Pension provision: exposing a two-tier and unequal system
Overhaul needed to put private and public sectors on more even footing
A glaring anomaly in the way the cost of pensions is calculated in the public and private sectors has been revealed in a new study. It is further evidence of the need to put workers in both sectors on a more even footing when it comes to pension provision.
The study by the Association of Pension Trustees of Ireland shows private sector workers and their employers would have to spend millions of euro to earn the kind of retirement benefits paid to our senior politicians, judges and public servants. A notable feature of the study is the finding that the pensions paid to State employees are valued by the Revenue Commissioners at considerably less for tax purposes than identical pensions paid to people in the private sector.
For instance a TD retiring at the age of 60 on full benefits after 20 or more years service will get a tax free lump sum of €135,000 and a pension of €45,000 a year. The cost of this pension on the open market would be €2.38 million but the Revenue Commissioners calculate the value of a Dáil deputy’s pension at €1.48 million. The critical point here is that pension pots valued at €2 million or more are subject to a “super tax” rate of 70 per cent. A TD is treated as being well under this threshold but a private sector employee with the same pension entitlements is over the limit and liable to “super tax”.
Senior public servants are in a similar position and while judges and hospital consultants with full entitlements are deemed to be a little over the €2 million thresholds by the Revenue Commissioners, they are considerably over it by open market calculations. The more favourable tax treatment of public service pensioners with substantial entitlements by comparison with their private sector equivalents is just another example of the generally better pension provision for retiring public servants at all levels of income.
This is on top of the fact that until recent years most private sector workers contributed considerably more to their pensions than their public sector counterparts.
There are understandable and valid reasons why public servants were given more favourable treatment in the past. The generous pensions were an inducement to some of the best and brightest people in the State to stay in the public sector rather than bringing their skills and experience into the private sector where they could have earned more. In the legal profession the generous pensions paid to judges were a factor in persuading leading barristers to take a big drop in salary at a certain stage of their career in the knowledge they would be able to retire on a handsome pension.
However, the time has come for a complete overhaul of the pension system and part of that must include a method of calculating pension pots that is fair and transparent to all.