Pension reform could deliver saving of €1bn to exchequer

ESRI report says changes to level of tax relief unlikely to benefit lower paid workers

Reforming the amount of tax relief on pension contributions  is unlikely to result in increasing the saving habits of lower paid workers, according to an ESRI report.

Reforming the amount of tax relief on pension contributions is unlikely to result in increasing the saving habits of lower paid workers, according to an ESRI report.

 

* Reforming the amount of tax relief on pension contributions could boost exchequer funds by up to a billion euro annually, with higher earners bearing the brunt of the cost.

But it is unlikely to result in increasing the saving habits of lower paid workers, according to a report by the Economic and Social Research Institute (ESRI).

The study on the tax treatment of pension contributions looked at the likely impact of reducing tax relief to the standard income tax rate of 20 per cent or to a new flat rate of 30 per cent.

A 20 per cent limit would deliver savings of €1 billion, with relief at 30 per cent yielding €420 million.

Workers currently get tax relief at their marginal rate. That means those paying income tax at the higher 40 per cent band benefit compared with lower earning workers who are taxed – and can get relief – only at 20 per cent.

The report also examined the likely outcome of halving the cap on the amount of earnings for the purposes of pension tax relief in any year to €57,500 from the existing limit of €115,000 – a reform it found would deliver savings of €114 million.

In addition, the report measures the “loss” to the exchequer by measuring the existing system – in which pensions contributions are tax exempt, with income tax paid only when a pension is drawn down – to one where tax is levied on both pension contributions and pensions drawn down as retirement income.

This “loss” amounts to €2.23 billion. However, the ESRI stresses that it is not proposing the introduction of tax on both contributions and pension payments as a policy reform.

The authors, led by research officer Karina Doorley, make clear that several other factors would need to be studied before conclusions on policy reform could be drawn.

“A key challenge for any reform to the pension regime is to provide incentives to save for retirement for low-income earners,” said Dr Doorley.

However, she and her fellow authors argue that tax incentives on pension contributions face a “substantial deadweight problem” in that they are merely subsidising savings that would have taken place anyway.

“Individuals may well react to a reform by increasing or decreasing the level of their contribution,” the report states. However, it says that available literature on the behavioural effects of such change shows that the “effects are likely to be small” in terms of the overall cost or saving from the reform.

“Policy reforms which require individuals to actively change their contributions in order to benefit are likely to have a low response rate,” the report says.

The report expands on work originally commissioned by the Pensions Council, a group that provides pension policy advice to the Minister for Employment Affairs and Social Protection.

* This article was edited on May 24th