Is auto-enrolment a good idea in the first place?

Marc

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A couple of thoughts on this.

Questions trigger a mental reflex known as “instinctive elaboration.” When a question is posed, it takes over the brain’s thought process. And when your brain is thinking about the answer to a question, it can’t contemplate anything else.

Like for example asking “is this even the right question to ask?”

Everyone rushes off to offer their opinion on auto-enrollment rather than taking a step back and asking a question first.

Is this even the right policy agenda?


1) There is no logical reason why contributions should only be allowed to be made by “workers” either employed or self- employed and there should be no minimum age to join otherwise we are throwing away 22 years of compounding.

This is elementary mathematics and effectively removes the need to force some people to contribute at all and this would still achieve the same policy objective.

There is no reason at all why the solution to the problem should only be couched in terms of traditional employer employee contribution and state incentives.

As Duke notes above, the change in the ratio of workers to retired makes this effectively an inter-generational issue since fewer people in work will have to support more people in retirement there needs to be a social contract between the generations.

I did a quick calc during the session.

If granny makes the current maximum CAT C exemption when junior is born today assuming an average 5% nominal then Junior will have €448,462 in their pension fund at age 68.

That more or less effectively solves the issue.

To put this into perspective the estimate of the current capitalization value of the State Pension is around €400,000.

To get the same pension fund under the same assumptions a 22 year old today would need to save €2,658pa for their whole working life.

Give a CAT exemption of up to say €25,000 to anyone making a contribution to a pension for a minor. This amounts to the same effective state contribution of 33% upfront but allows another possible source of contributions and gives longer for compounding to have the most effect.

The real economics of this problem have nothing to do with the proposed solution of auto-enrollment ( which is largely born out of Richard Thaler’s research on behavioral nudges)

The essence of the problem is born out of the basic economics of household budgets; cost of housing and cost of child care prohibits saving for ones own retirement.

Why not offer a tax incentives for child care or build more houses - either would have similar effects as auto enrollment.

2) Tax relief for employers

The employer will be able to offset the costs of their contributions against corporate tax. This should be against employer PRSI.

Let's say that I didn't pay much Corporation Tax last year and ironically the main reason was because I hired a new employee. There should be a direct link between the cost to the employer and the tax relief.
 
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A couple of thoughts on this.

1) There should be no minimum age to join otherwise we are throwing away 22 years of compounding.

I did a quick calc during the session.

If granny makes the current maximum CAT C exemption when junior is born assuming an average real return of 3%pa then Junior will have €121,278 in their pension fund at age 68 in today’s money.

To put this into perspective the estimate of the current capitalization value of the State Pension is around €400,000.

To get the same pension fund under the same assumptions but with junior saving from age 22 they would need to save €1,256pa for their whole working life. That’s 14% of a €8971pa salary for 46 years earning an average of 3%pa over inflation.

Give a CAT exemption of up to say €25,000 to anyone making a contribution to a pension for a minor. This amounts to the same effective state contribution of 33% upfront but allows another possible source of contributions and gives longer for compounding to have the most effect.

Nothing to do with auto enrollment Marc. Is an employer and the govt supposed to contribute to juniors pension plan too?



Steven
www.bluewaterfp.ie
 
I did a quick calc during the session.

If granny makes the current maximum CAT C exemption when junior is born assuming an average real return of 3%pa then Junior will have €121,278 in their pension fund at age 68 in today’s money.

To put this into perspective the estimate of the current capitalization value of the State Pension is around €400,000.

To get the same pension fund under the same assumptions but with junior saving from age 22 they would need to save €1,256pa for their whole working life. That’s 14% of a €8971pa salary for 46 years earning an average of 3%pa over inflation.


That was an impressive quick calculation to make while listening to the presentations.
 
I note Marc that you have assumed 0% inflation over the next 46 years...…..this wouldn't be my central prediction!
 
I note Marc that you have assumed 0% inflation over the next 46 years...…..this wouldn't be my central prediction!

I’ve fixed that by synchronizing the start dates.

As Brendan says, not the easiest calc to do in a conference.

thanks
 
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As Duke notes above, the change in the ratio of workers to retired makes this effectively an inter-generational issue since fewer people in work will have to support more people in retirement there needs to be a social contract between the generations.
I was referring to the Department presentations highlighting that the pensioner to working age dependency ratio is due to fall from 4.9 to 2.3.
As a policy objective seeking to force a constituency to save who otherwise would not do so is a laudable one. But it is illusory to believe that the overall demographic dynamic can be solved by saving/funding.

The Good Lord decreed that in general the human condition is that we are economically useful (in terms of labour) for about 40 years of mid life but otherwise must rely on other supports. He also in his wisdom made the economic condition that it takes a mixture of capital and labour to be economically productive. This seems to provide a nice fit with the human condition. We supply labour in the prime of life and accumulate capital to support us in our dotage. But to believe that this will always be a nice fit is wishful thinking. Just because as a nation we save enough to meet the demographic gap does not mean that productive capital will emerge to satisfy the savings. In extreme if there are no workers, it doesn't matter how much we have saved, there is no economy to serve our savings.
Now we might be tempted to think that as a small country we could divert our savings into foreign assets and behave almost like an individual. But from the macro point of view it is hardly sustainable that the bulk of our savings would be channeled into foreign economies.
The summary message is that whilst it is laudable to assist those to save who would not otherwise do so, as a nation the correct savings level and where those savings are channeled is driven by considerations of the macro needs of the economy.

As I understand it the much lauded Australian model actually originated by the Government wanting to appease Union demands for pay rises but wanting to dampen the inflationary impact of those rises. Increased saving was the neat solution.
 
The real economics of this problem have nothing to do with the proposed solution of auto-enrollment ( which is largely born out of Richard Thaler’s research on behavioral nudges)

The essence of the problem is born out of the basic economics of household budgets; cost of housing and cost of child care prohibits saving for ones own retirement.

Why not offer a tax incentives for child care or build more houses - either would have similar effects as auto enrollment.

The issue is to concentrate the minds of the cohort in question on retirement funding.

Giving them tax incentives for child care or more house building will not necessarily induce people to save for retirement, it might be the last thing on their minds.

In addition, Granny might have nothing to give.
 
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