Income tax reliefs on personal expenditure on pensions amount to social expenditure programmes delivered through the fiscal system. Ireland has used tax expenditure for many years to promote commercial provision of occupational and private pensions. The arguments for encouraging private pensions are that that the tax arrangements for private pensions are broadly equitable and that incentives for saving for retirement will enable most workers to supplement their flat-rate State pension to maintain living standards in retirement. Data for Ireland for about 5,000 households and nearly 13,000 individuals from the EU Survey of Income and Living Conditions for 2014 together with other data will be used to assess whether the distribution of pension tax expenditure is equitable. This will be done by looking at the decomposition of pensioners’ gross income in terms of income categories such as private and public pensions, earnings and investments. The relevance of social insurance and social assistance pension income and occupational and private pension income will be assessed for the average pensioner and for deciles or quintiles of the pensioner income distribution. Data on pension contributions for occupational and private pensions and employer contributions for individuals in work will be used to identify the distribution of tax expenditure on pensions in 2014 and to evaluate whether the allocation of pension tax reliefs are broadly egalitarian or concentrated on the highest earners. A comparison of the distribution of pension tax expenditure in 2014 with the distribution in 2005 will show whether some of the policy changes of recent years have improved the equity of pension tax expenditure. A proposal will be made to improve the equity of the system taking account that there is a limited range of policies which policy makers are willing to use.

1. Micheál Collins
Gerry Hughes
Tax Expenditure on
Occupational Pensions
in Ireland:
relevance, cost & simulating reform
NERI Seminar Series, 28th September 2016

2. Outline
1. 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

3. 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

4. 2. Data
• SILC
o 2014 microdata used
o 5,486 households and 14,078 individuals
o sample weights to make nationally representative
o detailed income data
o data on pension contributions…
• Modelling
o Using SILC 2014 as a basis
o Derive tax cases (individuals and couples), marginal tax
rates, tax credits etc
o Simulations based on this
o Robustness checks indicate it is representative

5. 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

6. 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

8. 4. Pension Contributions
• SILC data allows us to examine 3 types of pension
contributions:
o employee into occupational pensions = employee
o employer contributions for individuals = employer
o private pension contributions = individual
• Employee contributions include PRD
o Include PRD for public sector workers
o This has been modelled and removed
• Contributions in:
o Nominal terms €
o % of earnings = employee and self-employment income

10. All sources:
21% < €1,000
46% = €1k-€5k
32% > average
11.5% > €10,000

11. All sources:
21% < €1,000
46% = €1k-€5k
32% > average
11.5% > €10,000

15. 5. The Cost and
Distribution of Tax Expenditure
• We have overall Revenue data (improving…)

16. • Modelling €759m of tax expenditure

17. • Some assumptions to establish an initial estimate
• 2014 tax year
o 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)

21. €22
€5

22. 6. Comparisons,
Context & Policy

23. Limits on Percentage of Earnings
Employees Contribute to Private
Pensions, 1996-2016

24. Annual Absolute Earnings
Employee Contribution Limit (€),
1999-2015

25. Annual Limit on Size of
Individual Pension Fund (€),
1999-2015

27. Earnings Limits on Employee or
Employee (Ee) & Employer (Er)
Pension Contributions to Occupational
Funds in OECD Countries, 2015

28. 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
limits
But 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

29. Earnings Cap & Integration of
State and Private Pension Benefits

30. 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

31. Standard rating (20%)
Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline
€802 €396 €413m -€374m

32. Hybrid rate (31%)
Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline
€1,243 €613 €640m -€147m

33. All at higher rate (41%)
Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline
€1,644 €811 €846m +€59m

34. 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

35. 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 stymied
o Small reduction in regressive shape of pension tax
expenditure compared to 2005
o 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

36. Micheál Collins
Gerry Hughes
Tax Expenditure on
Occupational Pensions
in Ireland:
relevance, cost & simulating reform
NERI Seminar Series, 28th September 2016