IRELAND - Ireland should significantly reduce tax incentives for occupational and private pension schemes in order to pay for a higher, and universal, state pension, a joint paper from Trinity College and the Think tank for Action on Social Change (TASC) has claimed.
The response to the consultation on the Green Paper on Pensions argued the public pension system is much easier to operate than the private sector system, while the cost of tax reliefs on private pensions is "now as large as the cost of direct expenditure on the public system".
As a result, the TASC and the Trinity College Pensions Policy Research Group (PPRG) outlined two alternative options for pension reform:
The report argued a universal pay-as-you-go (PAYG) system is "lower cost and lower risk than a funded system organised in a pensions industry which is not competitive and locked into high risk investment strategies".
It claimed the Green Paper - which closed to consultation on May 30, 2008 - "implicitly" suggested the key to providing adequate retirement incomes and reducing pensioner poverty is to "continue to limit the role of the public system and to increase tax incentives for private pensions".
However, the TASC and PPRG claimed a further shift towards private pensions system over the public system would be "ill-advised" as they argued "this approach has not worked in the past and that it is unlikely to be successful in the future".
Instead, it said the trend should be reversed in favour of a public system, with subsidies for private schemes "significantly reduced and targeted at low and middle income earners".
The report claimed most of the benefits of the pension tax reliefs have been "appropriated by the very highest earners" - as the bulk of tax incentives are received by the top 20% of earners, while the bottom 20% receive "virtually nothing", for example these lower earners benefited from just 1.1% of tax reliefs in 2000.
In addition, the response argued the policy of providing generous tax reliefs to encourage the growth of occupational pension schemes "has not been very effective" as the coverage of occupational schemes fell by 4% between 1985 and 2006.
It also said the most important contribution to the total income of pensioners is made by social welfare pensions and other social benefits, with the public pension system accounting for 60% of pensioners' total income.
As a result, it claimed its options for reform "draw on the strengths of the public system and begin to correct the inequitable treatment of taxpayers who gain little from tax reliefs for private pensions".
It argued a New Zealand-style universal state pension "could be adopted in Ireland at less cost to the Exchequer than the present pension arrangements", while a universal pension would eliminate means-testing as well as address the problems of women's irregular contribution records and provide security for the 20% of older people currently receiving no state pension.
That said, the report highlighted the development of a universal system would have to include "a significant curtailment of the tax incentives for occupational pensions, Personal Retirement Savings Accounts (PRSAs), Retirement Annuity Contracts (RACs) and Approved Retirement Funds (ARFs)".
The report claimed the recommendation to reduce tax reliefs are "not as dramatic as they might seem" as the state pension is already providing the bulk of retirement income for the majority of pensioners, while tax reliefs have "not succeeded in increasing coverage of occupational schemes" and incentives for PRSAs "have had little effect on coverage especially at the lower end of the income distribution".
The response from the TASC/PRRG follows recent submissions against the introduction of a mandatory pension saving system from the Society of Actuaries in Ireland and the Irish Association of Pension Funds (IAPF). (See earlier IPE articles: Higher state pension 'more cost-effective' and IAPF warns of compulsory pensions 'havoc')
Meanwhile, Life Strategies, an actuarial consultancy, claimed in its response to the consultation diverting tax relief towards a higher state pension - one of the potions outlined in the Green Paper - would be "fundamentally unsound" as the figures in the paper had been "overstated". (See earlier IPE article: Diverting tax reliefs to state pension is "unsound")
If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com
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