INTRODUCED BACK IN 2011, the pension levy was an extraordinary measure designed to tackle huge economic challenges that Ireland was facing. At the time, few people questioned the legality, or even the fairness, of the Government’s decision to effectively put their hands into private individuals’ savings accounts and take a chunk of it for their own purposes.
We no longer live in extraordinary times. The exchequer is taking in hundreds of millions of euro in extra taxes, the jobless rate is falling and a new survey published this week by Bord Fáilte shows that almost three-quarters of surveyed tourism businesses were upbeat about their 2014 performance. Unemployment and tourism were the intended beneficiaries of the levy, with the Minister for Finance claiming in the Dail that levying a charge on pension savers would help finance the Government’s jobs initiative scheme and would provide a much-needed reduction in VAT to boost the hospitality sector.
If the objectives have been met, why keep the levy?
These positive indicators show that if these were the intended uses for the levy, then the Government’s objectives have been met. Despite the fact that it was always intended as a temporary measure, the pension levy, or to be more accurate, levies – an additional 0.15% levy was introduced in last year’s budget – is set to endure, according to the Minister for Finance, who plans to include it as part of Budget 2015.
There appears to be no rationale or explanation for its continuation other than the fact that it is an easy income generator for the Government.
It is expected that by next year the levy will have raised over €2.3 billion for State coffers since its introduction. To put the size of the levy’s significance into perspective, it will earn the Government €700 million this year, which is about double what Irish Water will take in from water charges.
Unlike water charges, the Government is able to reach normal citizens’ savings and take nearly three quarters of a billion euro without any protest or fear of controversy in the media.
It sounds like an easy win for the Government, but the continuation of the levy places an extra burden on those who were prudent enough to provide for their own retirement.
No efforts to reform the pension sector
Figures released recently by IBEC suggest that on average, pension savers stand to lose €2,500 every year from the levy. This is an extra cost on private sector workers who have already paid tax on the money they put aside for their retirement – and who also now pay a property tax, water charges and have the USC deducted from their wages. Will this continue or will the Government end the levy in 2015?
Levying an extra charge on private sector workers’ pensions for an indefinite period will simply deter younger workers from opening an occupational scheme. At the same time, the Government has made no real serious effort to reform the pension sector. Last year, the OECD commissioned a report into the Irish pension sector, which I contributed to. One of its key recommendations contained in that report was the need for the introduction of a mandatory pension scheme for all Irish workers.
As the old age State pension will not be sustainable in years to come; unless we hike PRSI rates, it will be necessary to countenance a form of mandatory pensions. Unfortunately, the Government has not yet made any plans to do this and, instead, seems content to take the easy option of punishing private individuals who had the foresight to provide for their old age.
Samantha McConnell is chief investment officer with IFG Pensions.
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