Advisors.ie

We are told that there will be a €500m package announcement today which is described as a ‘jobs initiative’. Formerly it was to be known as a ‘jobs budget‘  or an ‘alternative budget‘ (note that in the link there is also talk of ‘renegotiating the bailout’ – so U-Turns are becoming commonplace), this is the first Irish ‘downgrade’ in a while that hasn’t involved S&P.

It comes on top of a U-turn on ‘Tax relief at source for boom buyers’ which was meant to be happening prior to June (it will now be in December at earliest or never at all). For the political junkies, you can see FG’s Brian Hayes give a strong indication of commitment to the TRS plan in what was then still referred to as the ‘jobs budget’ on national TV at c. 1:40. Michael McGrath correctly states that FG likely gained a lot of votes on the back of this policy.

I digress, is the ‘jobs initiative’ a good idea? Yes, anything that gets some money moving in the economy is likely to do more good than harm. The funding of it however, is a lesson in the making for how to initiate bad policy.

So why is there not more dissent? My belief is that there is an implied sense of righteous indignation at people who have savings in pensions, the rationale being ‘they have money, so what are they complaining about?‘.

Another line of defence is ‘but pensions tax expenditures cost €2.9bn a year!’, that is taken from the Commission on Taxation (page 309). The figure is skewed though, obviously the Health Levy/PRSI cost aspect is almost gone (replaced by Universal Social Charge which doesn’t get relief), the same goes for employee PRSI relief and employer PRSI relief has been halved (Budget 2011, B10), so bring that figure down by about €150m assuming that the remaining employer relief represents about 1/3 of that figure.

Then dig a little, €510m of the ‘cost’ is under s.777 of the Taxes Consolidation Act. What does this figure represent? Unrealised Benefit in Kind, however, pensions were never viewed as a ‘benefit in kind’ so to my way of researching this is an ‘created implication’ rather than an actual one. It isn’t as if in the past there was BIK on pensions, it would be the same as saying that there is a tax expenditure on income tax for all workers because the Department of Finance reserve the right to raise taxes to 80% if they felt like it.

A further €1.2bn is tax exemption on investment income of pension funds, because pensions are allowed to grow tax free (and remember – this isn’t ‘tax free forever’ it is tax deferment) this again, is a meaningless metric, unless of course the future approach will be to tax pension growth or investment dividends paid back into them.

The actual tax expenditure for employee contributions is €660m, and bear in mind, that in the future upon draw down there will be taxes paid. Self employed people make up a further €380m but from 2010 there is a ceiling on contributions so this is not an example of financial abuse. In total you are looking at about €1.04bn being the actual foregone workers income tax. Throw in lump sum relief (€130m) and you quickly see….

The cost of pensions relief is therefore not €2.9bn (unless you use faulty metrics) it is closer to €1.25bn.

Which brings us to ‘Retrospective Taxation’, which may not even be legal under Article 15.5.1 of the Constitution. The planned funding of this scheme is by placing a 0.5% levy on private pensions with a view to raising €500m.

Why didn’t they just cut the rate of tax relief? Because in a hard year like 2011 people are not contributing as much to their pensions so they know the expenditure will go down, but money that was built up over the years won’t be going anywhere (because you can’t just cash-in). Therefore, a gross 0.5% levy on a private pension fund is taking money from a fund that was created in the past until the present and any tax in the present upon that fund constitutes retrospective taxation, they are going to reach into the past to pay for the now.

This will also be wrought upon Defined Benefit Schemes, that ‘golden brand’ of pension. But take a sincere look at DB schemes and you quickly see that of the c.1,200 defined benefit schemes that a full 891 are not up to full funding and are therefore insolvent. Put another way, 3 out of 4 schemes will not be solvent enough to pay their members. 75% of them are either in trouble or headed that way (link here taken from the PensionsBoard.ie).

So they are going to take from the broke to pay for this under the guise that they have all of the money. In 2006 we already knew that defined benefit schemes were in trouble, in fact, the Green Paper on Pensions states as much on page 9 under the ‘growth of DC’ heading.

Laughable.

Even more concerning is the fact that we still have a dichotomy in pension provision, where our unfunded liability per year (public sector pensions) is over €2bn and the accruals are in the region of €5-6bn. This ‘levy’ will not hit public sector workers who’s pensions would cost 35 times their annual benefit to buy privately. So if you have a public sector pension of €25,000 then it would cost about €875,000 to buy that on the private market. Is it any wonder that begrudgery is so deeply ingrained in the public/private divide?

Of course, we’ll be told that public sector workers don’t get paid very well, but actual research (rather than Union Representative repetition which acts as a substitute for fact) shows that in general the badly paid public sector workers are not the ‘fat cats’ at the top, it is the workers at the bottom and middle, as seen in the CSO presentation to the Statistical and Social Inquiry Society on ‘Investigating the Public-Private Wage Gap‘, look from page 13 onwards to get the graphics. The premium they earn doesn’t even factor in two of the most desirable factors of the job, firstly is job security, and secondly is the retirement benefits – why? Because the statisticians have not figured out a way to represent that yet.

If the levy on pensions were to be laid upon the assumed value of the pot for people in the public sector the annual charge would be in the thousands. I don’t think they should have to pay this, but I equally don’t think that private sector pensions should either, in particular when you have so many defined benefit schemes that are insolvent already.

I really hope something good comes of this scheme because at the very foundations it is morally and financially reprehensible, perhaps the initial approach has set the tone: did our new minister of finance consult with industry before doing this? It doesn’t seem to be the case, but who needs to negotiate when you are the one holding the gun?