Taking the Country & Western out of Pensions: The Recession Diaries – January 22nd

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Life can sometimes be like an American country and western song:

‘My girl friend left me / my dawg bit me in the leg / my mamma joined the army / and my sister is in jail . . . but with the Lord’s help, I’ll carry on.’

Even the most collective minded of us accept that no amount of social protection can save us from many of life’s cruel twists. That’s why, where we can, we should remove those worries that can be addressed by social provision; if nothing else, than to remove one more stanza from the country & western song in all of our lives.

For instance, no matter what our income, employment status, skill base or educational achievement – if we become ill we receive the best health care possible, free at the point of use from our visit to the GP to the most high-tech treatment in hospital. Again, for our children – they will be entitled to the best education from pre-school to third level and beyond; also free at the point of use. Your dawg may turn on you, but you’ll get treated; you mamma may get posted to Turkmenistan, but you’ll still finish your education. Social guarantees can’t ensure happiness, but they can remove one more source of worry which causes even greater unhappiness. The same goes for pensions.

To raise the issue of pensions is to essentially clear the room. The younger you are the more boring and seemingly irrelevant it is. I know that 25 years ago I couldn’t care less about pensions. Amazing that now it suddenly piques my interest. It should pique all of our interests. Ensuring a ‘comfortable and independent’ life in old age is an imperative of social policy. What’s the best way to do this?

TASC, in combination with the TCD Pension Group, has led the debate on pension policy and, at the launch of a new book, ‘Personal Provision of Retirement Income‘, edited by Dr. Jim Stewart and Prof. Gerry Hughes, they issued a policy update – Making Pensions Work for People.  Both are timely as we await the publication of the Government’s National Pensions Framework. The book brings together a number of papers from academics and experts throughout Europe to assess private pension provision. The conclusion is that such provision is costly (for individuals and taxpayers), regressive and not very universal – with low and average income earners losing out. No surprise there – it’s very much like private provision here.

TASC’s policy update puts forward an alternative framework. It is simplicity itself:

  • Increase the Social Welfare pension to 40 per cent of average industrial earnings over a five-year period.
  • Universalise this payment (i.e. remove means-testing) transforming it into a guaranteed basic income for all elderly
  • Introduce a mandatory 2nd tier social insurance provision that would, with the new universal social welfare pension, guarantee 50 per cent of final wage / salary up to a specified maximum (in effect, an earnings related pension).

There would still be room for private pensions – to top up, or to provide extra income to those whose income exceeds the maximum (say, €75,000 per year). Here, TASC proposes a range of measures: pension protection provisions, something ICTU has been campaigning on for years; amending the Companies Acts to ensure companies continue contributing to occupational schemes which are in deficit, rather than paying dividends to shareholders; and greater regulation to ensure private pension funds limit their riskier activities.

Taken as a whole, this would revolutionise both pension coverage and living standards in old age. Of course, the standard reply will be ‘it’s too costly‘, especially now that resources are limited. However, this argument fails not only to appreciate the amount of public subsidy that already goes on private pensions; it fails to calculate the real returns to individuals and society of an elderly population provided with an income for comfortable and independent lives.

The Commission on Taxation shows the scale of gross costs to the public purse from subsidies to private pensions – nearly €3 billion. Within this mix of tax reliefs a programme of reform could shake loose a considerable amount of resources (e.g. standard-rating pension contributions, reduction of contributions ceilings, taxation of lump-sum payments, etc.).

For instance, TASC calculates that increasing the social welfare pension to 40 percent of the average industrial wage would cost less than half the tax reliefs in operation.

In addition, TASC proposes new social insurance levy to pay for the earnings-related element. This would comprise equal contributions into a social insurance fund from the employer, the employee and the state, along with contributions from the self-employed.

But there is also much analysis on the cost reductions arising from proper income and social provision for the elderly. In short, the poorer you are, the more likely you are to be ill – which is a cost to the state. Maeve-Ann Wren noted that universal provision of medical cards coincided with an increase in the health status among the elderly. So, yes, providing medical cards is a cost to the state – but there is also a savings in reduced GP and hospital visits, are reduced medicine costs. And with the elderly living more comfortable and independent lives, their ability to continue to contributing to society in the form of social capital increases. This is a contrast to, at times, the unstated assumptions that the elderly are a ‘cost’ to be minimised.

The critique of the inadequacy of the private pension system is compelling. A policy framework is in place. The next step is to now provide an economic model for the implementation of this programme – one that assesses the costs to individual, employers, the Exchequer and the economy. This is not as easy as it sounds – especially given that one is dealing with demographic trends that are never easy to predict. However, this is work is necessary if people are to be convinced that, whatever about the undoubted social virtues of TASC’s programme, it is economically feasible.

If this can be done, then the argument for uncertainty removal becomes irresistible. For who could argue against a small levy on income (2%, 3%) to pay for a guaranteed income in old age? No more poring over leaflets from pension funds, no more examining the state of the equities market in the hope that your pension fund manager is making the right choice, no more worry about setting aside money you can’t afford (you’re doing that already by paying the new levy). In other words, one more worry gone.

Which means that our country and western singer can focus on other things – like feeding Rover and bailing out his sister and bringing his mother home; and maybe even starting to date again.

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