My draft submission to the Pensions Commission

Brendan Burgess

Founder
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45,244
The problems with the present system

  • The present system is completely unsustainable. Tinkering with the contribution rates, pension levels or retirement age will not make it sustainable.
  • The amount contributed is far too low for the benefits people receive.
  • People see no connection between what they put in and what they get out.
  • PRSI is seen as “just another tax” so some will go to great lengths to avoid and evade it.
  • There is a major political problem when the government must decide what the PRSI rate should be and what the Contributory OAP rate should be. The short-term horizon of politicians means that they keep the contribution rates too low and the OAP rates too high.
The self-employed problem

  • A PAYE worker earning €60,000 a year will have €9,000 (15.05% of their salary) contributed to the Social Insurance Fund.
  • A self-employed person earning €60,000 a year, will have a total of €2,400 contributed to the fund.
  • A self-employed person earning €60,000 but declaring €20,000 for tax purposes, will contribute €800 to the fund.
This is outrageously unfair to PAYE workers. For almost 4 times the contribution of a self-employed person, they get exactly the same pension.

I am not an actuary, but a contribution of €2,400 a year during a 40 year working life is not enough to pay €13,000 a year to a single person for 30 years of retirement, never mind €24,000 a year for a married couple.



Does any other country have a system as inequitable as ours?

The Commission has the resources to see what happens in other countries. I doubt that there are many other countries giving generous pensions for life based on contribution rates of 4% of income. Does any other country have limits on the pension paid while having no limits on the contributions made?

Most countries would have a system incorporating some elements of what I now propose.

Each person should have their own Individual Pension Account into which their PRSI is paid.

The pension which a person receives in retirement should be linked to the amount of PRSI contributed by them and on their behalf and not to the number of contributions made or credited.

  • The more they contribute, the greater their pension will be in retirement.
  • A person who contributes €15,000 a year in PRSI will get a much higher pension than someone who contributes €800 a year.
The big advantage of this system is that it would be sustainable.

  • As the amount paid out is directly linked to the amount paid in, it would be sustainable.
  • A deficit would not arise.
The other advantages of this system

  • People would understand and appreciate the very high cost of pensions.
  • They would no longer see PRSI as a tax – as they would see it going into their Individual Pension Account and they would be getting a benefit from it.
  • As a result, people would be prepared to contribute more.
  • It would remove decisions about pension age, the rate of PRSI and the levels of pension from the politicians. A person could choose their own retirement age and the pension they would get in retirement would depend on how much was in the fund.
  • It would be a lot fairer to PAYE workers.
  • People who underdeclare their income for tax purposes would be paying less PRSI and so would end up with less pensions.
  • It would remove all the complexities and anomalies in the present system.
Dealing with carers

The Exchequer would contribute directly to each carer’s individual Pension Retirement Account

The Income Tax system, and not the Social Insurance system, should be used for addressing income inequality.

A criticism of this proposal is that it is regressive as those who earn more, would get more and low paid workers would get less.

And that would be a fair criticism if it were being assessed in isolation.

The PRSI system should not be used for addressing inequalities in society. The Income Tax system should serve that purpose.

This system would take many decades to implement fully.

We have had a system for many decades where people contributed far too little to adequately fund the pensions they are getting in retirement.

This huge underfunding cannot be fixed overnight but a start must be made.

The cost of pensions being paid out now could be dramatically reduced by linking the pensions to the amount contributed over the years by the pensioner.

This would result in a lot of existing pensioners having their pension greatly reduced. It would not result in poverty as most will have income and assets from other sources. Those who have no other income would be entitled to the means-tested non-contributory OAP.

Over time, the contribution rates should be increased to make each person’s IPA adequate.
 

noproblem

Registered User
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2,681
People about to collect their contributory pension today would, in a lot of cases, be getting substantially more than what they earned in work for quite some years of their lives. It's not their fault the low wages they were paid and the state still took their cut %'age wise. Now it's pay back time and some might see it as a win win for the low paid worker and a blow, or unfair, for the well paid. I don't think one can see it as being as simple as that. Maybe a scaled %'age of salary should be taken as a contribution, eg, up to €30k @2%, €30 to €40, 3%, €40 to €50 @4%, and so on. I'm not saying they should be the percentages but might be seen as a better way. Then again the lower paid would probably say they should pay nothing and so on it goes and on and on. A good political party has to get the bull by the horns on this one. Too much of this "i'm not paying" being tolerated in society today.
 

Brendan Burgess

Founder
Messages
45,244
Maybe a scaled %'age of salary should be taken as a contribution, eg, up to €30k @2%, €30 to €40, 3%, €40 to €50 @4%, and so on.

But it's supposed to be insurance.

And generally in insurance, the premium paid in is linked to the claim paid out.

In the UK, the employee Social Insurance rates are as follows:

First £9,500 : 0%
Next £40,500: 9%
Balance over £50,000 : 2%

We had something like that up to a few years ago. There was a ceiling on employees' PRSI.

Brendan
 

Marco 1972

Registered User
Messages
99
Very interesting and informative article Brendan, seems unfair especially between PAYE workers like me and self employed. Think financial advice and literacy should be embedded from school upwards and whole pensions area simplified.

There will likely be another crisis in 20/30 years when generation rent have to retire and have no means to pay for accommodation. Already only 1/2 population have access to additional income apart from OAP payment.
 
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