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Micheál CollinsGerry Hughes

Tax Expenditure on Occupational Pensions            

in Ireland:relevance, cost & simulating reform

NERI Seminar Series, 28th September 2016

Outline1. Introduction

2. Data

3. The Income of Pensioners

4. Pension Contributions

5. The Cost and Distribution of Tax Expenditure

6. Comparisons, Context & Policy

7. Policy Simulations

8. Conclusion

1. Introduction• A research project on pensions, pension contributions

and associated tax expenditures

• Building on previous assessments; ‘fiscal welfare’

• Objective here:o establish the role of pensions (various) in pensioners

income

o estimate the distribution of tax expenditure on pension contributions

o Draw some evidence based policy recommendations

o Policy simulations

2. Data• SILC

o 2014 microdata used o 5,486 households and 14,078 individualso sample weights to make nationally representativeo detailed income datao data on pension contributions…

• Modellingo Using SILC 2014 as a basiso Derive tax cases (individuals and couples), marginal tax

rates, tax credits etco Simulations based on thiso Robustness checks indicate it is representative

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3. The Income of PensionersTerms:

• Private pensions = private plans…not employment related

• Occupational pensions = pension scheme of company/organisation

• Old age related payments = various social protection payments

Income Category Average Average

Employee Income 1.9% 359.67

SE Income 4.9% 941.41

Private pension income 4.4% 847.75

Occupational pension 27.9% 5,373.82

Old‐age related payments 53.1% 10,222.32

Rent income 1.8% 355.71

Investment income 2.0% 385.67

Other direct income 0.0% 1.72

Housing allowances 2.3% 445.89

Other social transfers 1.7% 323.02

Gross Income 100.0% 19,256.97

4. Pension Contributions• SILC data allows us to examine 3 types of pension

contributions:o employee into occupational pensions = employeeo employer contributions for individuals = employero private pension contributions = individual

• Employee contributions include PRDo Include PRD for public sector workerso This has been modelled and removed

• Contributions in:o Nominal terms €o % of earnings = employee and self-employment income

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All sources:

21% < €1,000

46% = €1k‐€5k

32% > average

11.5% > €10,000

All sources:

21% < €1,000

46% = €1k‐€5k

32% > average

11.5% > €10,000

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5. The Cost and

Distribution of Tax Expenditure• We have overall Revenue data (improving…) • Modelling €759m of tax expenditure

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• Some assumptions to establish an initial estimate

• 2014 tax yearo Modelled tax cases and determined marginal tax status

o One of three: 0%, 20%, 41%

o have individuals total pension contribution• after adjustment for PRD

• not modelling employer contribution

o can estimate tax expenditure cost

o Models well when benchmarked to admin data (Revenue)

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€22

€5

6. Comparisons, 

Context  &  Policy

Limits on Percentage  of EarningsEmployees Contribute to Private Pensions, 1996‐2016 

Annual Absolute Earnings Employee Contribution Limit (€),1999‐2015 

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Annual Limit on Size of Individual Pension Fund (€),1999‐2015

Earnings Limits on Employee or Employee (Ee) & Employer (Er) Pension Contributions to OccupationalFunds in OECD Countries, 2015

What Should Caps Be on Earnings Contributions & Lifetime Size of Fund?

Changes in 2009 -2013 still leave Ireland with highest limit on earnings contribution in OECD countries which impose limitsBut limits apply only to employee contribution

“Changes could be made to the terms of employment contracts, due to the reduction in the annual earnings cap, to provide for a switch from employee contributions to employer contributions.”

(Minister for Finance, written reply to PQ 6 Oct. 2009)

Earnings cap should apply to combined employer and employee contribution & should take account of integration of State and private pension benefits

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Earnings Cap & Integration of State and Private Pension Benefits 7. Policy Simulations

• Modelling the impact of some reforms:o Standard rating of tax expenditure (20%)

o Hybrid rate (31%)

o All at the higher rate (41%)

o Marginal rate but earnings limit of twice average earnings

• Comparisons to structure and revenue forgone cost of 2014 tax expenditure (as modelled)o First round effects – no behavioural change

Standard rating (20%)

Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline

€802 €396 €413m ‐€374m

Hybrid rate (31%)

Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline

€1,243 €613 €640m ‐€147m

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All at higher rate (41%)

Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline

€1,644 €811 €846m +€59m

An earnings limit (€72,180) & relief at the marginal tax rate

Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline

€1,228 €689 €632m ‐€155m

8. Conclusion• Pension costs = €2.5b + €5b• Distributions of Tax Expenditure skewed• Contrast to profile of public pension recipients• Reform of private pension system:

o Slow and often stymiedo Small reduction in regressive shape of pension tax

expenditure compared to 2005o Would need more radical policies to address regressivityo If not standard rating, then other 2nd best reforms (as we

suggest)o Pathway to fairer and better use of these resources

Micheál CollinsGerry Hughes

Tax Expenditure on Occupational Pensions            

in Ireland:relevance, cost & simulating reform

NERI Seminar Series, 28th September 2016