Pension levy is a stealth tax on thrift and those who built up their savings

THE LAST week has seen an enormous outpouring of national introspection in relation to how we will get out of the economic mess.

At the heart of this has been the as ever controversial and polemical Prof Morgan Kelly, whose proposal at the weekend that we ditch the bailout and simultaneously close the gap in the national finances in the course of one year has been at one and the same time reviled and welcomed.

Kelly deserves enormous kudos for being the (almost) lone voice in the wilderness, calling the property bubble for what it was and in doing so dropping the scales from many of our eyes, and more latterly for holding up a stark mirror to the folly that has been the banking rescues.

It’s probably no exaggeration to say that millions of words have been written about the Irish banking collapse, and about the consequential economic disaster.

Curiously muted has been the discussion around jobs. At start of 2007, unemployment was a little more than 4%, while now it is more than 14%.

This troubling trend has occurred against a background of massive emigration, and the headline unemployment rate masks startling discrepancies. Overall, male unemployment is now a little less than 18%, while for men between the ages of 20 and 24 it is nearly 33%.

It against this background that one cannot but welcome the focus that this government has on reducing unemployment. Under the watch of Brian Cowen we saw not only the collapse of the banking system but also the collapse of the Irish employment system. While Hercules had but one Augean stable to clear out the Government has three, any one of which would daunt the staunchest.

The initiatives themselves are worthy, but will hardly reduce the unemployment level by much.

At most they can best be seen as an opportunity to ensure that certain categories of industries are favoured, that certain types of jobseekers are favoured, and that the Government is seen to be doing something. Being seen to do something is important, as it might well give people a degree of confidence, that somebody somewhere is trying… we have a small reduction in VAT, which on past experience will almost certainly not translate to a reduction of prices for the Irish tourist product; we have some additional expenditure on minor roads; we have a reduction in PRSI at the lower level but only for a time limited period; we have some incentivisation for universities to seek additional non-exchequer funds and to be then allowed to employ people; and we have the introduction of common tourist visa between Ireland and Britain, in hope of cashing in on large numbers of non EU residents visiting the Olympics one assumes. The largest single amount of jobs noted will be training and internships, worthy but not self evidently sustainable in the long term.

BEFORE WE get too carried away with congratulations we need to be cognisant of the fact that this is a jobs initiative built upon an unfortunate foundation. The proposal to levy not the premiums but the asset values of pension funds is entirely regrettable. Irish pension underfunding is a massive problem.

At least in principle, in the public sector all employees who are members of the defined benefit scheme can hope there would be tax revenue to pay their pensions. In the private sector people have to put aside funds, and while there are very generous tax breaks for doing so the long-term argument in favour of encouraging private sector pension provision is indisputable. Make no mistake, this is a levy, a tax, on thrift. For every multimillionaire who has put aside vast sums of money as tax shelters there are a dozen or more small to medium business owners who have put aside a modest amount of money to try and ensure they will not be reliant simply and solely understating their old-age pension. It is astonishing that the Pensions Board has not been up in arms about this, in particular the consumer and pension representatives. What we have here is a retrospective tax on saved income, and if constitutional there is no reason why such a tax cannot be applied to bank deposits or other forms of wealth. Taxes on income from such savings are one thing but this is a new departure. And its an unwelcome one.

Brian Lucey is Associate Professor in Finance at Trinity College, Dublin.


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