State pension age to increase by three years

Social Affairs Minister Mary Hanafin insisted the move was necessary because people were living longer and healthier lives.

“It is simply not sustainable that we can afford a pension system based on the current model which allows people to spend almost as long in retirement as they do in the workforce.”

Under the plans, the State pension age will rise to 66 in 2014, to 67 in 2021 and finally to 68 in 18 years time.

This means that anyone currently 49 years or younger will not reach official retirement age for three years longer than expected under the present scheme.

The Government is also bringing in a new supplementary publicly-run pension scheme for workers who are not covered by a private work pension.

Anyone aged over 22 years will be automatically enrolled and will pay extra contributions through their PRSI, which will be matched by their employer and the State.

Aimed at younger people who have not signed up for a private savings pension scheme, workers will be able to opt out of the payments at any time – but will be automatically re-enrolled every two years and will not be able to withdraw their savings before retirement.

Employees will have to pay 4% of their wages – within yet-to-be-decided upper and lower thresholds.

The Government will then contribute €2 and the employer €2 for every €4 saved by the worker.

Ms Hanafin confirmed the scheme, to be introduced in 2014, will not be guaranteed by the State and will therefore be exposed to the usual risks associated with private investments.

Those automatically enrolled will be added to a default low-risk fund.

The Government is planning a one-off bonus payment for those who remain on the scheme for more than five years in a row as an incentive.

It is estimated half the workforce do not have any access to a private pension scheme through their work.

The Social Affairs Minister admitted there was a risk that private companies who do have schemes could scrap them if they believe they can save money through the Government-run savings plan.

“It’s a risk, but we don’t believe it’s a great risk,” she said.

Ms Hanafin signalled other changes to the State pension, including how it is calculated.

Under the new method, benefits will be worked out based on the total number of social insurance contributions made over a person’s working life, with 30 years of contributions required for a full pension.

The move is part-intended to favour women who are penalised for taking time to look after children, and who will be given credits for their caring duties.

There was a mixed response to the revisions of the State pension provision.

The Director of the Small Firms Association, Patricia Callan, described the framework as "premature", saying it would prove costly to the Exchequer, to business, and to employees, without any associated benefits in the long-term.

“Moving to mandatory pension provision at this time makes no sense, as we still have a comparatively young population in comparison to the rest of the EU, and have by no means exhausted the many opportunities still available to us to increase the success of voluntary schemes," Ms Callan said.

" With small employers struggling to keep their doors open, and trying to reduce costs, it is unacceptable to impose an extra direct tax on labour for employers of 2%, and a potential additional 4% increase in the cost of labour."

"This proposal is simply unworkable."

Meanwhile Age Action warned Age Action warned that the Government must introduce measures to support older workers.

“It is imperative that the phased introduction of an increased pension age coincides with Government measures to support older workers to keep them in employment and incentives for employers to retain them,” Eamon Timmins of Age Action said.

“Otherwise the big losers will be older workers – those in their late 50s and early 60s.”

However the group also said it welcomed the fact that the Government has responded proactively to address the future funding of pensions in Ireland.