Emptying the Pension Pot of Gold
Ireland taps retirement benefits to deal with debt.
June 15, 2011
Debt crises have a funny way of upsetting settled arrangements. They go beyond simple austerity – cuts in social programs, public sector layoffs, even sales of state assets as well as higher taxes on individuals and businesses. Canada has lived through that. And Canadians remember the hard lessons of the 1990s, when the country hit a debt wall – of sorts.
But Canada had room to manoeuvre. When austerity really licks, it can have a tremendous kick, touching sacrosanct entitlements, the most sacrosanct of all being pensions and other benefits for retirees. Take Ireland.
Ireland is facing a deficit of 11.6% of GDP which, to meet its IMF/EU/ECB bailout conditions, it must bring down to 3% by 2014. There has been a massive fall off in capital taxes, which have dropped by two-thirds, with the result: “While taxation is now back at 2003 levels, current expenditure by Government Departments and Offices (known as voted expenditure) in 2009 is about 70 per cent above the level it was in that year.”
Indeed, revenues fell from €47.5 billion euros in 2007 to €31.5 billion euros at the end of 2010 – a drop of 35%. Yet, to meet the 2014 deficit target, Ireland needs to find or save €15 billion euros – double what it was a year ago. What has worsened the situation is the balance sheets of the banks the Irish government took over. So while the gap between revenues and expenditures is 11.6% of GDP, once the bank debts are incorporated, it balloons to 31.9%. (By contrast, Canada’s federal deficit is about 2% of GDP, and the total government deficit is somewhat more than double if provincial deficits are added in, for a total of 5%.)
Few in Ireland have been spared by austerity. VAT has been raised to 21%. There are new income tax levies, ranging from 2% to 6% of income, plus higher rates for PRSI – a social security levy. Mortgage relief has been limited to the first seven years of the mortgage, and more tax expenditures are under the gun.
But what’s interesting here is changes on the pension front, public and private-sector, affecting income thresholds, tax deductibility of contributions and the tax status of retirement assets.
Says Towers Watson: “We believe that these changes are ill-considered and they bring the Irish pensions taxation regime to extremes not seen in other jurisdictions.”
First, at the beginning of the austerity period, in 2009, public sector employees in effect took an average 7.5% pay cut, as the Irish government introduced a pension levy.
Next, in 2011, Ireland reduced the pension contribution deduction. The pension deduction originally applied before social service levies. Now deductible income is subject to those levies. Effectively, it’s a 8% tax increase on the low end, 13% on the high end, suggests Towers Watson. It also halved the employer deduction for pension contributions against social services levies.
That’s on top of a reduction of the income threshold for pensionable earnings. Previously it was €275,000. It has since been rolled back to €150,000 and now €115,500. Deductions are graduated by age, starting at 5% for a young worker, and ending at 40% of pensionable salary for a 60-year-old. That 40% deduction is scheduled to fall to 20%.
There have been other measures. The public sector is moving from final pay to career-average earnings for pension entitlements. Those already receiving public service pensions are slated to see an average 4% decrease in their payments, except for those pensions less than €12,000. Those public servants subject to the 7.5% pension levy will be spared..
And in the private sector, Eire is levying a 0.6% tax on pension assets for the next four years. That’s to promote jobs, it says, since Irish pension managers have significant investments abroad. The average Irish pension fund has an annualized 10-year return of just 1.7%.
There’s an old saying that, when the water hole begins to dry up, the animals look at each other differently. Austerity seems to be proving to be a similar experience, with pensions diverted to provide new supplies of water.