireland looks set to (really, we’re serious this time) introduce a pension auto-enrolment system.

This was meant to be implemented by September this year, but has been pushed to 1 January 2026. As anyone following the issue knows, this is the latest in an enormous string of delays in introducing auto-enrolment, which was first proposed all the way back in 2018.

But the delays are now in months instead of years. The scheme should be in place some time in 2026 (giving some scope for that 1 January date to slip a bit).

With that in mind, it’s time for politicians to address one of the biggest fears around the system – that it will be used as an excuse to ultimately cut the state pension.

To date, the government has insisted this isn’t the case. It recently stated: “The purpose is to supplement the state pension and not to replace it.”

But political promises related to anything beyond the next election cycle tend to hold their value in a way not dissimilar to magic beans.

This is why the government should put some kind of legally-binding measure in place which would make it harder to cut future state pension entitlements for auto-enrolment savers.

But before we get into that, a brief reminder – what is auto-enrolment?

What exactly is it and how does it work? 

Auto-enrolment is a system where employees are automatically enrolled in a pension scheme once they start a job.

Under the scheme, the employee, employer, and government all pay into the employee’s pension fund.

Employees can choose to opt out of the initiative if they wish and auto-enrolment will only apply to those aged over 23 and earning at least €20,000 a year.

There are plenty more details, but those are the key points to know. A more detailed explanation is available here.

Why is it being introduced?

The key idea behind auto-enrolment is that it should help people be financially better off in retirement.

In Ireland, it’s estimated about one in five adults have no form of retirement savings. Worryingly, this actually rises among over 55s.

It’s likely many more are not saving enough to prevent a drop in their living standards once they’re no longer working.

That means plenty of people will be mostly, or wholly, reliant on the state pension to cover their living costs in retirement.

But the state pension is only about €15,000 a year. As examined previously, if that’s your sole source of income, it’s likely to be extremely difficult to get by, even if you own your own home. If you’re still renting, forget about it.

Auto-enrolment is meant to be a supplement to the state pension. Say you end up with a pension worth €10,000 per year through the auto-enrolment scheme. This would be in addition to your state pension entitlement.

So an additional €10,000 on top of the €15,000 means you’re up to a retirement income of €25,000 per year. Suddenly, your financial situation looks a lot better.

Why are there fears about the state pension?

The big fear with auto-enrolment is that future governments will use it as an excuse to cut state pension entitlements.

A future government could, for example, use means testing to control who accesses the state pension. This is something which has just been floated by the Conservatives in the UK. In Ireland, while the non-contributory state pension payment is means-tested, the contributory one is not.

The concern then, in an Irish context, is that auto-enrolment savers may get lower state pension payments in future, because they now have a bigger private pension.

Why would the government consider such a thing? It’s because the state pension system, as it currently works, looks unsustainable.

We’ve previously covered this in detail, but in brief: the problem is Ireland’s state pension relies on an ever-increasing population.

The system is mostly funded through PRSI payments. That’s ok as things stand, because Ireland still has a relatively young population.

But the country will soon age – meaning a growing number of state pensions will have to be funded by a proportionally smaller number of workers/young people.

Because of this, it’s estimated the state pension fund will eventually be tens of billions in the red every single year.

There are a few ways this could be dealt with – and because the problem is so big, it’s likely multiple solutions will be needed.

You could raise the age at which people qualify for the state pension.

The government previously planned to do this – increasing the qualifying state pension age from 66 to 68 – before scrapping it due to political blowback. However, many officials and analysts still favour such a move.

One move the government has pushed ahead with is raising PRSI payments to help plug the funding gap. These hikes will eventually result in workers paying hundreds of euro extra per year.

What should the government do?

To bring this back to auto-enrolment: it would be perverse if younger workers who face much higher PRSI charges get ‘rewarded’ with lower state pension payments when they themselves eventually retire.

This is not to scaremonger. For the record, I have previously written broadly in favour of the auto-enrolment system. The main benefit I see is that private businesses will now have to contribute to employee pensions. Currently, there’s no requirement for them to do so.

Employer contributions are set to eventually rise to 6% of employee salary, and this would make a massive difference over time.

For example, a 6% monthly contribution for a worker on a salary of €45,000 for a period of 40 years would be just over €200,000 in today’s money.

However, it will only be a help if auto-enrolment pensions remain a top-up paid on top of the normal state pension.

Multiple TDs – including those in the previous government – have raised concerns over this exact issue: that the state pension would lose value over time, and that people would be expected to rely on auto-enrolment pensions instead.

It’s possible this could eventually happen in Ireland, where state pension increases are decided by politicians as part of the annual budget cycle – something which doesn’t happen in the rest of the eurozone.

By simply not increasing the state pension in line with inflation, it would lose its value over time. This could be easier to justify if everyone has private auto-enrolment pension savings.

The government could address this concern in several ways – mainly, by ensuring the value of the state pension does not fall.

One way would be to put some kind of legal guarantee in place that the state pension would remain at a certain value.

This would be similar to the UK’s ‘Triple Lock’ where the state pension rises by the highest of three measures: earnings growth, inflation or 2.5% a year.

Alternatively, the government could use a combination of benchmarking and indexation.

This is where the state pension is set at a certain value – a commonly cited one is 34% of average weekly earnings.

Once it is set at this level, then ‘indexation’ happens. This is where the payment is linked to an index – such as the Consumer Price Index – and periodically rises along with it.

The idea is that these measures would be done alongside auto-enrolment.

Any of these could, of course, be undone by a future government. Or even if they are implemented, measures such as means testing contributory pensions could be introduced.

But they would at least mean people currently in their 20s and 30s have a better chance of one day getting a decent state pension alongside their auto-enrolment savings.

Young workers are already expected to pay higher taxes to fund the state pension. They should have some kind of guarantee they will see the favour returned.

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