Why we call politicians’ pensions gold-plated
PENSIONS
IF a politician has a pension that we value at €2m, that doesn’t mean they will get €2m or that they could sell it for that sum — rather it means that if any other person in society wanted to buy a pension of the same amount they would have to have a savings pot of that sum.
When you get a pension that gives you a guaranteed sum every month as a percentage of a salary, it’s referred to as a ‘defined benefit’ pension. Such schemes are not typically available any more.
Politicians still get this even though similar schemes are failing in the real world — where new entrants have to pay for the retirees — but when the State is footing the bill, this doesn’t happen.
The cost of paying political pensions is part of the more than €430bn in pensions liabilities which this country has (CSO figures for 2015).
Of that sum, €350bn is unfunded, which means we have not put aside any money in advance to pay for those pensions (of which political pensions are only a small portion).
Instead it comes out of whatever taxes are collected in the year in question, hence the description ‘unfunded liability’.
Our political valuations don’t factor in the annual €93,599 wage of TDs, nor do they factor in the generous allowances, expenses or additional incomes they receive by sitting on committees.
It just focuses on termination payments (a €15,600 lump sum they can get when they stop being a TD), the oneoff lump sum at retirement (a maximum of €140,399 tax free), the TD annual pension (a maximum of €46,800 a year) and the office holders’ pensions, which we’ ll consider next.
When a TD holds an ‘office’ (Taoiseach, Tanaiste, minister, minister of state or Ceann Comhairle) for two years, they qualify for a 20pc pension of the higher office salary earned at retirement.
This goes up by 5pc every year to a maximum of 60pc of the office salary if they serve 10 years.
The Taoiseach earns an additional €98,634 per year on top of their TD salary so, for example, if a TD held the office of Taoiseach for 10 years and they were a TD for 20 years, they’d get the maximum TD pension of €46,800 and €59,180 on top of it, giving a total of €105,980 per year.
This example is made for demonstration, obviously no sitting TD was the Taoiseach for 10 years but several have been ministers, ministers of state or Ceann Comhairle for long enough to get maximum office pensions which are made up of sums from each of those office’s salaries.
To make a ‘valuation’ we compared what a TD would get at retirement and then showed what it would cost an ‘ordinary Joe’ to purchase similar benefits.
We can work through the following example: a 55-yearold TD has served 20 years, of which eight were as a minister and four were as a minister of state. The minister of state years can translate into minister years so they will be able to get the full TD pension of €46,800 and 60pc ministerial pension of €41,727 on top of it. Their annual income will be €88,527 per year — we’ll use that later as an example.
Now to make a comparison, a person who is 55 today can retire at age 68. We use an industry standard pensions quoting engine to check annuity rates.
There is no exact ‘like for like’ but we do make certain assumptions such as inflation protection and a spousal pension where we assume the spouse is the same age.
For a 68-year-old in the private sector wanting to buy a pension today, they would be offered an ‘annuity rate’ of 0.03243, which means every year the insurance company would give them 3.243pc of their money back as a pension every year for as long as they live, guaranteed.
We can’t know what pension rates will be in the future, so we price the 55-year-old as if they were 68 and assume that they’ll get the same price when their time comes.
Now we have to do two things. Firstly, figure out the lump sum value that would give you a guaranteed €88,527 per year.
That’s simple maths, if €88,527 equals 3.243pc then 100pc is €2,729,787, to which we add their future lump sum payment of €140,399, giving a total value of €2,870,186.
Then this has to be discounted back to a value in today’s money.
In this case, retirement is 13 years away so to express the money of tomorrow, today you reverse the compound interest formula and the ‘present value’, or ‘what it’s worth right now’ is €2,218,747.
By example, a 30-year-old hoping to retire at age 68 would have to put aside about €32,000 a year, markets would have to grow at over 6pc a year and have no market crashes for 38 years to match this.
A politician can get similar results in half that time for less than half that cost with a guaranteed outcome at the end, something that no pension elsewhere can promise.
This is why people in the financial services industry rightly refer to political pensions as being ‘gold-plated’ — they are simply the very best money can buy.