Taking the Country & Western out of Pensions: The Recession Diaries - January 22nd

Life can sometimes be like an American country and western song:

‘My girl friend left me / my dawg bit me in the leg / my mamma joined the army / and my sister is in jail . . . but with the Lord’s help, I’ll carry on.’

Even the most collective minded of us accept that no amount of social protection can save us from many of life’s cruel twists. That’s why, where we can, we should remove those worries that can be addressed by social provision; if nothing else, than to remove one more stanza from the country & western song in all of our lives.

For instance, no matter what our income, employment status, skill base or educational achievement – if we become ill we receive the best health care possible, free at the point of use from our visit to the GP to the most high-tech treatment in hospital. Again, for our children – they will be entitled to the best education from pre-school to third level and beyond; also free at the point of use. Your dawg may turn on you, but you’ll get treated; you mamma may get posted to Turkmenistan, but you’ll still finish your education. Social guarantees can’t ensure happiness, but they can remove one more source of worry which causes even greater unhappiness. The same goes for pensions.

To raise the issue of pensions is to essentially clear the room. The younger you are the more boring and seemingly irrelevant it is. I know that 25 years ago I couldn’t care less about pensions. Amazing that now it suddenly piques my interest. It should pique all of our interests. Ensuring a ‘comfortable and independent’ life in old age is an imperative of social policy. What’s the best way to do this?

TASC, in combination with the TCD Pension Group, has led the debate on pension policy and, at the launch of a new book, ‘Personal Provision of Retirement Income’, edited by Dr. Jim Stewart and Prof. Gerry Hughes, they issued a policy update - Making Pensions Work for People.  Both are timely as we await the publication of the Government’s National Pensions Framework. The book brings together a number of papers from academics and experts throughout Europe to assess private pension provision. The conclusion is that such provision is costly (for individuals and taxpayers), regressive and not very universal – with low and average income earners losing out. No surprise there – it’s very much like private provision here.

TASC’s policy update puts forward an alternative framework. It is simplicity itself:

• Increase the Social Welfare pension to 40 per cent of average industrial earnings over a five-year period.

• Universalise this payment (i.e. remove means-testing) transforming it into a guaranteed basic income for all elderly

• Introduce a mandatory 2nd tier social insurance provision that would, with the new universal social welfare pension, guarantee 50 per cent of final wage / salary up to a specified maximum (in effect, an earnings related pension).

There would still be room for private pensions – to top up, or to provide extra income to those whose income exceeds the maximum (say, €75,000 per year). Here, TASC proposes a range of measures: pension protection provisions, something ICTU has been campaigning on for years; amending the Companies Acts to ensure companies continue contributing to occupational schemes which are in deficit, rather than paying dividends to shareholders; and greater regulation to ensure private pension funds limit their riskier activities.

Taken as a whole, this would revolutionise both pension coverage and living standards in old age. Of course, the standard reply will be ‘it’s too costly’, especially now that resources are limited. However, this argument fails not only to appreciate the amount of public subsidy that already goes on private pensions; it fails to calculate the real returns to individuals and society of an elderly population provided with an income for comfortable and independent lives.

The Commission on Taxation shows the scale of gross costs to the public purse from subsidies to private pensions – nearly €3 billion. Within this mix of tax reliefs a programme of reform could shake loose a considerable amount of resources (e.g. standard-rating pension contributions, reduction of contributions ceilings, taxation of lump-sum payments, etc.).

For instance, TASC calculates that increasing the social welfare pension to 40 percent of the average industrial wage would cost less than half the tax reliefs in operation.

In addition, TASC proposes new social insurance levy to pay for the earnings-related element. This would comprise equal contributions into a social insurance fund from the employer, the employee and the state, along with contributions from the self-employed.

But there is also much analysis on the cost reductions arising from proper income and social provision for the elderly. In short, the poorer you are, the more likely you are to be ill – which is a cost to the state. Maeve-Ann Wren noted that universal provision of medical cards coincided with an increase in the health status among the elderly. So, yes, providing medical cards is a cost to the state – but there is also a savings in reduced GP and hospital visits, are reduced medicine costs. And with the elderly living more comfortable and independent lives, their ability to continue to contributing to society in the form social capital increases. This is a contrast to, at times, the unstated assumptions that the elderly are a ‘cost’ to be minimised.

The critique of the inadequacy of the private pension system is compelling. A policy framework is in place. The next step is to now provide an economic model for the implementation of this programme – one that assesses the costs to individual, employers, the Exchequer and the economy. This is not as easy as it sounds – especially given that one is dealing with demographic trends that are never easy to predict. However, this is work is necessary if people are to be convinced that, whatever about the undoubted social virtues of TASC’s programme, it is economically feasible.

If this can be done, then the argument for uncertainty removal becomes irresistible. For who could argue against a small levy on income (2%, 3%) to pay for a guaranteed income in old age? No more poring over leaflets from pension funds, no more examining the state of the equities market in the hope that your pension fund manager is making the right choice, no more worry about setting aside money you can’t afford (you’re doing that already by paying the new levy). In other words, one more worry gone.

Which means that our country and western singer can focus on other things – like feeding Rover and bailing out his sister and bringing his mother home; and maybe even starting to date again.

Comments

[Proposition Joe]

While I agree broadly with the tenor of your proposal, you make the classic pension-policy mistake of assuming sustainability by comparing current contributions and current outgoings, as opposed to considering the future trajectories of both:

"For instance, TASC calculates that increasing the social welfare pension to 40 percent of the average industrial wage would cost less than half the tax reliefs in operation."

This puts me in mind of the argument oft-made in public sector union circles that the state actually makes a profit out of PS pensions (because current incomings in the form of superannuation contributions & pension levy exceeds current outgoings in the form of pension payments). Blissfully ignoring the €108 billion in unfunded future liabilities and the massive changes in demographic structure projected for the coming decades.

[Mack]

Michael - the biggest problem with your pension plan is that with an aging population the cost will steadily increase. Worse there is bulge in the population that will impose huge costs on our children.

If each generation were to fund it's own pension pot _with no recourse_ to the earnings of our children then it might be a good idea.

But imposing rising costs on our children to pay for our living standards is the opposite of what most parents would want..

[paulp]

I think it's a fine idea, but needs a caveat that retirement age is linked to percentage of population in retirement versues percentage of population in workforce.

[tgmac]

It's quite an interesting notion that each generation is seperate economically. I suppose future generations don't have to consider the previous generation's contributions to infrastructure construction, educational structures, or taking correct ecological and political decisions to maintain a stable economic environment. Each generation, like individuals, are now autonomous and operate in vacuums. Once a generation has outlived its economic usefulness, it must survive as best it can on its own until demise. This outlook combines economic Darwinism with the modern notion of technical obsolescence - the throw away society - very neatly.

Of course, rational societies should recognise demographic trends and adjust spending, savings, and investment decisions as best they can by the variability of these criteria to maintain a sustainable financial system in greying economies while those retiring would also need to adjust expectations. The problem is that we have such a skewed manner of income disbursal in society, based increasingly upon Darwinian notions, that many individuals cannot plan for their financial futures. This planning becomes more problematic as additional fixed costs such a bin charges, tolls, parking taxes, health care levies, legally imposed insurance requirements, and now possible water charges are added each year to household budgets thereby decreasing discretionary spending and savings for an increasing number of economic actors in order salve the sentiments of rugged individualism in the taxation system.

During the propery bubble I often wondered why more parents, supposedly with more experience, didn't try to temper the expectations of their children with regard to home price inflation and the subsequent debts loads assumed. The answer is now quite obvious. If the present generation knows that the emerging generation will eventually view them as surplus to requirements and as a financial drain, the present generation's strategy of charging the present generation above economic value for assets allows the present generation to realise cash gains and impose rent charges onto the future generations so that they retire in comfort. I suppose matricide and patricide then become viable tactics by the emerging generation in order to combat the existing generation's Machiavellian economic machinations.

For those unable to contribute an increasing share of their income to defined retirement plans. Well, work til yee drop.

[MichaelBurke]

" Maeve-Ann Wren noted that universal provision of medical cards coincided with an increase in the health status among the elderly. So, yes, providing medical cards is a cost to the state – but there is also a savings in reduced GP and hospital visits, are reduced medicine costs."

So, there are multipliers attached to the provision of free universal health care too, which would grow over time as behavioural changes increase willingness to present at the GP.

The alternative is clear, a fully privatised system of health care such as the US, where per capita health costs are more than 50% higher than next highest economy (Norway), and 43 million Americans have no medical insurance.

http://www.oecd.org/dataoecd/46/2/38980580.pdf

And the US has the LOWEST number of hospital beds per capita in the OECD.

[Michael Taft]

The following has been written by Dr. Jim Stewart, one of the editors of 'Personal Provision of Retirement Income'.

* * *

Proposition Joe states a classic pension policy mistake made is to assume current expenditures on pensions can be matched by current revenues. Not so. Pension policy, for example in relation to Public Sector Pensions and State Old Age Pensions, can and will be adapted to future trends. There is lots of evidence for this in countries with predominantly Pay-as-you-Go pension systems (see Hughes and Stewart (eds,) Reforming Pensions in Europe, 2004). Future pension payments are likely to be adjusted in line with future economic developments by changes in pension entitlements, tax policy, and age of retirement. Current costs of public sector pensions can be reduced by removing added years. Many of these proposals in relation to reform of public sector pensions have been discussed in the Commission on Public Sector Pensions published in 2000.

A separate argument is whether public sector pension should be funded. The issue of funding or not funding is to some extent irrelevant. All future pension income must come from future output (haircuts, bread, services, etc required by older people can only be provided by a future work force). This transfer from those at work to those who are retired can be achieved via future taxation, or by a stream of future dividends, interest and rent. The decision to fund or not to fund should be based on efficiency and cost, and the evidence is that funded pensions driven by tax expenditures, are higher cost, less efficient, far more risky than PAYG type systems, and because they are driven by tax expenditures they are highly inequitable.

The current value of estimated future pension liabilities is often used as part of the argument for funding (‘the elephant in the room’). The report (August 2009) by the C and G is the most recent exercise of this type (See: C and AG Special Report on Public Sector Pensions, (http://www.audgen.gov.ie/documents) and as noted by Proposition Joe, estimated the current liability in current terms of future pensions at €108 billion. This exercise will now be done as part of the Annual Finance Accounts.

Why undertake such an exercise ?

The C and AG report states that it is to ensure that the State is aware of the cost impact and timing of future pension outflows” (par. 3.44). This report also advocates partial funding to smooth out “the impact on future taxation by setting a long run sustainable pension charge target” (par. 3.14). This point was made in a previous report (Commission on Taxation, 200, par. 23.2.2). However recent economic history shows that the variability of expenditures by the State on pensions is far more stable than that caused by the economic cycle.

There is also an issue as to why pension expenditures should be examined in terms of current value of liabilities as distinct from other areas of Government expenditure such as health costs. In the case of health costs it is likely that the current value of future health expenditures by the State will far exceed the current value of future public sector pensions. All areas of Government policy could be examined in the same way and result in a very large sum. The fact that it is not widely done indicates that such an exercise is of limited usefulness. Some reasons for this are:-

The estimated current liability for example, of future pension payments (as in the case of other Government expenditures) is subjective as it will depend on many assumptions, such as future pension increases, age of retirement, etc.

The net cost will vary as tax rates and tax policy varies. It is likely for example that the current relatively favourable tax treatment of retired persons will change, and that there will be other major changes in public sector pension provision.

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