ERSI Advocates Change To Irish Pension Tax Relief

by Jason Gorringe, Tax-News.com, London

30 November 2009

The Economic and Social Research Institute (ESRI) has called on the Irish government to cut pension tax relief for the country’s highest earners "to save money and make the system more fair".

ERSI argues that tax relief at a standardized rate could help to achieve the overall objectives of public pension policy in a more efficient and equitable way.

“Currently, over EUR8 out of every EUR10 of tax relief goes to taxpayers in the top one-fifth of the income distribution. This is because high-income earners are more likely to participate in pension schemes, more likely to make higher contributions, and the value of tax relief at the top rate of income tax is about double that for the standard rate taxpayer. There is a strong incentive for high earners to contribute to pension schemes, but a weaker incentive for those with low and middle incomes,” the ERSI report observes.

“Evidence from the UK and the US suggests that much of the saving by high-income households would take place even without the incentive (what economists call ‘deadweight loss’). There is also growing evidence that decisions on pensions can be strongly influenced by non-economic factors, at lower cash cost to the Exchequer."

"For example, pension schemes in which the default option is to enrol in the scheme, but with an option for individuals to withdraw (sometimes called ‘soft mandatory’), and a system of partial matching of contributions at a single rate, rather than tax relief, have been found to be effective in other countries.”

The ERSI report suggested two options for the government, namely:

• Standardization of relief on all pension contributions (employee, employer and implicit government contributions), which could raise revenue of over EUR1bn per annum. This would imply a reduction in income tax relief for top rate taxpayers, but no change for those paying the standard rate. Revenue raised could be applied to sustaining State pension levels as demographic pressures on the financing of public pensions intensify;
• An increase in the relief from the standardised level to allow relief at a hybrid, 30% rate – an option similar to that recommended by the Commission on Taxation and included in the Programme for Government - which would involve gains for standard rate taxpayers and losses for top rate taxpayers, and a gain to the Exchequer in the region of EUR500m per year.

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