Monday, February 02, 2009

Ill-considered Pension Levy Will Be Highly Iniquitous And Divisive

The proposed "pension levy" on public sector workers will be highly iniquitous and divisive; will visit inequality amongst them, and will impose different levels of effective taxation on workers on the same salaries in the same employment. These will arise from several aspects.

1. Years of service

It appears that the pension levy will be based on current salary and that it will be based on an assumption of a full public sector career and consequent pension entitlement. However, many staff, especially professional staff and those who have entered the public service after some years in the private sector, will not actually serve the full pensionable service of about 40 years and, therefore, will not be entitled to a full pension. The inequality of taxation in such cases is easily demonstrated.

Let's assume that two employees each earn 50,000 and will retire on the same date. Assume that one, at retirement, will have full pensionable service of 40 years and the other will have 20 years service. For simplicity, let's assume a pension levy of 5% of pensionable salary, amounting to 2,500 per year for each employee. The pension payable is normally based on 1/80 of salary per year of service, subject to a maximum of 50% of salary. In this example, therefore, the employee with 40 years' service will receive a pension of 25,000, while the employee with 20 years' service will receive a pension of 12,500 per annum. However, from the date of its introduction, they will both have paid exactly the same levy amount for their pensions but the employee with the lesser service will receive only half the pension. This is clearly iniquitous and will lead to severe inequality in the treatment of similar employees.

Effectively, this creates, for every single public sector employee, an individualised taxation regime which will be highly divisive, with workers with longer service benefitting significantly over workers with less service in the same scheme. It also effectively represents a change to a scheme without consultation with the members involved and may be open to challenge in the courts.

It also demonstrates that this so-called levy is, in fact, a tax and not a levy, and so should be called such. If it is a pension levy, it should be based on pension income, not on current salary.

2. Coordinated and uncoordinated pensions

Some public sector staff have uncoordinated pensions, which means that their pension is based entirely on their salary at retirement. Other staff, including all staff who joined the public service after 1995, have coordinated pensions, which means, in simple terms, that their pension is based on their salary at retirement, but reduced to take account of the old age pension, which they also receive. Because of this, they pay a higher rate of PRSI (A1) than pre-1995 staff, who pay a lower rate (D1). Therefore, post-1995 workers will pay the same pension levy, plus a higher rate of PRSI, for the same or a lower pension than their pre-1995 colleagues.

However, this iniquity does not end there. Post-1995 salaries were adjusted in some cases to take account of the differential in A1 and D1 PRSI contributions. Therefore, post-1995 workers will pay the pension levy on a higher gross salary (usually about 5% higher, though netting to the same value after PRSI) than their pre-1995 colleagues. So if the levy lasted for seven years, say, an employee who joined after 1995, based on the above example, would pay approximately 875 Euros more than his colleague for the pension.

3. Taxation based on future projected earnings

As the pension levy is not a contribution from which an employee will derive any additional pensionable benefit, it can only be considered as a tax on future potential earnings, based on current salary. For a variety of reasons, an employee's salary might be less at retirement than it was previously; say, perhaps because of a reduction in overtime or allowances that might have been reckonable for pension purposes. So, therefore, the levy will have been paid at a salary level on which the projected pension will never be earned. This is surely unjust.

4. Preserved pensions

Many employees who left the public service may have decided to preserve their benefits when they left. This means that their pension will be paid when they reach retirement age based on their service when they left and on the current equivalent salary level. If an employee returns later on a higher salary than they had previously left on, the preserved part of their pension will be paid at the old salary and the later pension will be based on their current salary at retirement. The levy, however, does not take account of the value of the preserved pension, which is, once again, highly iniquitous.

5. A divisive individualised tax

This pension levy flies in the face of the very concept of personal pension provision as it offers no pensionable benefit for the “contribution”. It will create severe inequality for many employees. Employees with longer service will benefit far more, based on the same contribution levels, than those with shorter service; the levy pits public sector worker against private sector worker; it imposes current taxes on future potential earnings, and it individualises the taxation system for every single public sector worker, breaching the principle of equality in taxation. Could anything be more ill-conceived and more likely to increase division in society than this blunt taxation instrument?

So let’s dispense with the populist charade of calling this a "pension levy" to appease private sector workers; right wing economists; media commentators and employer representatives and call it what it is: a special taxation levy on one group of workers - those in the public sector.

No comments: