The government pension system was introduced in 1979. It was designed in a manner that the pension income a person receives over time would be 2/3rd of the gross wage of the highest public service salary which in 1979 was equivalent to €13,980. The objective was that the 2/3rd relationship between the pension income and the highest public service salary would always be maintained. This did not happen. Indeed, between 1979 and 2004, this 2/3rd relationship was only adjusted once in 1987 – from €13,980 to €15,727.
This increase, in what is technically known as the Maximum Pensionable Income threshold on which the 2/3rd pension income is calculated, increased over a 25 period by €72.8 annually – far, far lower than the increase in the average national wage that occurred over the same period. The result is that persons who in 2004 earned a gross wage above the Maximum Pensionable Income of €15,727 received a far lower pension income when compared to those who retired in 1979 – 54% of the Average Pension Retirement Rate (the relationship between the average pension income and the average national wage) as compared to 66.7% for those who retired in 1979.
This was one of the major problems that the reforms of the pension system in 2004 sought to address. The reforms introduced the following mechanisms to increase the Maximum Pensionable Income as follows:
Persons born between 1952 and 1961, known as transitional, were not exposed to the full brunt of the reforms: for example, the accumulation period was increased from 30 to 35 years, the retirement age staggered, etc. The Maximum Pensionable Income was from 2007 allowed to increase annually by the Cost of Living Allowance. Today, the Maximum Pensionable Income for this cohort of persons stands at €19017.37.
Persons born on and after 1962, known as switchers, were also exposed to the full brunt of the reforms: for example, the accumulation period was increased to 40 years, (in 2016 to 41 years for persons born on and after 1969), the retirement age set at 65 years, etc. The Maximum Pensionable Income was from 2011 to 2013 boosted to €20,970 and after that increased by an indexation formula of 70% Wage inflation + 30% Retail inflation. Today, the Maximum Pensionable Income for this cohort of persons stands at €24,986.
As can be seen from the Table below if you are born on and after 1962 you receive the full 2/3rd pension in the event that your gross wage over a period of 10 years averages €24,986 or less. You will only receive the maximum pension if over your working life of 40 years (41 years if you were born on and after 1969) your annual contributions for a period of any 10 out of the 40 years (or 41 years) exceeded the Maximum Pensionable Income.
If you are to retire in 2020, a full maximum pension is 2/3rd of the Maximum Pensionable Income – which is €16,657 (€24,986 * (2/3)). Thus, as you can see from this Table, if your annual gross wage and fringe benefits exceeded the Maximum Pensionable Income level of €24,986, the difference between the income you earned during employment and pension income in retirement grows larger and larger.
| Maximum Pensionable Income | €24,986 | |||
| Maximum Annual Pension | €16,657 | |||
| Salary | €25,000 | €30,000 | €40,000 | €50,000 |
| Pension in proportion to salary | 67% | 56% | 42% | 33% |
In real terms this means, that if you enjoyed an average gross salary plus fringe benefits of €40,000 on your last day of work, the following day your income falls to €16,657 – a drastic drop in your income of €23,343, giving you an average pension retirement rate of 42% and not 66.7%.
You need to keep in mind one other important matter.
It is important that if you are in a position to do so, you start saving for your retirement at an early age. Also important is that you educate your kids so that they too begin saving for retirement early. Note that saving €83 monthly for 40 years from the age of 25 years will, as a result of a cumulative interest rate of 2.5%, give a person a retirement nest egg of €70,000 or so.