slides tax expenditure on pensions in ireland 28 09 16
TRANSCRIPT
Micheál CollinsGerry Hughes
Tax Expenditure on Occupational Pensions
in Ireland: relevance, cost & simulating
reformNERI Seminar Series, 28th September 2016
Outline1. Introduction2. Data3. The Income of Pensioners4. Pension Contributions5. The Cost and Distribution of Tax Expenditure6. Comparisons, Context & Policy7. Policy Simulations8. 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 recommendationso 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
3. The Income of Pensioners
Terms:• 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 AverageEmployee Income 1.9% 359.67
SE Income 4.9% 941.41Private pension income 4.4% 847.75
Occupational pension 27.9% 5,373.82Old-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
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
5. The Cost andDistribution of Tax Expenditure• We have overall Revenue data (improving…)
• Modelling €759m of tax expenditure
• Some assumptions to establish an initial estimate• 2014 tax year
o Modelled tax cases and determined marginal tax statuso 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 costo Models well when benchmarked to admin data (Revenue)
€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
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
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
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 regressivity o 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
reformNERI Seminar Series, 28th September 2016