Eilis Quinlan of ISME has been at it again. On the Last Word on Today FM this evening, she again said that it was a mistake to say the public sector pension levy was a pay cut. The key argument she produced as to why the reduction in net take home pay related to the levy was a pension contribution rather than a pay cut was that it was tax deductible, just like other pension contributions.
Let’s think about this for a second. Consider a worker on €50,000 facing a 20% marginal tax rate. Now the government introduces a pension levy that see her gross pay reduce by €3,000. The pension levy isn’t taxed, so the worker now has a taxable income of €47,000. Consider the alternative in which her pay is cut by €3,000. In this case, the worker also has taxable income of €47,000.
So, in either case, whether it’s a pay cut or a “tax deductible” pension contribution, the worker has the same level of taxable income—the pension levy may be tax deductible but the government also can’t tax salary that a worker hasn’t been paid.
In other words, from the point of view of the worker’s take-home pay, the pension levy is identical to a pay cut. Now, of course, there are reasons why various tax breaks exist to encourage people to make pension contributions: The government wants to encourage people to put additional money aside to build up their pension entitlements. But, of course, the payment of the “pension levy” doesn’t add a cent to public sector worker’s pension entitlements.
To recap, the fact that the pension levy was tax deductible doesn’t make it different from a pay cut. It makes it exactly like a pay cut. And the fact that it doesn’t add to pension entitlements means that it has all the features of a pay cut and none of the features of a pension contribution.
To be honest, I don’t see how it serves the interests of the hard-pressed small and medium-sized businesses of Ireland to have the Chairman of their representative organisation continually making provative and misleading statements that only serve to upset thousands of public sector workers that have experienced very significant losses in take-home pay.
52 replies on “Tax Deductibility of the Pension Levy”
“To be honest, I don’t see how it serves the interests of the hard-pressed small and medium businesses of Ireland to have the Chairman of their representative organisation continually making provative and misleading statements that only serve to upset thousands of public sector workers that have experienced very significant losses in take-home pay.”
Agreed. I think we should also be clear about just how few businesses IBEC and ISME represent.
@ Karl
Good point. Small error perhaps though – “from the point of view of the worker’s take-home pay, the pension levy is identical to a tax cut.” Pay cut?
@Marcus
Ahh tax cuts, remember them? Thanks — error fixed.
@ Karl,
I have also seen & heard the same thing.
Of course it’s a pay-cut. If your employer led you to believe that a non-contributory pension scheme was part of the conditions of your employment and then arbitrarily decided he was going to deduct 7% of your gross to fund the pension scheme it is a 7% reduction in your gross.
Of course an employer in the private sector could not do that without negotiation or labour court challenge.
But worse, if an employer in the private sector, after negotiation, took 7% of your gross and “trousered” the money (did not invest it in a fund) he would go to jail.
The government are using salami tactics against the PS.
Pension Levy, Income Levy, Direct Pay Cut. And the coup de grace increases in income tax at the next budget.
The protection of existing PS pensions is becoming a fetish for Fianna Fail.
Eilis Quinlan seems to me to relish in her attacks on the PS and welfare recipients. Reductions may be necessary in order to correct fiscal imbalance but for the sake of her membership I think she might consider a different tone. Perhaps she has a political career in mind.
@Karl Whelan
I can’t remember the last time I heard ISME or IBEC vocally denouncing the conduct of FF/developers/bankers. I guess they approve of it. I also don’t remember them stridently demanding that commercial leases be reformed before NAMA has finished its valuations – I guess they approve of that too. We can also assume they approve of the government spending billions keeping property prices high and giving billions to bank investors and developers. I haven’t heard anything approaching outrage from them about the government not cutting the other €3Bn in pork identified in the McCarthy report – I guess they’re happy with THAT sort of government spending. Finally, I don’t believe they have ever vigourously urged the breaking of private cartels and monopolies – I would guess they approve of those, so long as some of the beneficiaries are SMEs.
I would like to officially tag my post as, “ISME, Chutzpah”.
@ Karl
As a small business owner not represented by these organisations, thank god, I wonder just how getting involved in a slagging match with Public Sector unions furthers their cause.
They would be better off sticking their neck out and tackling the real reason we have high costs in this country and the real reasons we are so expensive/uncompetitive when compared to other economies.
The high minimum wage and Energy costs are the two most critical components in the cost of running a competitive small/medium bisiness.
It is the minimum wage that sets the rate of pay at all levels not the top rate.
It is about time people put their heads above the parapet and stated this obvious fact.
I know it is politically sensitive but if it was approached in a fair and equitable manner it could be achieved and it would save jobs and businesses.
If some sort of mechanism could be put in place between Govt. Banks and mortgage holder to reduce this burden along with reductions across the board in Energy, Public Transport, Hospital visit costs, it would rebalance the costs across the economy and make wage reductions more tolerable.
Otherwise according to the unions there won,t be an economy to rebalance.
In fact, Karl, the pension levy reduces net income by _more_ than a pay cut would have. This is because if pay is cut, both taxes and PRSI contributions fall; if you increase your pension contribution, your tax liability falls, but your PRSI liability is payable on all income, so doesn’t.
I’ve seen people claiming that public sector workers preferred the pension levy to a pay cut of the same percent because the former doesn’t reduce the eventual size of the pension. This is rubbish – at least for someone as youthful and with as high a discount rate as me; give me a pay cut any day (it would also cut out the Quinlan-type commentary).
Of course it’s a pay cut. I’m not entitled to a pension (temporary contract), but still pay the levy. How else can I look at it?
Aedin Doris is right: it is a levy. The unions were still walking over the government when it was introduced – a pay cut would have hit pensions immediately, so they didn’t allow it. They also figured a levy would be easier to reverse.
@ Graham Williams
Did you read Aedin’s comment in full?
The PS union leaders and the government conspired against the younger PS workers.
Karl –
“But, of course, the payment of the “pension levy” doesn’t add a cent to public sector worker’s pension entitlements.”
Except, relative to an actual pay cut, it does.
It strikes me as similar to the arangement common in DBC pensions in the private sector whereby the pension is funded (by a given percent per month, by the employer) once a set contribution is made by the employee.
@Andrew
You can’t possibly be paying the pensions levy as I have it on the authority of no less a personage than the notorious and ubiquitous Proposition Joe that the law exempts those who have no pension entitlements.
Unless Proposition Joe has made some kind of error. . . But if that were to happen, surely his views on the justice of the pensions levy would have to be modified.
Oh the thought is too horrible to contemplate!
Eilis Quinlan has got quite a ways to go in terms of chutzpah to match the IBEC assertion that the Irish public should be discouraged from travelling over the border for cheaper goods – in order to reduce their carbon footprint(!).
Globalisation – for the rich only, it appears.
@Andrew, in the same boat as you paying the pension levy without a pension. Additionally, we pay the levy on all additional income – which if I was on the pension scheme wouldn’t wouldn’t increase the value of my pension. Been hearing a lot about marginal tax rates of high earners in the private sector of 50-52% as a disincentive – with the pension levy mine is 61%.
How can the pension levy be classed as a pay cut? Last year I decided to put some AVC into my pension due to a deficit from working in small private sector companies that don’t pay pension contributions. I didn’t look at it from the perspective of getting a pay cut – only form the reality of having to pay for my pension. It’s just now that the public sector have been shown this same light.
Logic at odds with stated government policy?
They will tell you otherwise! Dishonesty in small things leads to dishonesty in all things! The PS deserve the reductions as they could have had their unions address all of the dishonesty in government. But they have a conflict of interest as the backlash would affect their interests.
So they all suffer for failing to sort out matters such as a collusion between govt and developers, banks and those who receive monopoly licences! ISME are clearly gombeen men and wish to help take some pressure off of the government in this and all other matters. Why? Because they have “access” to the government.
This is another reason why I exhort privatization of public services. The newspapers will be full of leaks!
Fair play Karl for correcting the statement by Eilis Quinlan of ISME.
I view her statement as deliberately putting the boot into public servants just as they have had pay further reduced by the government….
I believe cuts are necessary, but honesty is also necessary.
Careful! It could turn into a full time job though 🙂 correcting the misleading and downright false statements of the various pillars of society here…. And if you don’t correct them all, you’ll probably be branded as something or other!
@ Aedin
Your quite right that the pensions levy is basically a pay cut for someone as young as you. But for someone close to retirement, it is very much preferable to a pay cut.
The whole debate about “is it or isn’t it a pay cut” can never be finished because there is no one answer. The levy was a clever way to cut salaries while sparing pensions. It’s like that story about the two blind men trying to describe an elephant, one by feeling the tail and one by feeling the trunk. They get very different answers and they are both right from a certain perspective. (Pay cut for the young, pension contribution for the old.) Don’t expect either Govt or unions to ever acknowledge this though.
I am sick of listening to PS workers bleating on about the 7% pension levy.
As I understand it
i) tax relief was given on the levy (remember Dermot Ahern stumbling and stuttering when asked that question on RTE, he was unsure of the answer at the time) so its a net cut of say 3/4%, and
ii) pensionable pay was not cut at the time so the levy had no impact on final pensionable salary (an important concession I would say)
I would agree however that it was a blunt instrument at the time and PS workers who would have no entitlement to pension should not have been hit by it
While I on the subject its about time the link between PS pensions and the pay of a person on a particular grade at a point in time was severed once and for all
@ Andrew
I know of many public servants on contracts who are entitled to pensions. If you are salaried (ie full-time temporary, not working on an occasional basis) then I think you should be entitled to join a pension scheme. Speak to your personnel manager and mention the Fixed Term Workers Act. If you join the pension scheme that will cost you about another 5% of your pay though.
But your point is valid. I know of some people working for public bodies on an occasional basis who are paying the levy. I don’t know for sure if this is an error on their employer’s part or the legislation really does require them to pay it despite having no pension entitlements.
@ casimir
I think it is a pay cut plain and simple. See my comment above re terms and conditions of employment.
The money is not being invested in a fund. It is being used to meet current pension liabilities.
Greg –
It’s certainly a drop in income, there’s no doubt about that.
The average private sector worker, with no pension provision, would need to take a ‘pay cut’ of more than 30% (taking into AVC upper limits) to match the pension provisions of public sector workers.
Anyone paying the levy without recieving a pension is being unfairly taxed, and should be entitled to refund including interest and penalty charges!
@TOD
Ah yes, I’m sure public sector workers are very grateful for the tax relief on their pension levy payments. That makes it so different from a pay cut ….
@ Paul
“How can the pension levy be classed as a pay cut? Last year I decided to put some AVC into my pension due to a deficit from working in small private sector companies that don’t pay pension contributions. I didn’t look at it from the perspective of getting a pay cut – only form the reality of having to pay for my pension. It’s just now that the public sector have been shown this same light.”
Ask yourself two questions:
1. Did your AVC contribution increase the final value of the pension you are going to get?
2. Will public sector workers get any increase in their pension entitlements because they are contributing this “levy”?
The answer to 1. is “Yes” and to 2. is “No”.
I used to get the bus to work for free, it was just part of my entitlement, the other people on the bus had to pay to ride it, but not me. We all arrived via the same mode of transport to the same destination and I didn’t feel bad because nor did the others (necessarily) because that is just how the system worked.
But then there wasn’t enough money to let people ride the bus for free and I kicked off a storm about having to pay for the right to ride the bus, I don’t mention the fact that I am receiving transport, nor do I make a case toward the position of everybody else on the bus, I only consider the value in reference to myself, and specifically to the fact that in the past I rode the bus for free.
Charging me to ride the bus is an affront, it is unfair, you are essentially cutting my income by making me pay for a service I receive.
I think the elephant in the room is the government’s ability to honour its pension commitments. I am relatively young, working in a university and I really doubt that the government will be able to pay the pension it is promising me now in 30 years time. It is far more likely to bankrupt itself paying huge pensions to currently retired PS workers who contributed far less to their pensions than the government is asking me to contribute now. So I pay in way more and I get far less in return. Sounds fair and just to me.
@ karl deeter
“I used to get the bus to work for free”
Was your free ride part of the terms and conditions of your employment?
Did your employer unilaterally change your terms and conditions?
You should get yourself a good lawyer.
Seriously Karl — the point of the post is that the pension levy was a pay cut. Nothing I wrote here, nor in most of the comments as far as I can see, was about the pay cuts being an affront or unfair.
And fyi to all — words that would upset your mother-in-law will be deleted.
@ Karl
you’re right that it is pretty much the same as a pay cut (with the obvious exception of it not impacting on their pensions), but i think the problem is how most people view a “pay cut”.
If you tell 100 people they are taking a pay cut of 7.5% for the pension levy, most of them (probably 95 of the 100) immediately think they have 7.5% less money to spend. Because of the tax system, for most people (except those paying nothing at the marginal rate) this obviously isn’t the case. They in fact have around 4.4% less to spend. Obviously a 4.4% take-home-pay cut sounds a bit less severe than a 7.5% gross pay cut. Likewise, this weeks paycut has only reduced most people’s take-home pay by around half of the headline “cut”.
@karl deeter:
Your logic is faulty.
1. When you took the job, (presumably with Dublin Bus) you knew that a free ride on the bus was part of the perks so you would have calculated that in when considering whether to take this job or another one which may have paid more but required you to pay your bus fare.
2. You are not being asked to pay for the bus ride, it is being deducted automatically from your paycheck by your employer so it is a pay cut.
3. All of your co-workers including those who walk to work have to pay this imputed bus fare.
So it is a paycut.
@ Karl
whilst a pay cut it was never a 7% pay cut and for a year at least it had no impact on pensionable pay or service
So when I joined my employer’s DC scheme by means of a tax-free contribution at 20% of my gross salary, I was actually taking a pay cut? I wish someone had told me that. Was social partnership benchmarked against post-pension-contribution private sector salaries? I didn’t think so.
I’m not being thick here. That 7% pension levy becomes part of the current spending which actually pays public sector pensions. That’s a contribution, not a cut. They get something for it – and it’s a hell of a lot better than what I’ll get from my much larger private pension contributions. Moreover, when my employer cuts my salary, that’s it. It’s just gone. And my pension contributions fall with it, leaving me with even less money when I retire. There is simply no honest equivalence between the pension levy and a real pay cut.
@ Eoin\TOD
I really don’t get it guys.
When people talk about pay cuts, they always mean a cut in gross pay. Always.
Of course, because we have a progressive rather than flat income tax system, this means that when your income is cut by x% your take-home pay falls by less.
But it’s still a 7.5% pay cut by the normal understanding of the phrase “pay cut”.
And this point applies whether you pay is being adjusted via a straight cut or tax-deductible pension levy.
It seems that people just don’t want to understand this point because it’s really not so hard.
@Karl
no need for the patronising tone at the end
funny though the government did not give me a tax write off for the pay cut I took earlier this year
@ Jon
“That 7% pension levy becomes part of the current spending which actually pays public sector pensions. That’s a contribution, not a cut.”
Let me repeat:
Will public sector workers get any increase in their pension entitlements because they are contributing this “levy”? The answer is No.
If your employer takes something away from you without giving anything in return, this is a cut.
But look, you’re a smart guy so you do actually understand this. But rather than admit the truth, you’d prefer to come up with a formulation of words that legitimises the Eilis Quinlans of the world to continue going around spouting misleading rubbish.
@ TOD
Yes, the government did give you a tax write-off for the pay cut you took! Are you really claiming that the government is now taxing you on income you didn’t earn?
If they could do that, the budget deficit could be sorted in seconds.
But yes, sorry for the patronising tone. Obviously, it’s harder than I thought for people to understand that governments don’t keep taxing people at their higher salary rate after they’ve had a pay cut.
@ Karl
im agreeing with you that its a pay cut. Im just saying the headline “7.5% cut” (whether in the public or private sector) always sounds worse than the reality. If i went to a 4-day week, i wouldn’t see a 20% cut in my spending power. I get that. A lot of people don’t.
@ Eoin
Fair enough. But to be clear, there was nothing special about the “tax deductibility” of the pension levy pay cut. That just made it exactly like any other pay cut.
@TOD
Go check your pay cheque before and after the pay cut because you would have received tax relief on it!! Unless you are paying tax based on your old salary!
@ Karl
“That just made it exactly like any other pay cut.”
Actually, to be fully clear, didn’t it make it worse than other pay cuts, in that you can only deduct 41% off the pension levy, but the full 50% or so (ie paye+prsi+income levy+medical levy) off a pay cut? (or am i wrong with that?)
@ Karl
there is a big difference between
i) PS-starting with gross income then deducting the 7% Pension Levy which is a contribution towards something you will get in the future i.e your pension
and
ii) private sector taking a pay cut of 7% off the top line and lowering your pensionable salary full stop
the difficulty I have is with the public sector unions who have portrayed the 7% pay cut as a net pay cut of 7%
@ Karl
Point made and taken, obviously some people don’t understand that the less you earn the less you pay in income taxation etc.
One could be optimistic and say well my tax bill has been reduced now that I earn less money etc.
However I was under the assumption that pensioners whose pension is index linked to a existing occupation also have their pension reduced in a proportional amount.
As for “formulation of words that legitimises the Eilis Quinlans of the world to continue going around spouting misleading rubbish.”
Unfortunately Eilis Quinlan is not the only one. Politicians do it all the time, media presenters in TV and Radio also like to act as Judge, Jury, kangaroo court and excutioner all in one. It is all down to how well researched the topic is and if the person has a reasonable, open mind and able to see the bigger picture. Understanding symptoms is one thing, understanding the cause is another.
We should be encouraging people who value the truth, but unfortunately Ireland is a country (like the rest of the W.World) which has little or no value on honesty.
@dreaded estate
I understand the concept.
Though I would not use the phrase “tax relief”
As I understand it tax relief means
export sales relief, manufacturing relief, patent income relief, urban renewal relief etc etc tec
of course ers and manu relief are long gone
Karl
“1. Did your AVC contribution increase the final value of the pension you are going to get?
2. Will public sector workers get any increase in their pension entitlements because they are contributing this “levy”?
The answer to 1. is “Yes” and to 2. is “No”.
”
From the reverse angle – If DBB pensions were discontinued in the PS, would PS workers still have to pay the pension levy?
@ Karl Whelan
“And fyi to all — words that would upset your mother-in-law will be deleted.”
You haven’t met my mother-in-law then. 😯
@karl w: this ‘pay cut’ is actually only part payment for the power of the benefit received, in every report from CSO to ESRI there is a premium in public sector employment WITHOUT the consideration of security of tenure and pension entitlement!
To provide a cop with a pension would cost a comparably waged person in the private sector c. €1,000,000 – that means the public sector have a super pension, before we even get into the guaranteed nature of it!
“the issue isn’t do they get extra pension for what they now have to accept” – the issue is actually paying for what is received, it is the foundation of fairness, while you didn’t say it was specifically ‘unfair’ you have instead raised the point that it is a ‘pay cut without additional benefit’ but that isn’t the point, rather it is a remedy in order to right a wrong.
why don’t you do the actual maths and stop focusing on take home pay being a cut or not, that is an aside, its semantics, you can’t drive a ferrari on a skoda budget but that is exactly what seems to happen in Ireland.
btw: you didn’t have to remove my minor explecitive (which for the curious is mentioned often with the line ‘they killed kenny!’) for the benefit of my mother in law… she refers to me using that term all the time! 🙂
@Garo: your logic is faulty – because the value of my bus ride, while perhaps factored into my decision to work in my job, has been over supplemented by the raises I got in the last decade, and in no comparison to the fare paying passengers has this benefit ever been factored into the value or worth of my job. So really, I just want to ride the bus for free, I am paid better than other people who have to pay for the same thing.
@greg: i have a better idea, why don’t we strike and bring the country to its knees?
@Karl D
“while you didn’t say it was specifically ‘unfair’ you have instead raised the point that it is a ‘pay cut without additional benefit’ but that isn’t the point.”
But Karl that is exactly “the point” I was making in this post, the only point in fact. You want to make a different point about public-private sector pay differentials which is fair enough, though we’ve had plenty of discussion of this here and elsewhere. And every time it came up over the last year, my position was that cutting public sector pay had to be part of the fiscal adjustment.
But tell me, how is public discussion of our fiscal problems improved by pretending a pay cut isn’t a pay cut? Or a “pay cut” as you’d call it.
The answer seems to me that pretending the first cut wasn’t a pay cut strengthens the rhetorical position of those who want to campaign for more public sector pay cuts, as I assume you do.
Sorry to hear about your mother in law, btw. She sounds mean. 😉
Another issue to bear in mind is that annual increments were paid last year (these would be called pay rises in the private sector) and will most likely also be paid next year. Also AFAIK the current pay cut will not apply to allowances for having degrees and the like, this year.
The drop in income last year was somewhat mitigated, in fact for third level the CSO stats would suggest an increase in the aggregate!
@karl w: my mother in law isn’t mean, sadly, she is an excellent judge of character! 🙂
Anyway “But tell me, how is public discussion of our fiscal problems improved by pretending a pay cut isn’t a pay cut? Or a “pay cut” as you’d call it.” the wording is rather insignificant in my opinion, it is the action that matters, the wording is semantics. Fiscal problems aren’t addressed with labelling issues as ‘pay cut’, ‘levy’, or otherwise, they are addressed with actions, and those taken are appropriate.
I don’t think that further pay cuts would make sense, accountability and performance measurement would be far better alternatives, but the unions don’t seem to want that – which leaves the bluntest of tools for fiscal reform…. more cuts, likely with the badly worded labels we have all come to know and distrust.
the pension levy is not tax deductible. However it is levied on gross income, so most workers will see a reduction in their level of taxation arising from the levy. Of course, this reduction will be greater for those well paid workers who pay a higher rate of tax.
@ Karl W
Well, thanks for the compliment!
A lot of commentary in the print media is tendentious and, particularly on the airwaves, intended to persuade by stroking prejudices rather than offering genuine information. The same can be said for some contributions to this website.
ISME is not credible and one can only presume their contributions are deliberately propagandist.
The issue of public service pay is one where assertions can be supported by selected statistics and much of what is argued extrapolates from particular cases to a generalised conclusion which is misleading. The extent of the PS premium, how much this was out of line with other comparable countries and how it affects different categories of PS employees is contestable. This is a very complex area and although the available evidence suggests a problem existed here in the recent past, it is not so definite to allow the certainty of conclusion that organisations like ISME put forward. But then they have an agenda.
Incidentally, listening to the radio since the budget it is striking that many commentators seemed unaware that the PS cuts would not be applied to CIE, the ESB etc. No doubt they will now be targeted.
One thing that very much needs to be said is that the PS cuts mark a profound change in the contract between the PS and the government as is marked by the threat of industrial action by the Gardai, surely a development that must concern all interested in the wellbeing of democracy. So much so that it will take some time before public servants can get their collective minds around the new paradigm. Strikes and working to rule are the weapons of the last era, just as the cavalry became redundant during WW1 because of new weaponry. The PS unions will probably take some time to react and it would be a mistake to confuse a lack of immediate turmoil with acceptance.
The outcome of the search by public servants for a new way of asserting real concerns might be sullen and long term trench warfare. Alternatively, perhaps some new weapon will emerge. It is not possible to predict just now what will happen other than to say that if a sense of fairness is not established, Ireland will loose out for sure.
A prosperous society needs quality public services, a lot of which are not as amenable to business management practices as many a businessmen imagines. We need reform of our public services for sure but this will come about best if a process of change is accepted by public servants. A confrontational approach supported by nostrums based on the selective use of contested statistics will make things more difficult.
What will exacerbate the situation is the kind of contribution to the discourse made by ISME to which Karl Whelan has wisely drawn our attention.