Brendan Burgess
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I have today submitted this.
Brendan
Submission to Consultation on Total Contributions Approach
From Brendan Burgess, Consumer Advocate.
3rd September 2018
Introduction
The Consultation Document sets out “three concepts which are important in the design of any pension scheme”
· Adequacy
· Equity
· Sustainability
It then goes on to propose a system which completely ignores two of these three concepts.
The proposed Total Contributions Approach is just tinkering around the edges of a system which is unsustainable and grossly inequitable.
Sustainability
The third listed concept is the most important concept:
The third is Sustainability, or more simply, the principle that the demographic changes will not push up costs to a level where they will not be sustained in the longer term. People who currently fund existing pensions have a right to know they will have similar supports when they reach pension age.
Sustainability must be the absolute priority. A pensions system which is inadequate is still a pension system. A pension system which some see as lacking equity is still a pension system. But a pension system which is adequate and equitable which no longer exists is of no use to anyone.
It’s very clear that the current system is completely unsustainable as it is completely underfunded. It is, in effect, a Ponzi scheme, where those who are drawing down a pension today are drawing down an amount far in excess of anything justified by the amount they have contributed over the years. This is only made possible by using today’s contributions to pay today’s pensions – a classic Ponzi Scheme.
It is absolutely shocking that the current value of the projected shortfall in the Social Insurance Fund is €335 billion.
This means that the current pension system is going to collapse even under the most optimistic assumptions.
· A self-employed person declaring an income of €20,000 a year pays a contribution of €800 a year into the scheme and yet would earn a pension of €400 per week when they reach pension age.
· A person who spends a long time not working and contributing nothing during that period will also receive €400 per week.
· An employee earning €40,000 a year contributes roughly €6,000 a year to the Social Insurance Fund via their own and their employer’s contribution. Even this is not enough to pay a pension of €20,000 a year for life.
We must face up to the reality that people have not been contributing nearly enough to fund the very generous pensions in retirement.
In particular, the self-employed must realise that a contribution of 4% of their income is not sufficient to pay their pensions and this must be raised to the same level contributed by and on behalf of PAYE employees or about 15% of their income.
There is no greater inequity than taking contributions from employees today with the promise of a contributory pension in the future and then reneging on that promise because the Social Insurance Fund has collapsed.
Equity
The second is Equity, or more simply, that those who pay contributions into the system receive an appropriate reward for that contribution.
The pension which a person receives in retirement must be linked to the amount of PRSI contributed by them and on their behalf and not to the number of contributions made or credited.
Thus a self-employed person who declares a very low income and pays 4% PRSI on it, would get a very low pension. A PAYE employee on the same salary but who has 15% of her gross salary contributed to the fund would get a much higher pension on retirement.
The simplest solution would be to remove the payment of contributory OAP entirely from the Social Insurance Fund. Use PRSI and the Social Insurance Fund to pay just for the insured benefits such as Jobseekers, Maternity and Illness Benefits.
All pension contributions should go into a segregated account in that person’s name. The pension they get on retirement would depend on what is in the fund on retirement.
The self-employed pension contribution would need to increase from the current level of 4% PRSI to around 15%. This will be acceptable only if the person is getting a benefit from the increased contribution. If it just goes into the general Social Insurance Fund, it will be seen simply as a tax increase of 11%.
Such an account based pensions system would render unnecessary the arguments about the levels of pensions and the age of retirement. The size of the accumulated fund would determine the age of retirement and the amount of the pension.
Serious consideration should be given to merging the proposed auto-enrolment pension with the Contributory OAP.
Adequacy
The first is Adequacy, or more simply, that the rate of the payment be maintained at a level that is considered enough for pensioners to live on, with a reasonable standard of living. This adequacy should not be dependent upon someone being male or female.
An equitable system where the pension received is based on the contributions made will mean that many low paid workers will not receive an adequate pension in retirement.
These people should be kept out of poverty by receiving a top-up from the taxpayer to bring them up to at least the level of the non-contributory pension.
Brendan
Submission to Consultation on Total Contributions Approach
From Brendan Burgess, Consumer Advocate.
3rd September 2018
Introduction
The Consultation Document sets out “three concepts which are important in the design of any pension scheme”
· Adequacy
· Equity
· Sustainability
It then goes on to propose a system which completely ignores two of these three concepts.
The proposed Total Contributions Approach is just tinkering around the edges of a system which is unsustainable and grossly inequitable.
Sustainability
The third listed concept is the most important concept:
The third is Sustainability, or more simply, the principle that the demographic changes will not push up costs to a level where they will not be sustained in the longer term. People who currently fund existing pensions have a right to know they will have similar supports when they reach pension age.
Sustainability must be the absolute priority. A pensions system which is inadequate is still a pension system. A pension system which some see as lacking equity is still a pension system. But a pension system which is adequate and equitable which no longer exists is of no use to anyone.
It’s very clear that the current system is completely unsustainable as it is completely underfunded. It is, in effect, a Ponzi scheme, where those who are drawing down a pension today are drawing down an amount far in excess of anything justified by the amount they have contributed over the years. This is only made possible by using today’s contributions to pay today’s pensions – a classic Ponzi Scheme.
It is absolutely shocking that the current value of the projected shortfall in the Social Insurance Fund is €335 billion.
This means that the current pension system is going to collapse even under the most optimistic assumptions.
· A self-employed person declaring an income of €20,000 a year pays a contribution of €800 a year into the scheme and yet would earn a pension of €400 per week when they reach pension age.
· A person who spends a long time not working and contributing nothing during that period will also receive €400 per week.
· An employee earning €40,000 a year contributes roughly €6,000 a year to the Social Insurance Fund via their own and their employer’s contribution. Even this is not enough to pay a pension of €20,000 a year for life.
We must face up to the reality that people have not been contributing nearly enough to fund the very generous pensions in retirement.
In particular, the self-employed must realise that a contribution of 4% of their income is not sufficient to pay their pensions and this must be raised to the same level contributed by and on behalf of PAYE employees or about 15% of their income.
There is no greater inequity than taking contributions from employees today with the promise of a contributory pension in the future and then reneging on that promise because the Social Insurance Fund has collapsed.
Equity
The second is Equity, or more simply, that those who pay contributions into the system receive an appropriate reward for that contribution.
The pension which a person receives in retirement must be linked to the amount of PRSI contributed by them and on their behalf and not to the number of contributions made or credited.
Thus a self-employed person who declares a very low income and pays 4% PRSI on it, would get a very low pension. A PAYE employee on the same salary but who has 15% of her gross salary contributed to the fund would get a much higher pension on retirement.
The simplest solution would be to remove the payment of contributory OAP entirely from the Social Insurance Fund. Use PRSI and the Social Insurance Fund to pay just for the insured benefits such as Jobseekers, Maternity and Illness Benefits.
All pension contributions should go into a segregated account in that person’s name. The pension they get on retirement would depend on what is in the fund on retirement.
The self-employed pension contribution would need to increase from the current level of 4% PRSI to around 15%. This will be acceptable only if the person is getting a benefit from the increased contribution. If it just goes into the general Social Insurance Fund, it will be seen simply as a tax increase of 11%.
Such an account based pensions system would render unnecessary the arguments about the levels of pensions and the age of retirement. The size of the accumulated fund would determine the age of retirement and the amount of the pension.
Serious consideration should be given to merging the proposed auto-enrolment pension with the Contributory OAP.
Adequacy
The first is Adequacy, or more simply, that the rate of the payment be maintained at a level that is considered enough for pensioners to live on, with a reasonable standard of living. This adequacy should not be dependent upon someone being male or female.
An equitable system where the pension received is based on the contributions made will mean that many low paid workers will not receive an adequate pension in retirement.
These people should be kept out of poverty by receiving a top-up from the taxpayer to bring them up to at least the level of the non-contributory pension.