Ireland’s two-tier pension system goes with a two-tier health service
All reports lament the unequal coverage rate but manage to ignore the elephant in the room, writes Colm McCarthy
IRELAND has long had a two-tier pension system to go with the two-tier health service. Some groups of employees are covered by decent occupational pension arrangements but many are not. Those who work in favoured sectors of the economy are fortunate, notably permanent employees in banks and in the public service, but there are very wide variations and many workers in the broader economy have little or no entitlement to income from an occupational scheme.
Individual pension entitlements are not the only sources of living expenses when older people withdraw from economic activity. Income in retirement comes from other sources too: there is a flat-rate contributory pension available to all who have an adequate record of PRSI contributions and a means-tested scheme is available to everyone over 66 even if they lack the required record. Owner-occupiers with mortgages paid down get to live rent-free, so paying off the mortgage is a form of retirement saving. Those in social housing pay low rents and enjoy security of tenure in old age. Farmers and small business owners expect to have assets to realise when the time comes to pack in doing paid work. But the State pensions are modest, not everyone has a farm or business to sell and access to additional retirement income from occupational pensions is necessary to maintain living standards for most in the labour force. Personal pension savings are not evenly available under current Irish arrangements, and the situation has worsened over the period since the financial crash.
The Quarterly National Household Survey from the Central Statistics Office, one of the best sources of data on economic and social trends, released last week its first survey on pension coverage since 2009. The figures reveal a huge disparity in pension coverage across the economy.
The economic bust since the banks went under in 2008 has taken its toll. Membership in pension schemes is voluntary in most sectors and has fallen sharply. The highest coverage figures are in public services, or in sectors where the State is the main (direct or indirect) employer. Most public service pension schemes are unfunded, that is to say, they are a charge on the general Exchequer. It is notable that the finance sector, rescued by everyone else, still had strong pension coverage in the final quarter of 2015. Some of the billions injected by the taxpayers to rescue bank bondholders managed to find its way into the underfunded pension schemes of bank employees.
There are large sectors of the private economy where very few employees can expect any retirement income over and above their State pension entitlements. The incidence of (relative) poverty in old age in the years ahead is likely to be concentrated in the groups that rent their homes privately and have not had the foresight to work for the government, or the banks.
The problem of unequal pension coverage has been evident for decades and has provoked endless hand-wringing reports from government departments and the pension industry’s very own quango, the Pensions Board. All lament the low coverage rate nationally but manage to ignore the elephant in the room. People who work for small business firms, that is to say the vast majority, do not have pension coverage. If they can afford to ‘get on the housing ladder’ and pay off a mortgage by the time they retire they can get by on the State pension. If not, well that is just too bad.
The think-tank publicpolicy.ie released a report last year calling for a fresh look at pensions policy.
The details are technical but the main point is that there needs to be a single national system for retirement saving, open to all in every sector of the economy. It is already the case that most workers would wish to supplement their State pension entitlement with savings from earned income.
It is clear that the employer-based occupational pension system works only for those in lifetime secure jobs, unlikely to be the experience of most Irish workers. The liability of employers for income in retirement is credible only where the employer in question is the State or a State client.
For everybody else, the vast majority, pension saving is unavoidably an individual matter. If retirement saving is to be facilitated by the tax system there are deep questions to be addressed about how this should be done.
Clearly, funded pension schemes will not survive if contributions must come from taxed income, to be taxed again when drawn down in retirement. But the tax rules apply only to funded pension schemes: there is no imputation of tax liability for unfunded schemes and it is clear that this has resulted in hidden remuneration, in the form of untaxed pension promises, for public service employees.
A simpler and more transparent system would preserve the principle of taxing retirement saving only once: there will be no retirement saving if it gets taxed both on the way in and on the way out.
But a more coherent system would abandon the connection to employers.
The job-for-life economy has never been a reality for most citizens and it is absurd to persist with an occupational pension system based on the fiction of employer liability for retirement income.
The so-called defined benefit system, where the employer is the scheme sponsor and guarantees income for retirees into the indefinite future, has never been realistic. Even the State cannot guarantee its solvency 20 years, or 40 years, hence, and retirement savings cannot credibly be the liability of business firms which are mortal.
The better option is the defined contribution model, where workers own their retirement savings personally, and accept the investment risk that naturally follows. There is no rational basis for the continuation of unfunded and opaque pension schemes in the public service, or for excessive tax privileges for high-income earners in the private sector.
‘Poverty in old age in the years ahead is likely to be concentrated in groups that rent’ ‘There will be no retirement saving if it gets taxed on the way in and the way out’