Budget 2011-Pensions

REFORMING THE PENSION SYSTEM

The Irish Government spent roughly €7.3bn in 2009 on the provision of pensions, a figure which is set to rise dramatically as our population ages and lives far longer than previous generations, as a result of greatly improved medical treatments. Roughly €3bn of this annual figure is given by way of tax reliefs to those investing in pensions.

The idea of giving €3bn per annum in tax reliefs to earners who can afford to contribute excess income to their pension plan is most unjust to lower paid workers, who by definition do not have enough disposable income to invest in their long-term pension plans. In truth, the main beneficiaries of this government largesse are well paid individuals and the financial institutions who have succeeded in producing a return on average of 0.1% per annum over the last ten years after deduction of their hefty management fees. This pension tax break should be discontinued immediately.

With regard to the old age pension, the politicians are terrified of another grey backlash if they attempt to reduce the current state pension benefits.  Whether contributory or non-contributory, any person in receipt of a pension income in excess of €50,000 per annum, should not receive this state handout. The argument is that people who have paid taxes all of their working lives are entitled to it, but it should of course only be paid to those who are in need of it. Anecdotal evidence would increasingly suggest that those in receipt of the non-contributory pension are the ones who have nothing else to live on. Setting a threshold of €50,000 per annum of pension income is reasonable in the circumstances in which we currently find ourselves.

Part of the €4.3bn annual pension outlay pays the pensions for retired public sector workers (and their spouses). The practice of benchmarking people’s pensions to increase in line with public sector salaries is crazy, completely unsustainable and should be discontinued immediately. In addition, the idea of paying a pension to anyone in full health before the normal retirement age of 65, is only compounding the problem of the ever-increasing annual pension bill. 

Some people may find it surprising that this pension bill is paid for out of the annual budget under the umbrella of Social Welfare, whereas of course it should always have been paid for out of an investment fund, instead of the current account. Charlie McCreevy recognised the looming problem with the pensions time bomb when he instigated the 1% of GDP investment fund over a period of 25 years under the management of the NTMA, which was a right and proper thing to do.

Unfortunately the Govt has found it necessary to raid the fund to save the banks, so who will pay the future pensions bill ? The only viable solution is likely to arise from a combination of immediate pension reform and a return to prudent investment for the future !