For tomorrow’s Farmers Journal:
The government announced a package of measures, described as a jobs initiative, on Tuesday. There is to be a reduction in the VAT rate for tourism-related spending and the travel tax is to end. Both measures should help a recovery in this important sector. There are also to be some modest capital spending allocations for schools, road-works and home insulation. Employers’ PRSI is to be cut for low-paid employments.
These measures will be offset by a sharp increase in the minimum wage. In the United Kingdom, the minimum wage is £5.93 per hour, which translates to €6.74 at today’s exchange rate. The Irish minimum wage is currently €7.65, well ahead of the UK figure. The unemployment rate in the UK is only about half the Irish level, but the Irish government, while acknowledging the need to restore competitiveness, has decided to increase the minimum wage to €8.65, bringing the premium over the UK to no less than 28%.
The other eye-catching wheeze is a levy of 0.6% per annum on the capital amounts saved in pension funds. The retirement incomes of workers in the private and commercial semi-state sectors are paid out of the assets contributed over the years to occupational pension funds. Many of these funds are inadequate due to improving life expectancy and the weak investment returns of the last decade. As a result both employers and employees are facing higher contributions in future as well as reduced benefits. Those with the foresight to choose employment in the public service are exempt from the new levy, since the public service does not bother to fund its pension obligations. The Minister for Finance, Michael Noonan, looked a bit uncomfortable while explaining this measure on television on Tuesday evening. His justifications included an argument to the effect that much pension fund saving is invested abroad, and that his plan will see these funds ‘brought home to invest in jobs.’ Sadly some pension funds were foolish enough to invest in Ireland, in safe Irish banks and even safer Irish government bonds for example, and are nursing the biggest losses for their pains. But they will have to fork out the levy regardless, since it applies to all funded pension schemes.
Money accumulated in private sector pension funds belongs to the people who have saved it up, and is capital rather than income. The funds are trapped given the trust law and this makes the assets a sitting duck for a cash-starved government. In October 2008, the government of Argentina, unable to borrow in the international markets, simply expropriated $29 billion of assets from private retirement accounts to plug a budget gap. One wonders if Mr. Noonan’s advisers have been studying any other elements of Argentinean policy, which also features an export tax on agricultural produce.
Around 520,000 people own the €80 billion in these funds, an average of about €154,000 per person. The levy will cost them about €920 per annum on average. About 330,000 employees have entitlements under public service pension arrangements. These schemes are unfunded and thus have no taxable assets, but the total liability has been estimated by the Comptroller and Auditor-General at €108 billion. It follows that the average sum standing to each member in these unfunded schemes is about €327,000, more than double the amount standing, on average, to those in funded schemes and liable for Mr. Noonan’s levy. The jobs initiative is being funded, in effect, not by those who are fortunate enough to have occupational pensions, but by those who have small occupational pensions. Those with the bigger pensions, public servants in the main, will not be contributing. Interestingly, since the new levy is a levy on assets, it will affect disproportionately the older members of the private sector workforce who have more substantial funds already saved. Younger workers can relax: they have too little in the way of retirements savings at risk.
It is of course true that tax concessions for private sector pensions were excessive for those on super-duper incomes, and there have been sensible reforms over the last few years designed to place a cap on these tax breaks. Some people were able to duck tax and accumulate multi-million pension pots while managing the banking system into spectacular insolvency. Others have retired from their labours in the vineyard of public service with enormous pensions to which they never had to contribute. But the sins of these fortunate folk are now being visited on the workers in the private and semi-state sectors prudent enough to have made funded retirement income provision. In March of last year, the government released a document on pensions policy which expressed alarm at the condition of private sector funded pension schemes, including the inadequate level of contributions and limited coverage. The new government has sent a clear signal that it is content to see these problems get worse.