The Pension Levy

“These measures will be offset by a sharp increase in the minimum wage.”

What increase? The measure, which was promised in the election program, merely restores the minimum wage!

Some people can’t resist the opportunity to snip away at those least well off.

Younger workers can relax: they have too little in the way of retirements savings at risk.

What follows will be the viewpoint of one such sprout.

It is of course true that tax concessions for private sector pensions were excessive for those on super-duper incomes,

I’m glad that this fact has been somewhat acknowledged at least. But I would go further than just “super-duper” salaries and lay the charge of excessive remuneration on a substantial section of the older generation in this country. To recycle a comment I made on another blog:

The Generation That Wrecked The Country consists of the people who have recently entered, or will shortly be entering retirement. ~60 year olds(those born in the post war years). Now, finally, after years of avoiding the repercussions of their feckless handling of the country, this generation will finally be expected pay up themselves. No more passing the buck to the generations below them, to whom they have bequeathed negative equity, unemployment and emigration. They will not now simply be riding away into the Mediterranean sunset, travel bags stuffed with handsome pensions.

There was a massive transfer of wealth over the last 20 years from the younger generation to the old, and it is right and proper that those who amassed such generous nest eggs on the back of that transfer, pay back what they owe to the rest of the country.

I’m not speaking solely about the decision makers or those on “super-duper” salaries. I’m talking about the rank and file of the upper middle class who backed the boom to the hilt in word, thought and deed for 15 years. I’m talking about those with no mortgages, in secure jobs, who have suffered no significant salary cuts, taxes, or job losses since this crises began. I’m talking about the people who are today driving new cars, still taking foreign holidays, and who still long for the return of the property boom; all the while still backing what is in effect _their_ bailout. _Their_ get out clause from the tax burden they have evaded almost their entire lives.

A mere 0.6% levy has raised €500 million. If it had been charged at the same rate as the USC, this levy would have raised over €5 billion–enough to pay for Bank of Ireland’s last recapitalisation. I think it should have been charged at such a rate, or something approaching it.

This may sound harsh to those with pensions who are approaching retirement, but these are the kind of hardships that are being faced by all below you. Those with jobs, property, businesses, shares, blind allowances, etc have lost this and more. Now finally, you are being asked to pay your share. And once we prise the senior civil servants off the treasury, we’ll finally all be in this together!

(Which is of course, around the time we’ll all decide to leave together.)

Those in the agriculture and agribusiness sectors in Ireland – or at least those who take the Farmers Journal – are blessed as they are receiving sufficient instruction to become the most economically literate segment of Irish society.

I suppose the key point here is political. The government had to do something – and be seen to do something – and every other door was shut. All more displacement activity whose costs are likely to out-weigh the benefits.

@ Paul Hunt

One door never shuts when another opens. Would not the cut in the EFSF interest rate fund the “jobs initiative”?

Did someone just do a little pee onto the FIRE? Awful lot of steam!

BpW

@ Ahura

how is it “retrospective”?

@Conor
The minimum wage is a relatively red herring in the context of restoring national competitiveness. The problem is at the other end of the spectrum as, based on the distribution of income, the impact of a ten percent reduction in earnings would be about ten times greater than any corresponding percent change to the NMW.

Your points about the pension fund levy are well made. If Irish funds are no longer untouchable, why do the bondholders of busted banks remain out of reach. Is it that we can hit Irish private sector funds because they are soft targets but not German, French bondholders or goldplated Irish public sector pensions?

OK, I know the answer – he who has the gold makes all the rules.

The minimum wage reduction announced in last December’s Budget only ever applied to new entrants. Anyone that had a job had the existing rate of €8.65 could not have that reduced.

The level of “churn” that occurs in this type of employment is quiet high but given that the minimum wage only applies to around 2% of the workforce, the €7.65 rate would have applied to a smaller proportion again.

The big problem, as was evident in the discourse over the past few months, are the wage rates that are linked to the minimum wage. I could never understand why it was not said that existing wage rates would be pegged to the minimum wage that existed when the rates were set while new entrants would have a rate pegged to the new minimum wage. New entrants to the public sector will earn 10% than exisiting staff.

The increase in the minimum wage to €8.65 will only apply to new employments. Existing employments have not been affected in this time. This maybe a “Jobs Initiative” but it is now more expensive to hire a new minimum wage worker than it was before. As per usual this is benefitical for those who get a job but not so great for the unseen who do not.

@DOCM,

The tight grip the Troika is exerting on the fiscals is highlighting the immediate costs and benefits – indeed it’s generating a form of hypothecation. Any relief provided by the Troika will have to go to fix the deficit. Remember Colm’s new ‘troika’: fix the deficit, fix the banks, get the cost base down.

The political optics are also important. It is likely this will hit far more FG supporters than Labour supporters. As I predicted before the election, the FG/Lab combo would only work if there were reciprocal swipes at their respective sacred cows. FG may have taken a hit on this one, but note that detailed assessment of the electricity and gas semi-states is coming up in quick order and plans to move on semi-state privatisation will have to be presented for consideration by the Troika before the end of the year. Given the grief Labour will get over this, I expect FG may have to suffer further swipes at some of its sacred cows to provide some ‘balance’.

If the combo holds together it could prove to be one of the most sado-masochistic political couplings ever seen.

What a fiasco this crisis is turning into

Where is the implementation of pay and condition reform in the public sector?

Why not seriously address this issue instead of moving against the assets of the prudent. And I think we can be sure that the current government will not do anything of substance in relation to public sector reform – even fine gael has no mandate to implement them, let alone labour!

There is so much heat generated about wages of those at the top of the public sector – but while there probably is issues there – I think I’m right in saying that the evidence suggests that compared to other countries and compared to the private sector the people at the top of the public sector are the least overpaid.

Moreover, the amount to be saved by reducing the pay of the lucky few is substantially less than the amount that can be saved by reducing pay and conditions for the broad mass of those who work in the public sector.

However, notwithstanding the above, media attention and the attention of many commentators focuses most of its attention on higher earners. But nothing will turn on implementing cuts here – save, perhaps, people’s willingness to take cuts lower down. (but most of this is heat; when people say why not cut the guys at the top, they are often really hoping that that will obviate the need to cut other peoples wages – but it won’t or at least not significantly so)

We have Brendan Walsh giving shocking statistics on youth unemployment and still few people seems to put the dots together.

Wages at the lower and middle end of the public sector, and conditions at the middle and lower end of the public sector, need to fall significantly.

It is simply unfair to have the current levels of unemployment – combined with a recruitment freeze in the public sector – while people who work in the public sector enjoy a very substantial wage premium over market rates and job security nonetheless.

Moreover, the State is facing bankruptcy.

Why are public sector workers paid more than their equivalents in the private sector or their direct equivalents in the UK? While I would accept that the state has obligations to its employees and that these obligations may go further than those of a private sector employer in some circumstances, paying the type of premium we see in the public sector is a form of systematic corruption, that more or less all of political parties buy into to suit their own political ends.

The sheer hypocrisy of some is remarkable – for instance when the amount lawyers were paid by the legal aid scheme were released last year Pat Rabbitte suggested that the amount paid out to lawyers was excessive. Whether or not this is true is not my point here. Instead I want to use this is as a comparison.

The top 100 criminal lawyers received on average of €100,000. Now there are also overheads involved but what I want to flag is that this is the TOP 100 – no mention by Pat of the average wage of criminal lawyers – in fact I would suggest that Pat doesn’t know what the average wage is – and Pat doesn’t care what the average wage is. I would suggest that the average wage is closer to €50,000 at best.

However, when questioned on why the AVERAGE wage at ESB is €80,00 and whether that was excessive Pat’s response is simply remarkable – he says the there is nothing necessarily wrong with ‘workers’ being paid well!

Now, I think its clear that these two positions are mutually inconsistent. The difference of course is that labour draws support disproportionately from public sector workers and favours tax and spend policies. I don’t necessarily have a problem with that.

But if you are a tax and spend leftie, surely you also have to be someone who is strictly in favour of cost and condition control in the public sector because the bigger the public sector the more inefficiency and costly will be overpayment.

But of course the labour party don’t take this view. They simply ignore public sector premiums and support the interests, not of the country as a whole nor do they support the general interest in fairness and good government. Instead they support the interest of those who work in the public sector so that they can be re elected.

It’s a farce

@ObsessiveMathsFreak: You say: “Why not charge a levy of 4-5%? What makes pensions so sacrosanct? I didn’t hear all this commotion about “grabs” and “looting” when the USC came in at 7%.”

The USC is based on income: the new levy on prnsion funds is based on Capital. Given a rate of return on capital of 5% (just an assumption, which might be slightly optimistic), a capital-based levy of 4 to 5% would equate to a tax of 80 to 100% on the returns. Rory O’Farrell has already pointed out a 0.6% tax on capital assets is equivalent to a much higher tax on investment income.

I would have thought that this was all to obvious a point to have to make on this blog. Get your Maths right!

@ObsessiveMathsFreak
Your conflating the USC with this new Levy.
The USC is a charge on the taxable income you earn. This levy is simply the expropriation of savings.
Or are you arguing that the government should have the right to simply take the savings of anyone in the is country when funding is needed.
That is the line that is being crossed as we are now in the situation where bondholders and public servants must be protected at all costs while those of us in the private sector must bear the costs of the fecklessness of others.

In General.
My main concerns with this proposal is that it sets a precedent going forward that we are willing to cross formally sacrocsant lines for what is essentially a very minor jobs budget.
This worries me greatly as the pressure on the exchequer is increasing and in my view is eventually going to lead to a soveringn default if we keep insisting on maintain our current standard of public sector pay and repaying the ECB. Unfortunately this action by the government indicates that before this stage is reached the private sector funds and savings will be raided to maintain the status quo.
Also this plan makes it more expensive to hire a new employee by increasing minimium wage even with the PRSI reduction. If the plan is increase SME employment then i cannot see this succeeding.

@ christy

I think an exclamation mark tax might raise a bit!!!

Think of it!!!!

€1 per exclamation mark!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

This time next year we’ll be millionaires!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

What is the role of the pensions board on this? Can anybody tell me that or are we putting our faith in god to help us?

@Rory O’Farrell

DIRT is a tax on interest! You don’t have to pay DIRT if you don’t make a gain. All I have is losses. That is why the state is going to tax my capital sum with this new tax.

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.

Oh we’re exempt from the pensions levy, are we? Hallelujah! Does that mean that I’ll no longer see a deduction on my pay slip labelled “Pensions Levy” and which takes upwards of 8% of my income?

Oh, and we don’t bother to fund our pension obligations? Then what, pray tell, is that “Pensions Levy” for? You mean to tell me it has nothing to do with pensions and was just a convenient label to sell the thing to the public? You mean it was a pay cut by another name?

It’s amazing how Orwellian all of this has become. We have always been at war with East Asia. Public Sector pay remains at pre-crash levels. Only the private sector pays a pensions levy. And down the memory hole it all goes.

I also note, once again, an economist making comparisons in the wage rates of different countries with tools no more sophisticated than a simple conversion (at current exchange rates) of the wage of one into the currency of the other, as if that were a meaningful comparison.

Seriously, do you guys get paid for this stuff?

@ Ernie

+1

@Brian Flanagan

I think the conclusion you’re drawing from those figures is unjustified.

I would say one way to look a th this issue could be to see how much would be saved by reducing the wages of public sector workers to their private sector or UK levels equivalents

If you take the view that high earners are overpaid in the UK and/or you don’t see a problem with wage compression between levels in the public sector then you could simply analyse how much could be saved by capping all wages in the public sector at 100,000 and then compare this to how much is saved by reducing people below that figure to the amount that they would be paid in the UK.

Either way, I would guess/estimate that the amount saved by bringing wages below 100,000 into line would dwarf the amount saved by bringing higher wages into.

There simply is not enough big earners in the public sector to make really substantial saving from gutting their wages.

I would also add that top earners are likely to be more able (perhaps still not a big problem – i don’t know) to find employment somewhere else (i.e private sector or abroad) at better wages (particularly if capped at 100,000) than people on lower incomes.

It will be interesting to see whether the Irish Times will use a slice of my pension fund’s capital to reduce its cover price from 1.90 to 1.82 when the new VAT rate kicks in or will simply use the proceeds to help meet its running costs.

@Rory

Someone once told me in relation to exclamation marks that if he was reading an email and he saw more than [pause] “none”, he was pretty sure that person was, “well, a moron”. Maybe i should stop using them…

@Ernie

Public sector workers are paid substantially more, enjoy better work conditions, and receive far better pensions than their private sector equivalents.

They may be annoyed about reductions in pay – were not talking about percentage changes – we’re talking about the level of pay and the level of pensions.

It would be great to have a calculation for what a public sector pension is worth in term of yearly pay. I’m sure its been done but having it to hand would be good. Then, when discussing pay in the public sector we could start to compare like with like by adding the figure for yearly pay to the figure for what the pension is worth and use that as the base line comparison whenever pay is discussed. People who didn’t use the adjusted figure would be the ones who needed to justify its exclusion as opposed to the other way round.

Also, public sector job advertisements should include the cost of the pension. Basic advertising should do this anyway – the fact that they don’t seems questionable

So we have an Irish Government raiding Irish citizens retirement savings accounts while protecting German citizens retirement savings accounts.

Could this move trigger a flight of deposits abroad?

@Hoganmahew.

I think a gombeen levy is an excellent idea and especially approppriate for ex ministers.

@Christy

My figures related to the entire workforce and not just the public sector. However, I dug out the following which may be of interest for “Public admin and defence”:

Number earning over €2k a week = 1,173
Aprox total annual payroll (based on average of €2500/wk) = €152 mn

Number earning under €250 a week = 5,386
Approx total annual payroll (based on average of €200/wk) = €56 mn

On this basis a 10% reduction in payroll costs would save €15.2 mn for the highest paid and only €5.6 mn for the (almost) five time numerous lowest paid.

If you think I’m singling out the public sector. I’m not – the distribution is much greater for the private sector where low paid workers are much more numerous.

@ROF

“So a tax (different percentage) on the capital or capital income stream are equivalent.”

There is a big difference between a tax on capital and a tax on capital income stream if you are nursing a large loss like many irish pensions!!!

“(I know there are also implications regarding income tax that you pay when the pension is paid out, but I that is largely offset by the original income tax relief)”

Hold your horses there! Firstly, if I pay tax now and don’t put it in a pension then I only pay tax on the income once rather than twice with the new levy.

I will have to pay CGT if I make a gain but that is only if I do make a gain. [b]More importanly,[/b] I have the full use of all my capital and all my gains to reinvest to make future gains rather than losing a bit each year. The mathematics of a yearly levy on capital rather than a lump sum charge on gains at the end is that you lose not only the amount paid but also the compounded annual income/gain on that amount.

Also importantly, I don’t have to pay a “[mis]management fee” to a pension fund manager if I pay my tax now.

@ Zhao

Suppose you are paying at the top rate now (none of my business if you are or not, but I’ll pretend you are for the sake of argument). With a pension fund, due to the reliefs you are likely to shift some of the income to a lower tax band (assuming you are not paying at the top rate when 65). There is also the benefit of discounting future tax flows.
Of course, you lose the flexibility of having to wait until you are a pensioner to access the money.

I think what is the better investment decision depends on people’s personal circumstances. But if this charge is only for 4 years, for most people a pension fund will still be highly tax efficient.

I’m not sure I understand you correctly, but are you saying you must pay capital gains tax in addition to the levy charge on a pension fund?

HELP–
I’ve just gotten feedback from a potential major investor based outside the EU that the proposed “retroactive legislation” could lead them to decide NOT TO INVEST in our company.

They said any government willing to enact retroactive legislation (clawback of previous funds; or making the new legislation effective as of 1 Jan. 2011) makes Ireland too risky a place to do business. If this law goes through, they could not trust that the government might enact other retroactive laws of any kind.

Their words: “This is very dangerous legislation”, and “This is unheard of.”

It’s not the specifics of the proposed pension legislation that are the main issue–it’s the principle of enacting something retroactive.

How can I rebut this concern?

@ OMF,

“The Generation That Wrecked The Country consists of the people who have recently entered, or will shortly be entering retirement. ~60 year olds(those born in the post war years).”:

I don’t see that you have provided any support for that statement- -assertion.

It seems to me the country was wrecked subsequent to 2002 and had much to do with the (culture of the) then elected govs. (which governed during the wrecking of the economy, when banks’ ‘foreign’ borrowing surged and was invested pretty much in consumption, and the permitting of which may have had much to do with “three in a row”). This would include a few more of the electorate than those over 60. Let’s see, 2002 from 2011 leaves 9. Age Of Majority is 18, so 18 plus 9 makes 27 (not 60) (- and you’re an obsessive maths freak …). My votes did not contribute to this. Did yours?

“DeValera effectively appropriated the Land Annuities to fund the free state, “:

… and gave us The Economic War (thanks again, FF).

And better mention again the manifesto of 1977 – thx yet again.

@ Eamonn Moran,

“The Private credit expansion in this country has lead to a massive transfer of wealth from the Young to the old in the last 15 years.”:

Do elaborate, as your logic escapes me?

@Christy

You wrote: Are you suggesting that public sector wages and pensions are not out of line with wages in the UK (PPP exchange rates)?

First, I was referring to Colm McCarthy’s claim about the minimum wage, which isn’t related to public sector/private sector bullshit.

Second, yeah, not only will I suggest that, but I will state it: public sector wages and pensions are not out of line with wages in the UK using PPP exchange rates.

Michael Taft has done some work on this here.

You’ll find my own modest contribution, comparing academic salaries on my blog:

http://ernieballsblog.wordpress.com/

It’s a myth that the public sector is particularly overpaid here.

@Joseph Ryan

I don’t begrudge the state the pension tax they are getting from me either. I would prefer if it were put in a fund and I could trade my shares in that fund but that is no biggie. My main point was I won’t be investing any more in my pension. I am not sure if it is secure, I have no confidence in pension fund managers generally after educating myself on the topic, and as I am not satisfied that it is tax efficient.

BTW, today it is Fine Gael, the most right-wing conservative party in Ireland, dipping into the pension pot. What will happen if and when SF and PBP get into power?

@ Ernie Ball

Nothing Orwellian about the issue if we deal with facts.

The Comptroller and Auditor General’s (C&AG) 2010 report published last Sept showed that the net annual cost (after all employee contributions) of a new public pension entrant is 19.5% of salary while the net cost of an additional 1 year’s service for ministers and judges is 62% of salary.

The total overall actuarial cost for the civil service of an additional year, averaging out staff was 15.1%. It’s was at 7.8% for the health sector because of the big jump in employment of young staff.

The Minister for Finance Brian Lenihan said in Feb 2009 that the total cost of a State pension for an Irish public sector worker, hired after 2004, was 26.1% of pay, and the employee paid on average 4.8% of the cost, before the introduction of the pension levy.

You can retire at 60, the pension is linked to current earnings which is unheard of in private schemes and the C&AG said last year that additional years have become a feature of pension awards in universities. By way of example, in UCD 78% of staff retiring between October 2007 and September 2008 had years added to their service for pension purposes. These 42 employees had an average of 4.2 years added to their pensionable service and their average salary on retirement was €74,434.

Similar provisions apply in other universities – – Trinity College stated that since 1972, on the basis of custom and practice the award of added years has become a legitimate de facto entitlement under its Master Pension Scheme and that Scheme members were advised that they had been granted added years.

Guess what the funding cost would be for an additional year at 60?

It appeared to cost nothing but in 2009, the State assumed direct responsibility for the pension funds of the old universities and deficits of about €630m led by Trinity College at €315m.

There were no calls for burden-sharing.

So rather than George Orwell, the contrast with the lot of the majority of private sector who have no occupational pension, and those who have who are facing deficits or payouts dependent on market returns, could be compared with Peter Sellers in I’m All Right Jack (1959).

@Christy
“Cutting the wages of people over 2,000 a week will not have significant effects – because there is only 1,173 of them.”

Disagree. It will be significant because they earn 8 times more than the lowest paid.

Based on the CSO data there were 27,478 workers in the State earning over €2k a week in 2006. Based on a weekly rate of €2,500, the annual wage cost was about €3.6 bn. As you say this small when compared with the estimated €59 bn national annual wage cost. I think this is your point which I accept.

My point is that they are highly significant when compared with the 233k workers who earned under €250 a week and account for only €2.4 billion of the national annual payroll. High earners in both the public and private sectors should be the primary targets for cuts rather than the lowest paid.

Anyone for a NMaxW wage alongside a NMinW? Everything is possible now that the Government has raided sacred, untouchable pension funds. Just declare force majeure and TEMPORARILY limit public sector salaries to max of €100k and tax any income above that in the private sector at 80% along with changes in tax rules on changing residency.

@Michael Hennigan

There’s a very simple reason why added years are given to academics. Since you love to repeat this little factoid and appear particularly obtuse about it, I’ll spell it out for you.

Academic jobs require a PhD. You cannot even get your foot in the door without one. PhDs, particularly good ones, take a long time to get. The average time for completion of a PhD in an American university, for example, is 9-10 years. Retirement at 65 is mandatory. This means that virtually no academic, given these constraints, would be able to retire on a full pension without the addition of pensionable years.

You make it sound (ad nauseam) like the governing authorities of the universities are just tossing out extra pensionable years like peppermints. They are not: they do so for documented cases where staff were engaged in pursuit of academic degrees that are a requirement for the job. This is eminently fair. Moreover, it would impede the ability of Irish universities to recruit internationally (which they must do) if this practice were stopped because of the obsessions of small-minded plantation owners in Kuala Lumpur.

Gavin Kostick: “how come the state controlled AIB is allowed to burn bond-holders while the state isn’t?”

This is subordinated debt. It’s hard to justify giving them anything at all.

@ Paul Hunt

I am afraid that you are not allowing for the incompetence quotient on both sides in the new coalition and throughout the Irish establishment. It is one area where Ireland comes out on top of the charts.

@ Ernie Ball

Your comments would impress me more if you went a bit lighter on the invective. If I follow your logic, if Ireland inflated its prices even further, Irish academic salaries would have to be twice as high.

That is not where the problem lies. The other countries you mention have a higher tax take and a much wider social support network, including free health care, creches etc., which reduce the level of disposable income required to maintain an equivalent standard of living to that in Ireland. The overall level of salaries is also lower for a very simple reason: a large proportion are not earning excessively high salaries as in Ireland. Their societies, in a word, are more equitable.

In addition, for valid comparisons between the public and the private sector, there has to be a capitalisation of two elements – (i) guarantee of permanent employment and (ii) payment of an unfunded defined benefit pension – which logically demand that salaries and pensions paid from the “public purse” (forget the distinctions between this branch or that branch or that category or the other) should be lower, not higher, than they are in the private sector.

The sound of back-tracking on the funding proposal for the “jobs initiative” is deafening. However, such is the furore these rather obvious, but politically uncomfortable facts, should become more evident to the wider population especially with regard to enlightening them as who is actually paying for that “safe well-paid job in the civil service”, which one of their children may have. The answer, of course, is the other members of the family that either have lower paid jobs in the private sector, no jobs or have emigrated.

@ Colm

Are you saying that a higher minimum wage in Ireland when compared to the UK is the causal factor behind the higher rate of unemployment?

If so, can you produce any evidence to back it up? I assume you are aware that almost every piece of research, econometric and otherwise, has found that there is absolutely no empirical relationship between lower levels of unemployment and lower minimum wages.

When Irish minimum wages are compared to Finland, Sweden, Netherlands, Norway, Austria and Denmark we come out at either about the average or below the average. Most of these countries do not have a national minimum wage but a sectoral minimum wage. Furthermore, they have much lower levels of unemployment. Why? Because they have regulated labour markets that incentivize employers to maintain employment not shed it (and they did not have the same reckless behavior in the private sector as occurred in Ireland’s post 2000). Are they less competitive? Not by any empirical measure that is currently in use.

We need labour economists with an understanding of the dynamic interaction effect between institutions, actors and markets to make an informed contribution to the employment crisis in Ireland?

@ Ernie Ball

I assume the other points will knock some gloss off your victim’s cross.

Read the C&AG’s report and if you may see beyond your prejudices, that the issue of additional years was as in the rest of the public service, has often been arbitrary and in one university, at the discretion of the finance officer.

So it’s not an issue of contractual terms; so why have admin staff also been on this gravy train?

The C&AG’s report was not about contractual obligations.

So before effusing on PhDs — read the report.

The buck of course stops nowhere.

It is surprising that you all take the UK as a reference when discussing income or pension inequality.It is oe of the most inegalitarian country in the Western World.I suggest you use Sweden or Denmark in your comparisons.

I gather Ernie B’s defence of salaries that many would claim are a tad excessive is that “Ireland is an expensive place to live”. Now I wonder has he ever given any thought as to why that might be the case.

@Paul Hunt

So, Ireland is an expensive place to live, I gather, because the public sector is wildly oversized and overpaid and not because we have a lightly-regulated grocery cartel or because private-sector interests pumped up a property bubble that is taking its time deflating.

It is interesting to me that the only ones who are ever called upon in this blog to begin the deflating are public-sector workers, via their wages and their wages alone.

@overseas commentator

The reason they always refer to the UK is because it’s the only place in Europe more given over than Ireland to the neo-liberal right-wing deregulatory snake oil that got us into this mess. That and the postcolonial hangover.

Why not grab all the private pension funds and give us all a public sector pension – as Marie Antoinette Murphy would say.

Why not? What’s the point of a private pension sector anyway? The article notes that most funds are inadequate(i.e. insolvent) anyway, so once again, in will step the public exchequer to make up the difference. Once you factor out the money extracted in profit, and the cost of private sector fecklessness, is it really worth taking the risk of having a private pension sector at all? This argument can be applied to an entire gamut of financial services (banks, insurance, etc), as we are by now all too well aware.

As someone under 35, my constant experience has been that private industries invariably utterly mismanage themselves, to the ruin of companies, economies, the public, and generally everyone except overpaid management. Older commentators may disagree, but I think we should simply nationalise a lot of industries, particularly financial ones. Maybe people who grew up in a world with the Soviet Union see things differently. For me, the mantras about the efficiency and reliability of the private sector and free markets have worn themselves a little thin.

OK, Ernie. So we can rule out the wildly over-sized and over-paid PS. And then it’s all down to the grocery trade and the lingering effects of the property bubble (presumably being supported by NAMA).

It’s good to know who the real villains are.

@ All – oops, that link is for the AIB subdebt buyback btw.

@ ObsessiveMathsFreak

Have you a guaranteed job in the public sector?

There is no Utopia anywhere but your view of the private sector reflects an ignorance of it.

The buck stops nowhere culture in Ireland hardly supports mass nationalisation.

Do you think that the cheap computer you’re using was produced by a public committee?

@Ernie Ball

You seem to be confusing
(a) a worker having to pay towards a pension (e.g. pay cut which was caled a “pension levy” but was clearly a pay cut), and
(b) a worker having part of their pension payout future permanently reduced with immediate effect.

Unfortunately, public sector pensions will be cut substantially in years to come. You will understand the nuances then.

@ Peter Kineane

“Do elaborate, as your logic escapes me?”

There was massive credit expansion in this country over 15 years up to 2008. The country was booming and profits were being made in an economy that was “growing” faster than jacks beanstalk. Many people (the vast majority of which would have been between 40 and 65) became very wealthy on the back of this.
What was the basis for the massive level of credit expansion?
Easy. The banks were prepared to role out the dosh. Why? access to international money markets and bank employees being paid on how much they could shove out the front door.

In other words it was a massive ponsi scheme.

And now who is going to be left to carry the can for for all the people who are at the bottom and middle of the Ponsi? The ones who didnt cash out before 2008?
Well it will be mainly the sons and daughters of the people at the middle and bottom of the Ponsi as well as those who didnt even participate in the scheme. We are just seeing our bill grow over the last 2 years its drip fed to avoid a heart attack. Somewhere between 200 and 250 billion depending on who you listen too apparently.

@Finfacts

“It appeared to cost nothing but in 2009, the State assumed direct responsibility for the pension funds of the old universities and deficits of about €630m led by Trinity College at €315m.”

That’s shocking – i heard nothing of that

@Paul Hunt Where is the evidence for a wildly oversized PS? Do we have more teachers, social workers or hospital consultants than comparable places?

As for the “raid” on pension funds, is this not what Daniel Gros suggested in a paper a few threads back? i.e. that Ireland has adequate savings, just that the government doesn’t have them. I have some issues with it, but the pension funds are analogous the equivalent of the grain being exported during the famine.

@Eoin Bond As public sector pensions have declined less than PS salaries in most cases, such an adjustment would be reasonable.

@ Mr Bond

Cheers for that. Appreciate the explication.

G

I wonder why the government doesn’t go the whole hog and nationalise the private pension funds. Then perhaps it might use the €80bn (€470m / 0.006) to buy Irish debt or even more shares in Irish banks or invest in revenue generating employment rich infrastructure (roads, broadband, energy).

Presumably that would be regarded as bordering on anarchy but haven’t we started going down that road anyway with the 1% levy this year (€470m for seven months will be equivalent to 1% annualised).

Interesting exchanges above. Useful info. As I view the situation, it appears that we are headed for the Mother of All trouble – economically.

I am assuming that an assumption has been arrived at that, that some sort of growth resurrection will be forthcoming, going forward into the future. I fear not.

The global economy is facing severe stress due to a shift(ing) of loci of production and consumption, and the manner in which these two activities have been kept going.

Could anyone explain to me why we neglect the massive accumulation of debt (which grows exponentially, totally without any nutrients) in arriving at a metric of economic wellbeing? Debt is, as I understand it, a (negative form) future income. In the current circumstances it appears that there can be NO future income at all. Its all bespoken for! And now those illigitimates are taking my savings (aka pension) as well.

What shall I exist on? Virtual income to pay for virtual necessaries? Nice one. Anyway, it good to see more folk getting exercised about this issue. Maybe, just maybe, the pols will get a fright. Hope so.

BpW

@Winelake

Was this not what that guy the other day meant when he said we should lump sum tax domestic owned foreign assets?

the crazy thing is I see a small, perhaps very small, but realistic chance of this type of thing happening

I could see that happening before I could see public pay and pensions reduced to levels that are the same as in the private sector – another 25-30% cut in public pay? Not happening – particluarly with labour in power

@Dearg Doom,

I’m distinctly NOT saying that we have a wildly over-sized PS. I’m an agnostic is this area. All I understand is that there used to be a compact that PS workers received lower pay than any equivalent measure of pay in the private sector and were compensated by job security and unfunded defined benefit pensions (and often other benefits in the terms and conditions of employment). I don’t think anybody can deny that PS pay increased along with general pay levels during the bubble period. Some of that has been clawed back and the PS pension levy is simultaneously a further pay cut and a contribution to general government revenue.

I abhor this private v public conflict because it is totally counter-productive at a time when we need national solidarity. Ernie B asserts that pay is high because Ireland is an expensive place to live. He has identified two culprits for this. I’m keen to identify more. If the cost of living can be cut disposable incomes will rise and more equitable burden-sharing that will avoid this futile public v private conflict may be possible.

@Ernie

In a world where the well worn constraints of risk and return are accepted as part of the capitalist system – public sector workers should ALWAYS earn less than their private sector equivalents.

If the return I get for the provision of my labour is subject to the whims and flows of the market and economic cycle then the risk I assume whilst working in the private sector is higher than the public employee equivalent, compensation should always reflect these risk differentials. Its nothing to do with academic profiles etc its to do with economic risk.

The whole basis for an entrepreneurial economy lives and dies on the understanding of risks and returns. Those who choose to take an economically safer route with their labour (and I stress economically safer route – not physical) should always be willing to accept lower compensation resulting otherwise the entrepreneurial thesis fails as public service does not operate within an equivalent economic risk profile.

The empirical evidence from the crisis over the past number of years clearly indicates that those who entered the crisis under permanent working contracts within the Public sector have not experienced anything approaching the job losses that their private sector equivalents have suffered. In fact they have been largely insulated from the economic cycle.

Arguments to the contrary have, and always will fail this acid test in times of economic stress.

It’s risks as well as returns which need to be considered – most commentary including those noted always forget this fundamental issue.

@Paul

The “conflict” between public and private is not futile – far from it – it is part of a debate about avoiding default – a fundamental issue. You say

“I abhor this private v public conflict because it is totally counter-productive at a time when we need national solidarity. Ernie B asserts that pay is high because Ireland is an expensive place to live. He has identified two culprits for this. I’m keen to identify more. If the cost of living can be cut disposable incomes will rise and more equitable burden-sharing that will avoid this futile public v private conflict may be possible.”

In particular look at the bit “I’m keen to identify more”. I suspect that’s what ernie does – assumes away the issue – and then goes to find explanations for the data – starts saying things like “neo liberal agenda” or some other weak explanation that is divorced from the data or at least can’t be numerically tested against it

@christy,

Those on the left will always avoid consideration of factors in PS or semi-state service provision that increase the cost of living. My comment of 11:50am tries to sketch the political context. Under direction from the Troika, all these factors (private, PS and semi-state) will have to be exposed and dealt with. The quicker this were done the better. It should have kicked off at the end of 2008, but better late than never. Ireland, unfortunately, may be in the Troika’s treatment room for some time.

@NoGuru.

How can I rebut this concern?

Tell them not to invest.
If they have investment funds tell them that there is risk free investment in Irish and other assorted European bonds.
Risk is guaranteed by the ECB on pain of economic annihilation to defaulters and underwritten by the citizens of the issuing country.

A veritable investors paradise. Why bother to invest in real goods and services when there is loot to be earned from real shakedown.

@Peter Kinnane

The younger generation will win this argument. They have youth on their side.
They may and possibly will refuse to pay for the benefits of the ageing population when their time comes.
It may even be called payback time.

@ Joseph Ryan,

I’ve fair hope in good fortune in the dynamics of life, based on my philosophy system (and dismissal of much of Einstein) and that all that money swirling around over the years may fortuitously have scattered some of its seeds, which even now may be breaking ground germinating.

@finfacts
Notional years for public service pensions can be purchased but at actuarial rates and I suppose this might be considered good value as long as you think the state will be in a position to pay out. Would you put your money into them in current circumstances ?

Don’t forget Patrick Honohan’s “network of contracts” argument that put senior bank bondholders out of reach.

Gordon Brown did away with advanced corporation tax credits in ’97 or so, actually at a time when pension funds were not in trouble with their returns. He was warned at the time that eventually the public would view it as a stealth tax – which they eventually did. It removed much of the incentive to allocate assets to shares that paid dividends towards things like, er, internet companies. Pension funds are largely stuffed now and funds have gone defined contribution to avoid being closed.

Colm McC makes the point about UK Irl comparisons over the minimum wage. He is right tio point up what looks plainly cracker to the electorates of Ireland’s creditors, but don’t think all that irritates them is the minimum wage. The whopping salaries paid for out of borrowed money are at least as much of a red rag. Go and live in the UK and be amazed at the fact that cutbacks are being made all over the place that in Ireland it wouldn’t even be worth wasting the time thinking about because they just will not happen. Ireland is exempt from the need to scramble around to the extent its bigger and solvent neighbour has volunteered to. It is much cannier. If it cannot repay loans they will be written off, then things carry on more or less as before.

Perhaps a more realistic representation of the 100 and odd billion Euros liability for public pension commitments would be to declare these “Euros” to be specifically backed by the full faith and credit of the Irish state instead of Eurosystem.

Time to pay a few bills using that method perhaps – Ministers salaries and pensions would be an obvious start and I cannot imagine them being unwilling to accept (what kind of message would that send?).

@Kevin
I agree with you about the impact of marginal rates for high earners. A public sector payroll saving of €50k might translate into a net saving of only about half that for the Excehequer. This underlines how difficult it is to make real and substantial savings.

@ FinFacts

I confess I don’t understand pensions – but I guess if I earn 80,000 and my pension is worth 20% of salary – that is 16,000 per annum – but then given at
least until recently there is a 50% tax back for my pension for it to really be worth 20% of salary the contribtuion would be 32,000. Over 35 years (I’ve subtracted the 4.2 years) this (returns free) would result in a pot of 1,120,000.
If I then earnt 5% per year this would give me 55,000 without touching the capital – if I run down the capital at a sensible rate I supose such a fund would yield say 150,000 a year – I wonder since my pension statement says I will get 40,000 if I should complain?

The public sector is paid more than the UK in general but then so is the private sector – see the Union Bank of Switzerland study. Comaprisons regarding gross pay are grossly inaccurate. For example see the European university Institute acadamic pay scales – look at the gross pay – Irish academics are clearly overpaid – then look at the adjusted for cost of living it is not so clear – the data is for 2006. Since then Irish university acadmics have recieved pay rises (3% in benchmarking) but so did acadmics elsewhere. Irish academics also got a 7% pay cut and a 8.5% pension levy – so I very much doubt that Irish acadmics are really overpaid in real terms.

The public sector is samll compared to other EU countries but unfortunately it is not as small as the tax take.

@ Ceterus Paribas

“When would you believe that AIB will be able to raise money in the bond markets again?”

Glad i can amuse! 😀

Well they aint gonna be raising sub debt again any time this side of 2020, but sub debt is gonna be a rarity across the entire European banking system going forward after this crisis and the new capital regime being brought in by Basle III. Pure equity is gonna be a much bigger player than before.

But this in many ways backs up the decision to protect senior debt – there is a clear differentiation in the way that senior has been treated vs sub debt, it has been protected, sub has been toasted. Therefore, there is a reasonable chance (note im only using the word chance) that senior debt could be issued again on its own in a couple of years time, and thats probably the most important thing going forward (though with the deleveraging process, less so than before). Senior debt was always about creating funding, and subdebt was always about making capital cheaper for equity holders. Thats why we are treating one as risk capital, and not the other.

Apologies. Please ignore the last 4 lines of last post.

About 5/6 years ago, a few weeks before the a ceiling of €5 million was put on pension “pots”, there was strong rumours of a big transaction by an Irish person, no doubt tipped off as to what was coming.

It was said that €75 million was put into a pension fund. Not only that but that person did not have to write a cheque. By some wizardy or other substantial properties amounting to that value were transferred into the fund. It was even so neat that stamp duty was also avoided on the share transfer.

All to keep growing within the pension “pot” tax free from then to eternity. Well eternity is now a finite concept.

At least there will now be some money coming back to the State.
But watch for the scramble in valuing privately owned and privately managed pension funds.
Also watch how quickly these funds will “relocate” to sunnier climes.

@Ernie
There’s a difference between what the state does for the “common good” and what it does for sectional favouratism.

What we’re seeing in Ireland is the latter, not the former.

Ireland staggered along for decades (at least half a century) after 1932 with an over priced labour force coupled with low productivity. Sean Lemass was the first politician to voice concern about our lack of competitiveness and hemorrhage of young people to well governed countries. Ireland is a deja vu all over again and again country. The EU saved us from ourselves for over thirty years during which we enjoyed a prolonged period of prosperity. We then experienced a period of governance characterised by an abdication of responsibility that would boggle the mind of most sane people.

Today we are back to 1932 blaming everyone but ourselves as the Gov’t reverts to the usual Irish “Head waiter (Taoiseach) and the waiters (TDs’)” mode of Gov’t. Competitiveness, sure that is for others we have our low corporate taxes. Exorbitant legal and medical costs, sure aren’t our boys and girls the best in the world, they deserve to be paid more than their counterparts in foreign countries. Ireland has not evolved to the stage where citizens vote for good Gov’t we are still at the stage where we are sending clerks to dish out the candy on Kildare Street.

@Ernie Ball

What lurks beneath this attitude is Libertarianism, including the idea that nobody should ever have to pay for anything that benefits someone other than themselves.

They have not gone away you know. It is a testimony to the distribution of influence in modern western societies that after a global financial crisis and depression caused essentially by a fanatical faith in the powers of market liberalism and unregulated capital that what we get is the right, who just happened to be in power when things went wrong , baying about how we can not afford social democracy (it is so uncompetitive!) while also insisting that private investors have to be protected to prevent the downfall of civilization as we know it (moral hazard being a movable feast).

In Ireland’s case the the benefits of the free market have been even more comically awful, we find that the sectors that are the least regulated and most subject to market discipline (my little joke) are the most significant contributors to our high cost of living (housing, fuel and food) and therefore our ability to adjust to reduced circumstances. Obviously this means we need more privatization.

However, even if we acknowledge that the root of our problems is the current flavour of capitalism and the EU’s reduction to a currency protection organization we still need to work within those constraints. When we have a lower deficit than the median European one we will get a certain freedom of action, until then it is cuts in services and wages accompanied by tax increases, like the pension levy. Morgan Kelly or oblivion.

@ Have a Heart

Leglislative authority?

It’s a similar move to the introduction of the DIRT tax in the 1980s.

@ Shay Begorrah

The imperfect world comes in technicolor not in black and white.

I assume you welcome competition in consumer products that keeps prices low?

As for food, is there too much regulation or too little? Have you heard of the pan-European welfare programme known as CAP which restricts food imports?

However on the positive side, the reduction/elimination of tariffs and barriers has had an impact of momentous proportions on the lives of billions.

Like everthing in life, it’s always easy to find the negative as a comfort to neutralise inconvenient facts!

And, I might add, no moral reason either.

@Joseph Ryan
“The whingers, particularly those on large salaries benefiting at 41% could do well to reflect on those figures.”
So lower the limits.

@HS

“They have not gone away you know. It is a testimony to the distribution of influence in modern western societies that after a global financial crisis and depression caused essentially by a fanatical faith in the powers of market liberalism and unregulated capital that what we get is the right, who just happened to be in power when things went wrong , baying about how we can not afford social democracy (it is so uncompetitive!) while also insisting that private investors have to be protected to prevent the downfall of civilization as we know it (moral hazard being a movable feast).”

I wouldn’t consider myself right wing – or at least I wouldn’t be happy about about it if it turned out I was but it is a complete misrepresentation of right wing views to suggest that they support bail outs of private sector companies – the only people who object to bail outs more than fringe left wingers are people on the right

I think your man over on the baseline scenario has been pretty persuasive on this point. Nobody supports bailouts – save the ‘reasonable center’. It is not a left vs right issue. It is the financial sector vs the rest

@Michael Hennigan

The CAP might indeed cause food prices to be artificially high but it does not explain the difference between the rest of the EU and ourselves for that component of the cost of the living.

There can be little doubt that Ireland’s business environment and its business culture are a substantial component of the high cost of living and therefore the demand for high wages. How do we address this given that deregulation does not work for us and that better regulation and enforcement has poor economies of scale in a small state?

This is not to say that the semi-state and state sector must not be more leaner and more efficient, the lack of dynamism and the excess of job security is a noose around the neck of the state. There is zero reason for the state to be more tolerant of under performing staff than the private sector, quite the reverse.

@Ernie Bell

How do we manage our problem though? We genuinely need to balance the budget, we do not have the option of capital controls and the rest of Europe is in a centre right policy funk that guarantees no confrontation with the current configuration of the European financial sector or the wider structural problems with the EU economy.

We need solidarity of some kind to escape this trap (and we can escape it) so how do we fairly spread the burden in Irish society of recovering from the Washington consensus?

Apologies for the English as a Third Language style of my last posting. Painful to read.

This will be an interesting study in behavioral economics.

-Do Irish workers reduce or stop collecting capital in the form of paper investments for retirement, reducing funds available in the future to pay retirees?
-Do ordinary Irish start looking for tax havens? Or ‘misallocating’ their wealth to non productive but easily hidden assets like bullion, bank notes, or even worse antiques.
-Do Irish stop using these ‘tax advantaged’ investment vehicles and hold their investments in normally taxes accounts?
-Do Irish become less ‘foward’ or long term thinking due to lack of belief sacrificing in the short term will not pay off in the long term?
-How much of the tax will be born by the investment companies not their clients? Has anything been done to allow more competition for the funds to reduce non tax expenses?
-Will the Irish find a way to rely, perhaps foolishly, on unfunded retirement vehicles?

The tax was constituted to seem small but 0.6% over 4 years is really a 2.38% hit, assuming the claim of just 4 years is true. The tax is also a much larger junk or investment gains that underlying assets (28% of the Euribor rate of 2.15%). Will it last just 4 years and how do Irish react to this uncertainty? I am almost wishing that it is extended to see what happens.

I hope the Irish make every effort to collect meaningful and accurate statistics on their countryman’s reaction to this. Perhaps the jobs aspect of this will materialize in the econometrics area.

[
Around 520,000 people own the €80 billion in these funds, an average of about €154,000 per person.
]

Yes – but the distribution there is obscene. Some have tens of millions. And others have 5 thousand euro.

@Shay

Countries with larger tax burdens and heavier regulation enjoy a lower cost of living than we do.

> as do countries with lower tax burdens and lighter regulation

Funny that as soon as govt policy turned out to be a factor in causing high prices the debate went all sideways. I’d be perfectly happy to have well regulated highly competitive markets across the board (including services like education, health, etc), especially since it wouldn’t necessarily require high taxation at all.

Meantime, on the main point, the expropriation of pension assets to fund short term (albeit mildly attractive) job “creation” schemes is unwise even if it isn’t formally illegal. The expropriation of assets from private sector workers only is egregiously sectionalist and unfair.

@Paul Hunt

We are a long way from the pension fund levy question but it seems generally agreed that it is mostly harmless and hardly consequential given the more serious problems with the lack of a proper national pension system.

On deregulation and competition I have said before that I believe that the problem in the legal profession is chiefly one of patronage and transparency (I would nationalize the legal profession or set maximum fees) but otherwise I agree with your depressing conclusions.

Our policy on private cartels, corporate regulation and enforcement is not well developed or implemented, we show no signs of trying to develop it and there are a variety of entrenched interests agitating against any kind of change in either the private, sort of private or public sectors.

I might cry now.

@Shay,

If you have tears, prepare to shed them now.

The galling thing is that there is no independent analysis of this price and profit gouging. Those who could perform it are comprised or conflicted in some way and are well-rewarded to join in the ‘hear no evil, see no evil, speak no evil’ three monkey act protecting the elites. All citizens know they’re being ripped off, but they feel powerless to do anything about it. And even if they were informed, because the country is so darned small, they would be constrained from trying to do something about it as the outcome could impact the livelihood of a family member, another relative, a neighbour or a friend.

@Shay

You also said “There is no evidence, in an Irish context, that deregulation led anywhere other than concentration of control and abuse of market dominance …”

How about taxi plate deregulation ? I think that is one example of deregulation that did the opposite of what you are claiming. Of course one can cherry pick examples either way, but to say there is “no” evidence is an overstatement, I think.

>”Why keep on plugging market liberalism when the evidence of the last ten years overwhelming shows how dangerous and damaging it is?

That is a good question, unless of course it is not “market liberalism” that failed. I think there is evidence that every sort of market/social arrangement tried to date has been dangerous and damaging at someplace/sometime in history. In my opinion the reasons are not yet understood despite great minds working furiously on it. I’m going to go on a limb (having no expertise) and say that there is a lot of evidence of success for all models as well, for various definitions of success. Lifting large percentages of the world’s population out of poverty is one that can be accredited to what I surmise would be policies you are objecting to.

Here’s a question I got from Wall Street, where a disconnected eye finally saw the pension move. (doesn’t work on Ireland in any way, so didn’t immediately see the plan)

“Ireland is going to raid private pension plans now?
Wouldn’t outright default be less damaging?”

Of course it’s an interesting question from a strategic point of view.

If Ireland defaults it affects mostly foreigners who hold the debt. That should be “good”, but since we need to borrow more money from these foreigners it’s actually “bad”.

If Ireland instead expropriates domestic assets it’s “bad” because it’s stealing from one set of Irish people to give to another set of Irish people and to a lot of foreigners. But these assets are a captive supply of money and the victims can’t flee with their money, so it’s actually “good”.

In the long term the breach of faith with its own citizens may be an even bigger “bad” factor, but hey, when did politicians ever care about the long term?

Ah, the tangled webs immoral governments can weave.

Eoin

The vast bulk of people that will be subject to the levy are members of group pension schemes. The largest schemes can have management fees as low as 7,8 or 9 basis points. You only get fees above 0.6% on small group or individual arrangements. The argument that fees in Ireland are above those charged in the UK is completely bogus. All UK or international managers are free to set up operations here but none do. They will only pitch for business in the €50m+ bracket of assets under management. If there is such a gravy train in Ireland why don’t they jump on board? The thing that gets to people is the inequity of what is proposed – it applies to private sector not public sector, it applies to most pensions but not ARFs (there are very few ARFs with less than a couple of million euro invested), it applies to those below retirement age but not those above retirement age. All of these people got tax relief on contributions, but the people who got the most tax relief (pensioners and ARF holders) are exempt. There is no justification for this inequity – none whatsoever.
PS – I dont work in investment management

As Ronald Reagan might have said, a government big enough to guarantee all your liabilities is a government big enough to seize all your assets. There is no sense in approving “confidence-building measures” or whatever in 2008 and bitching when your nest-egg is confiscated in 2011.

@ Hugh

whats the difference between this and a wealth tax?

@ Colm

so the difference is in its application, rather than the basic principal of it? I agree 100%.

However, most of the critcism’s of this measure have been about its principal. I don’t think i’ve seen many people describe a “wealth tax” as a “raid” on private assets. What we’re talking about here is the taxing of a previously very heavily protected private asset (pension fund). The fact that these protections have been so quickly removed, albeit temporarily, have caught people by surprise, but i don’t see that as a reason for anger given the very clear arithmetic that should be easy for all to see.

@Colm McCarthy/Eoin Bond.

It is a poorly designed wealth tax that exempts the wealthiest even within that wealth catagory that it does tax.

Still, why the special pleading? The country is bankrupt.
Surely one cannot expect the load to be borne by those at or close to the minimum wage.
A reduction of the minimum wage will not affect the public sector wage bill by as much as one euro. The levy (wealth transfer) might help create some jobs.
On the other hand it might be used to to continue to pay PS pay increments and to pay the enourmous increase in the pension bill for those retiring with gold plated pensions.

@Kevin
0.6% of the assets of private pension funds will be taken each year in the next four years, essentially in cash. Now the cash was protected but it was also inaccessible. Either way, it’s going to be gone.

If the govt did an actuarial calculation of the current value of funds required to pay public sector pensions and demanded 0.6% of that, in cash, from the future recipients then we’d be hearing all about it.

@Eoin
This is so far from a wealth tax I’m surprised you ask the question. It’s a “only that kind of wealth and only those people” tax. Both exclusions are unfair.

@Hugh Sheedy
“In the long term the breach of faith with its own citizens may be an even bigger “bad” factor, but hey, when did politicians ever care about the long term?”
Yep. Reinhart and Rogoff pointed out that domestic default is far more common than international default for precisely the reasons you mention. Unfortunately, I think it has extremely negative consequences in the longer term. While it can be argued that international markets have short memories, domestic markets do not. People remember that the government ‘stole’ from them. The internal reputational damage is greater than the external reputational damage and for such a small amount.

Anyway, wait until you see the property tax and the basis that is levied on… exemptions for speculators and lifestyle-debtors is my guess…

@Eoin
The difference between this and a wealth tax is the perverse nature of it. For all my working life (twenty years) governments have been trying to encourage people to save for their own retirements and not to rely on the state. Little did we know it was just so that there would be a bundle of cash to be raided.

I blame Mr. Lenihan and his raid on the NPRF…

@ Hogan

we have encouraged people strongly to buy houses over the last 30 years, and we will likely shortly introduce a tax on that too. As i said, why will that not be considered a theft? The answer could, of course, be that you have the option to sell your house and avoid the tax, but we all, i assume, accept the impracticalities of that for a country with 70%+ home ownership rates.

@ kevin Walsh

“In general, I think the ARF thing is an anomaly that would probably best be solved by abolishing ARFs, since I can’t see any reason to permit such a tax shelter to have existed in the first place.”

Well prepare to be amazed as this loophole gets left open. I wonder why?

@ Hugh

“If your point is that this tax policy is – in many ways – no more inequitable or perverse than other taxes then I agree.”

That was basically my point. A lot of people seem to have a knee jerk reaction to the thought of pensions being affected in this way, but not other assets. There’s no rational reason for this, but its simply a creation of the previous assumed safeguards in place for pensions (including, but not unrelated to imo, bankruptcy or legal actions in many situations), and the previous highly beneficial treatment of pension provisioning.

Lets be honest – the govt had to create a massively beneficial treatment of pension contributions in order to encourage people to pay into their pension funds. They literally tipped the scales so far to one side that you’d have to be insane not to put invest your money into one. Is this new levy unfair in its application on one particular type of pension holder? Yes, absolutely, and i’d urge the govt to both close off the ARF-loophole as well as figure out a way to make sure that equality is maintained vis a vis public sector pensions. But that doesn’t take away from its intrinsic concept as a simple wealth tax that exists in many other countries in other forms. Calling it a “theft” is tabloidesque in the extreme imo, unless you wish to term all taxation as “theft” as well (and which many extreme libertarians, for whom i have a deep sympathy with, believe). We live in the real, practially application world – the country requires govt provided services (including aiding financial stability), the govt requires funding or investment to this end, it therefore requires revenue, and revenue is provided by taxing income or assets, with various pro and con economic reactions to those taxation policies. Its as simple as that.

In terms of its long term “unwiseness”, i’m less worried about that. The facts are that we need the money now, and Ireland is still on net metrics a very wealthy country. Arguments about long term pensions/savings incentives seem like an awfully big luxury to have for a country in danger of bankruptcy. As i noted above, inflation and management fees will take away much more (x5) of your pension fund in the next 4 years than this levy ever will, so a bit of perspective is required.

Hugh Sheehy and others would have more credibility when complaining about taxes that are not universal and apply only to a specific group if they had raised similar objections to the public service “pensions levy,” which had nothing to do with pensions but was all about the government taking money where they could get it (a “pure theft of convenience” as it were).

Go ahead, Hugh, and read the preamble to the PS pensions levy legislation and tell me then that it’s all in keeping with high-minded principles of fairness.

The good news for Hugh is that, unlike the PS pensions levy, the new one only applies for 4 years (as opposed to: forever) and only takes 0.6% of his pension fund as opposed to 7.5% of all his salary.

@ Have a Heart

i think the argument for not burning bondholders that were Irish pension funds, was that any savings would be negated at an overall economy level. So there would, for Ireland Inc, be no net saving. Yes, it would possibly go from the rich to the rest, but it’d be within the big Irish tent, and we should at least not kid ourselves about that fact. If we still want to proceed, then go for it, but lets not pretend that we would be burning some nefarious European investors like some would try to pretend.

Taxing a house has cashflow implications on Day 1 for the beneficial owner, where as taxing a pension only has future cashflow issues, and depending on how the underlying value of the assets fare, one i might never have to meet. As we know from inheritance tax, most people might prefer the future cashflow problem as opposed to the one today.

On the land/common good issue, count me unpersuaded – i buy a piece of land, its mine, forever or until i sell it. Thats what most people understand. If you want to tax my ownership of it, then go ahead, it will make me and others reconsider its intrinsic value and costs associated with its ownership, but i won’t be thinking about it as a shared common resource, and i doubt most others will too.

@ BeeCeeTee

i think people need to stop making this a moral debate, it a case of basic simple arithmetic. The country remains wealthy at an overall level, but with massive difference in who and where the wealth resides. I’m in absolutely no way a socialist, i’m simply a realist, and i think this was the argument Dan O’Brien, no left wing nutjob himself, made in the IT during the week:

“Against all those cons, in times as grave as these desperate measures are justifiable. This one probably is, for a number of reasons. First, pension contributions have enjoyed very generous preferential tax treatment in the past. Some clawback is justified under current circumstances.

Second, as a means of raising tax revenues, it is among the least damaging to already feeble consumer spending in the short run.

Third, given that the pensions industry charges fat fees to manage funds, it is likely to encourage the consumer side to seek a reduction in those fees to offset, partially at least, the new tax.”

It’s an emergency, and we have a large, previously heavily protected, tax-aided, and completely unencumbered asset, one whose beneficial owners are also in receipt of very generous state pensions as well (ie for all the talk of not relying on the state, having a private pension does not reduce that reliance by very much, it simply increases your standard of living). It’s easily justifiable in my view.

@Eoin

I see your point, although I don’t think cashflow impact is a determinant in the legality of a tax, except maybe in extremis. 41% – how’s that for cashflow impact ? But your point illustrates perhaps why you think the government justifies this new levy, on the basis that it is only 0.6% i.e. low cashflow impacting. If the cut was much larger, presumably it couldn’t be justified, but that would be based on the cashflow impact rather than the principle of it. If that’s the government’s reasoning, I find it frankly amoral.

You’re right, once a private party owns land it is forever theirs until they dispose of it, and is not a common resource. I wasn’t saying otherwise (unless unclearly). But it is the power and protection of the state that enables the legal contract for this ownership. And the land was originally owned as a shared resource by the state (I believe this can still be seen in action in the new world, where wilderness still exists and can be purchased or licensed from the government/people).

I think the above permits a case of taxation on moral or natural justice grounds. But – that’s all just my own rationalization that allows me to accept property tax. Here I am opposing a pension grab that’s going to hit me for peanuts, but becoming supine in the face of a property tax.

As I stated in an earlier post, I would really like to hear from someone who knows the constitutional basis for raising taxes in Ireland, presuming the constitution precisely lays this out and limits it, and can comment on the legality of this new “levy”. Or someone who can argue from first principles on the natural justice of it all.

@Hugh Sheehy

Well, I’m a CO, and provided I remain a CO, I would be a mug to stay in the state pension scheme instead of using that money to pay down my mortgage. Of course, the pension-related deduction is actually totally unrelated to my pension, as can be seen by the fact that it’s paid by temporary staff, who don’t have any pension entitlements, and that I pay it on my overtime pay, which doesn’t increase my pension entitlements by a single penny.

The ‘pension contribution’ levied on public servants was just a pay cut, and it would have been better all round to describe it as such. How can you have cash contributions to an unfunded scheme?

@Colm

If they had cut pay instead of introducing the “pensions levy,” then 90% of the posters to this blog wouldn’t be able to go on and on (and on) about how overpaid the public sector are. Calling it a “pensions levy” allows everyone to pretend that public-sector pay hasn’t been cut (or, rather, only once) because it only reduced the net pay, not the gross.

@Have a Heart
I guess you didn’t get the thrust of Colm’s rhetorical question.

@Hugh Sheehy,

You’ve presented your objection to the new pension levy as principled. The fact that you didn’t object at all–and were, in fact, quite pleased if memory serves–with the PS pension levy–indicates that your objections aren’t principled at all. You have no objection to taxes that target particular sectors, as long as the sector targeted is the public sector.

@Ernie
Resorting to near-insult from behind a pseudonym. How principled of you.

My views on public sector pay have been consistent over time. It’s both unreasonably and unsustainably high. This would be true even if we weren’t in a crisis, but it is hugely true since we are in a crisis, in receipt of IMF bailouts, borrowing billions etc. etc.

I can’t remember ever suggesting taxes that specifically targeted the public sector. I do remember often saying that public sector pay needed to be cut because it was too high. There’s a difference.

@Ernie
Having previously quoted chapter and verse from a Forfas report where the “too high” conclusion was very clear and where they explicitly said they HAD included the pay cuts – only to have you put on a pantomime voice and say “OH NO THEY HAVEN’T” – I see very little point in starting again.

I’m going to go out with the kids and leave you with the recent press reports on the IMF and EU point of view. Me believing in your “myth” is probably the least of your problems. If our lenders believe in the “myth” then the pressure is likely to stay on.

http://www.independent.ie/opinion/columnists/john-drennan/john-drennan-imf-slams-outrageous-public-pay-rates-2596280.html

Meantime, I’ll stick to my use of the word “mistake” to describe the pension levy. I’m using Colm Mc’s terminology. I hope he doesn’t mind.

@Have a Heart

Look, you and Hugh are talking out of both sides of your mouths on this. As Colm McCarthy makes clear, it makes no sense to talk about the pensions levy as a (cash) contribution to a pension scheme that is unfunded. That plus the fact that temporary staff in the public service and those without pension entitlements still have to pay it indicates that it has nothing to do with pensions.

So what is it, then? There are two possibilities.

1) It’s a pay cut by another name. Colm McCarthy and Karl Whelan have endorsed this view. The fact that one must pay PRSI on the money also seems to suggest that this is so.

2) It’s a special tax only on those working in the public service.

Now, you and Hugh have to choose between those two. But note what this entails. It means that either:

1) You’ll have to give up screaming about how unfair the new private sector pensions levy is insofar as it targets one group and exempts another.

or

2) You’ll have to stop acting as though the pensions levy is anything other than a pay cut and figure it in when making claims about whether or not the public sector is overpaid.

@Hugh Sheehy

So John Drennan’s opinion pieces in the Sunday Independent (the mouthpiece for big capital) are now to be taken as gospel? You really want to commit yourself to believing what you read in that rag? Did you notice what that article was missing? That article entitled “IMF slams ‘outrageous’ public pay rates” fails to provide a single quote from anyone in the IMF, let alone one that uses the word “outrageous” (which is in quotation marks in the headline). But of course you’re ready to take this is somehow probative of something other than your own prejudices. And you wonder why I call it a myth.

As for my previous response to your claims about the Forfas report amounting to a childish “OH NO THEY’RE NOT”, I reproduce that response here. If anyone else is still reading, they can judge whether that characterisation is accurate or whether, alternatively, it isn’t the sort of thing one reads in a banner headline in the Sunday Independent:

You quoted this sentence in the report: “Forfás research for the NCC highlights that pay levels for a range of public sector professions (teachers, nurses, hospital consultants) are high in Ireland relative to other developed countries.” There follows a footnote (47) that cites the source of this information as being this report: “National Competitiveness Council, Costs of Doing Business in Ireland 2010 Volume 1, July 2010″

So we look at that report. It’s an extraordinarily sloppy piece of work. To take only one example, on p. 48 it says this: “The starting salary for primary teachers in Ireland in 2010 is 15 per cent above the OECD-25 average, while the top salary scale for primary school teachers in Ireland is 33 per cent above the OECD average (Fig. 7.4.1).” You look at figure 7.4.1 and it has nothing to do with this claim. The relevant figure is Figure 7.4.4 and there the reference is to the OECD-24, not the OECD-25. These clowns can’t even get the basics right: I have no confidence that they can handle the tricky bits.

Then there’s this little gem, which you must have missed: “While these salary levels reflect the impact of recent public sector pay cuts, they do not capture the impact of the public sector pension levy.”

That pensions levy is the gift that keeps on giving, isn’t it? It allows you to cut pay and, all the while, insist that you haven’t cut pay in order to justify further cutting pay. Orwell’s imagination couldn’t have done better.

But on to the matter at hand (limiting myself to teachers’ pay). On p. 402 of OECD Education at a Glance 2010, you have a table that shows teacher pay in the OECD countries in 2008 (i.e., before both the pensions levy and the recent pay cuts). Using the terms of the Forfas chart 7.4.4 let’s look at starting Primary Teacher pay, after 15 years and at the top of the scale. Forfas claims that “The starting salary for primary teachers in Ireland in 2010 is 15 per cent above the 2007 OECD-24 average. The remuneration for teachers in Ireland with 15 years experience and for those on the top scale salary is the second highest (after Luxembourg) of the benchmarked group.”

What does the 2010 OECD report say? First, the starting salary for primary teachers is not 15% higher than the OECD average, it’s 12.8% higher, again, not taking into account the pay cut or the pensions levy. The remuneration for teachers with 15 years experience and at the top of the scale is not “second highest.” For those with 15 years experience, the salary is exceeded by those in Germany, Korea, Luxembourg and Switzerland. Pay at the top of the scale is exceeded by pay in Japan, Korea, Luxembourg and Switzerland. Again, this is all before the pensions levy and the pay cut took an average of 15% off these scales. But the claim in the Forfas report is clearly false.

There’s still more to be said about this, however. One has to wonder why the report only chooses to look at primary school teachers rather than other kinds of teachers. Why not look at, say, Upper Secondary teachers? Why indeed.

Pay in 2008 for starting Upper Secondary teachers in Ireland was 2/10 of a percentage point above the OECD average (and remember that the OECD includes the likes of Poland and the Czech Republic which pay their teachers buttons). It is exceeded by the pay in: Australia, Belgium (both parts), Denmark, Finland, Germany, Luxembourg, Netherlands, Spain, Switzerland, USA. This is, at the risk of belabouring the point, before the two rounds of pay cuts here. At the top of the scale, Irish pay was 12% above the OECD average but exceeded by the pay in Austria, Flanders, Germany, Japan, Korea, Luxembourg, Netherlands, Switzerland.

Given that none of this includes the two rounds of pay cuts, I conclude that there is no evidence to support the claim that teacher pay (again, taking only that) is “high” relative to other countries. This is still less the case when one considers three other facts: 1. Irish teachers teach more hours per year than those of most other OECD countries; 2. Irish teachers teach larger classes than those in most other countries; 3. Irish students perform very well on standardised tests.

Facts 1 and 2 have enormous impacts on the amount of work done. I would expect those posting on an economics website to have the minimal sophistication to know that, when evaluating a salary, it won’t do simply to compare numbers without comparing the amount of work done for the salary. Alas, that sophistication is apparently not even in evidence at Forfas.

The Forfas report does not include the effects of the PS pensions levy. At the time you insisted that that’s because the pensions levy is not a pay cut. That implies that you’ve opted to view it as a special tax on workers who happen to work in the public sector. In which case, all of your complaints about such taxes (but only when imposed on the private sector) in this thread are just so many expressions of wanting to both have your cake and eat it. Again, if the PS pensions levy is a pay cut, then stop pretending it doesn’t exist. If it’s not a pay cut, then stop complaining about the fact that the private sector pensions levy is not universally applied. Or continue doing both and risk being branded an unprincipled hypocrite.

Finally, on teacher pay, see my refutation of Ronan Lyons’ tendentious presentation of the 2009 data in the comments to this post. It is also a refutation of some of Hugh’s unanswered claims in our previous debate on these matters. The fact that Forfas repeats many of the errors hardly speaks in their favour.