Special savings accounts for pensions could work, writes Brian Keegan.
As well as aspiring to keep fit, have the right diet, be politically correct and so on, it seems we must now also aspire to be ‘counter-cyclical’.
Counter-cyclical is the term economists give to acting contrary to the prevailing economic wind. In simple terms, when things are good, we should save our money against the day when things are not so good.
Like everything else we are supposed to aspire to, this makes perfectly good sense, but in practice is hard to do. In fact, the trend in household savings in Ireland over the past few years has been remarkably positive, given the low rates of interest on offer and the confiscation of 37% of those meagre returns through the Deposit Interest Withholding Tax.
Nevertheless, the Central Bank governor, Philip Lane, has put the importance of domestic savings firmly back on the public policy agenda by suggesting the reintroduction of a Special Savings Incentive Account (SSIA)- type scheme. The SSIA is an idea the country has tried before and liked very much. Over one million of us subscribed to SSIAs launched in 2001.
Under that scheme, for every €4 we put aside as savings, the Government topped up the saving by €1 - a 25% Government bonus on the money its citizens were setting aside.
Though it worked very well for individuals, the broader issue with that scheme, as Mr Lane pointed out, was that
it was time-bound. All those special savings were released into the economy around the same time in 2006 and 2007. While it is suggested that all this money further contributed to what we now know was the last hurrah of the boom years, CSO research at the time pointed towards significant reinvestment of the money in savings and pensions.
In an ideal world, any major release of household savings back into the economy should take place during an economic downturn. Setting a time limit on a savings scheme is unsatisfactory because it is almost as difficult to predict when things will be bad as it is to predict when things will be good.
That’s why Taoiseach Leo Varadkar’s comments linking special savings accounts to pension contributions might merit some closer attention. One thing we can be sure of is that the vast majority of us won’t have as much money at our disposal after we retire.
Under a new Government proposal known as auto-enrolment, individuals would be encouraged to save for retirement by having their pension contributions topped up both by their employers and by Government. The Government contribution would be in the ratio 1:3. For every €6 put in by the worker, there would be a Government top-up of €2.
Such a scheme, of course, is not without its challenges, because there is an expectation that employers will be obliged to make a further contribution. The payroll burden on employers is already quite high by virtue of the 10.85% employer PRSI contribution on employee wages.
It’s easy to pour cold water on all these ideas. There are insufficient tax revenues to support any kind of meaningful SSIA scheme. Some will point out that yet again this is an initiative that will be of no assistance to the self-employed, or to carers and the unwaged. However, it is difficult for average workers to build up capital during their working lives to provide for a comfortable retirement, and this is a significant social problem.
There has been little in the way of innovative thinking on budgetary policy since the downturn. Mr Lane may have set the ball rolling on an important debate, even if we don’t end up with the kind of SSIA scheme that so many of us benefited from almost two decades ago.
- Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland