The issue arises because the current system is unsustainable, unjustifiable and, in many instances, just plain obscene. While the highest payment level under the state pension system hovers around the relative poverty line, taxpayers pay out more on regressive private pensions which primarily benefit the wealthiest in society.
- We spent, in 2003, about €2.5 billion on all state social welfare pensions.
- However, in that same year, it cost €2.9 billion to subsidise private pensions (the combined cost of employees and employers contributions, net pension fund income exemption and Retirement Annuity Premiums). And this excludes the tax subsidy to lump sum retirement payments for which Revenue can’t estimate.
Who benefits from this massive private pension subsidy? According the Gerry Hughes, in For Richer For Poorer (an essential text on the current pension system) approximately 75% of the tax relief subsidy goes to the top 20% income earners. Simply put, those who can’t afford to save are forced to subsidise those who can.
This regressive system has resulted in one of the highest levels of pensioner poverty in Europe, the lowest level of replacement income for pensioners (i.e. pension payments as a % of average incomes) and low levels of pension coverage; Ireland is one of the few industrialised countries in the world not to have a 2nd mandatory pension system. And it shows.
Even so, this sorry state has its supporters. The private pension lobby (though calling it ‘private’ is a gross misnomer as it exists only because of massive taxpayer subsidy) is adamantly opposed to mandatory pensions, mostly out of fear of losing access to savings. Employers, at least those who don’t already operate legitimate occupational pensions, are opposed because of the inevitable rise in payroll in taxes.
Still, there is a growing acceptance that something needs to be done. The State pensions system currently acts as a ‘poverty-avoidance’ payment; that is, it provides a flat-rate payment that keeps people at about the relative poverty line. What it doesn’t do is provide an adequate replacement income in old age. For those on average incomes (e.g. €40,000), the State pension makes up only 27% of their gross salary.
To top up people either need to be a member of an occupational scheme or rely on their own savings with tax relief support. There are two problems here: occupational schemes in the private sector are vanishing at an alarming rate and many others are being downgraded from final salary schemes (whereby employees are guaranteed a % of their final salary) to contribution schemes whereby employees receive benefits solely dependent on the value of the contributions that have been paid to the scheme and the investment return earned on those (the National Pension Board has been especially critical of contribution schemes, claiming they are inadequately funded).
A second problem is the cost of savings. For someone outside an occupational scheme – the majority of private sector employees – regular savings of up to 12% per year of gross income for 30 years, would be needed to provide an adequate post-retirement income (e.g. 66% of final salary). This is just too expensive for people with mortgages, families, childcare and medical costs, etc. Something has to give and its usually savings for old age.
And here’s the cruelest of catches – even if you did save for 30 years, the current system cannot guarantee you a defined pension. It all depends on the markets – retire when Asian or American or equity markets are in a slump, and you’ll get a lot less than you counted on. For many, it’s a lot of money for a shot in the dark.
There is a way out of this regressive and costly trap. A State Earnings-Related Pension (SERP) could ensure economic security in old age at a much-reduced cost for people and the State. Here’s how it would work:
- All income – including capital gains, gifts, inheritances, etc. - above a certain threshold (e.g. €15,000 per year) would be subject to a levy of approximately 12% to be split evenly between employees, employers and the State – 4% each.
- At retirement, people would receive 66% of their final salaries (whether the final year or an average of the preceding five years).
- To help fund this programme, tax relief on private pensions would be massively curtailed. For instance, tax relief would be standard rated, while the amount of contributions receiving relief would be capped.
Such a programme would amount to a revolution in people’s life-expectations. Instead of worrying over old age – shopping around different investment schemes which few people understand or buying second properties as a retirement nest egg – people would pay over a small levy to the state and, in return, know that they would be economically secure.
Of course, there are a number of other difficult issues that would have to be confronted – retirement age, tax treatment of pensioners’ incomes, reform of current welfare programmes such as free travel, etc. But the adoption of a SERP scheme would make such reforms easier to introduce since it would be part of a larger package of providing security and income adequacy to pensioners.
Unfortunately, this most important issue will receive little attention in the election manifestos. Fianna Fail knows something has to be done but won’t say anything until after the election. The PDs and Fine Gael are, of course, opposed to mandatory pensions while it is difficult to make out the Labour position. For all political parties, cowardice will out and the issue will not feature.
But for progressives this should become an important battleground. We must move the debate about the welfare state away from ‘poverty-avoidance’ and towards the terrain of economic security. Providing people with financial stability and adequacy – especially in a more dynamic and volatile economy – will be an important barometer of the political will to introduce a modern welfare state.
And pensions will be the first battle.