A long-term approach is needed when it comes to managing and funding the pension system, the Irish Fiscal Advisory Council has said.

A new report says Ireland's rapidly ageing population will put "increasing pressures" on the State pension in the years to come.

"The current 'pay-as-you-go' approach to funding the State Pension means that today's PRSI contributions are broadly used to meet today’s pension payments," it says.

"By 2050, the number of people reaching the retirement age of 66 will be 50% higher than it is today".

Source: Irish Fiscal Advisory Council

The council says moving to a system where the PRSI rate is set at a constant rate to finance the pension system over the long term - like in Canada - rather than year-by-year would avoid the need for larger increases in PRSI rates in the future.

"This would be achieved by raising contributions from the baby boomers while they are working. This would reduce the burden on future taxpayers," it says.

'Significant pension reserves'

The paper shows that this funding approach would require the combined employee and employer's PRSI rates to rise by about 3.5 percentage points over the current rate of 15%.

This is around half the increase that would be required under proposals from the Pensions Commission.

This increase would be almost halved again if the pension age is increased, the council said.

"This increase in PRSI rate would be even lower again if 'excess' Corporation Tax receipts were to be allocated to the fund to help finance future pensions, hence reducing the burden on future taxpayers".

Source: Irish Fiscal Advisory Council

The report also suggests that a State Pension Fund should be designed to take into the account the long-term variation between the number of people paying PRSI contributions, and the number of people claiming pensions.

It says moving towards this model may lead to the creation of "significant pension reserves", if demographic variations are smoothed by requiring current generations to contribute more and limiting the increase for future generations.

The system would move from being fully-pay-as-you-go to a partial funding model.

A similar approach was attempted here in the past with the establishment of a National Pension Reserve Fund in 2001.

This was invested in financial assets and its value peaked in 2008.

However, the proceeds of this fund were largely used to bail out Irish banks during the financial crisis.

Main image: An older man counting Euro notes. Picture by: Rodica Ciorba / Alamy Stock Photo