Brendan Keenan: Getting pensions right for posterity
Do the sums: less money must mean smaller pensions -- but the capital cost of public sector pensions is still rising and has now topped the €130bn mark
IN these desperate times, there is not much we can do for posterity. But we might do what we can not to make things worse than they need be.
There is much lamenting over the level of debt that we will bequeath to our children and grandchildren. But debt is a slippery concept. Inflation and growth reduce the real burden. It is possible -- many say probable -- that some of it will be defaulted upon. Depriving posterity of its savings may be more harmful in the end.
The younger generation has already lost the National Pension Reserve Fund. This was raided to recapitalise the banks -- and most of it will probably never be seen again.
It is a fascinating conjecture as to what would have happened to policy had the fund not existed. All the money for new bank capital would have had to be borrowed. It is certainly plausible that the last government would have looked at that prospect and decided that a full State rescue of the stricken banks was a non-runner. History would be different.
But the fund was there, and it was used. The borrowing was postponed; until the day, 20 years at least from now, when it should have been used to pay for State pensions.
Less money must, in the end, mean less generous pensions. The most recent figure for the capital cost of existing public sector pensions is €130bn.
That is twice the most pessimistic estimate of banking losses. It is not paid out in quite the same way, but nevertheless, the cost is equivalent to servicing borrowings of the same order of magnitude.
Had the National Pension Reserve Fund survived and its investments prospered, it might have been worth €100bn in 25 years' time, and gone a long way to meeting that cost. It has not survived, and something else will have to give.
The coalition parties, in their election manifestos, hit a figure. The idea -- and it was little more than an idea -- was that there should be taxpayer support only up to the point which delivered a pension of €60,000 a year.
This caused consternation among those looking forward to a pension worth more than that. Until recently, they could get tax relief on pension savings up to €5.4m, which would provide a pension of €270,000 a year, using the public sector valuation.
If it is to be limited to €60,000, relief would apply only for savings up to €1.2m. More consternation.
Yet this is a good way to think about tax relief on pensions. It is not the responsibility of ordinary taxpayers (and they are now more ordinary than at any time since the mid-1990s) to help pay for pensions of €110,000 -- which is the present tax-assisted limit.
The taxpayer should be doing two things. One is helping people to maintain a decent standard of living after they retire. A maximum figure of €60,000 per annum looks reasonable for that purpose.
The other is trying to ensure that pension entitlements do not land an impossible burden on future taxpayers. Under the present arrangements, that will happen. Recent changes to pension rules have made things worse, not better.
These changes are not enough to make the public sector pension system affordable in the future. The move to average career earnings, instead of retirement salary, will help, as will a move to inflation rather than pay-linked pensions -- but, in the end, government workers will have to save more from their pay, and receive less from taxpayers.
In the private sector, a larger long-term burden seems to be in the making. There is little doubt that the planned reductions in tax relief make it practically pointless for most private sector workers to save in a pension scheme. Even if they still want to, most will find their employers' contributions shrinking to negligible proportions, so that it becomes impossible for them to acquire anything more than a token pension on retirement.
They face less tax relief on their savings, and more taxation on the pension pot, even for pensions worth much less than €60,000 a year. Even in opposition, Fine Gael sneaked in a harmless sounding 0.5 per cent levy on private pensions, which, actuaries say, will actually have a pretty drastic effect.
All of this is to help reduce the deficit -- and that's a job which has to be done. But there appeared to be little or no attempt to fit the changes into the other government objective -- on which much work had been done; persuading people to make more provision for their retirement.
It may be said we do not want more saving now: we need people to go out and spend. I am not sure that is how people will respond to greater uncertainty about their old age. I'm certain posterity won't like it.
Sunday Indo Business