Tax Supports on Pension Contributions · Tax Supports on Pension Contributions Outcomes, Costs &...
Transcript of Tax Supports on Pension Contributions · Tax Supports on Pension Contributions Outcomes, Costs &...
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Tax Supports on Pension Contributions
Outcomes, Costs & Examining Reform
IGESS ConferenceDublin Castle, 8th June 2017
Micheál CollinsGerry Hughes
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Outline
1. Introduction2. Background3. Data & Methods4. Results5. Examining Reforms6. Conclusion
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1. Introduction
• OECD wide shift towards private pension provision
• Using the tax system to encourage retirement savings has been a central element
• Ireland no different• interesting given demographic profile• recurring policy initiatives • large allocation of resources = 4.8% of total tax revenue
• Effectiveness questions…
• Looking at:• pension contributions (broad definition)• cost and distributive effect of tax supports
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2. Background
The Irish Pensions System• Beveridgean with three pillars
(i) State social welfare financed pension (PAYG)
(ii) Occupational pensions
(iii) Voluntary private pensions
• Pillar i = bedrock• looking at current pensioners (2014 data):
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Tax Supports for Pension Contributions• OECD wide expansion….limited evaluation…
• Theoretically:• relative rate of return on asset (savings)… its
attractiveness
• scale of gain depends…
• Redistributive nature of these policies:
• Barr (1992) “voluntary welfare”
• Howard (1997) “hidden welfare state”
• “fiscal welfare”
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• Ireland = long history
• Tax relief on• employee and employer contributions to pillar ii
• voluntary contributions to pillar iii
• EEpT structure
• Costs are high• relative to other OECD states
• increasing over time
• Table and our focus…
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3. Data and Methods
• SILC• 2014 microdata used • 5,486 households and 14,078 individuals• sample weights to make nationally representative• detailed income data• data on pension contributions…• PRD removed
• Modelling• Using SILC 2014 as a basis• Derive tax cases (individuals and couples), marginal tax rates,
tax credits etc• Simulations based on this• Robustness checks indicate it is representative
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4. Results
a. Contributions
b. Tax Supports
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Contributions
• active contributors = 605,000 (34% of all earners)
• Looking as a % of earnings• earnings = employee + self-employed income
• 3 types of pension contributions:• employee into occupational pensions = employee
• employer contributions for individuals = employer
• private pension contributions = individual
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• Taking the median contributor (broad definition)
• €3,340 per annum
• for 40 years pension of €5,200 per annum
• Replacement Rate = 37.5%• of this 70% = pillar one pension
• Overall:• of those who contribute…relatively small contributions
(% and €)
• effectiveness and efficiency questions…
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Tax Supports
• Provided at the marginal rate of income tax
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Tax Supports
• Provided at the marginal rate of income tax
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Tax Supports
• Provided at the marginal rate of income tax
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Figure 2: Distribution of tax relief for pension contributions by income deciles, 2014 (employee and individual contributions)
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median contributor
Figure 2: Distribution of tax relief for pension contributions by income deciles, 2014 (employee and individual contributions)
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Two Decades of Reform:Distribution of Pension Tax Reliefs for Employees (1994)
+ Self-Employed (1999, 2005) + PRSA (2014)
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5. Examining Reforms
• A recurring topic given costs, regressive shape and tax needs
• Paper models a series of reforms:• benchmark of 2014 (employee & voluntary contributions)
• cost = €664m
• Gini = 60.9
• First round effects – no behavioural change
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• Some reforms:• Standard rating of tax expenditure (20%)• Hybrid rate (31%)• All at the higher rate (41%)• Marginal rate but earnings limit of twice average
earnings• Marginal rate but earnings limit of 3 x Min Wage
• Key message:• possible to save some resources• possible to generate greater equity• but, underlying problem of low contributions and
participation is unaddressed….but resources available
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Standard rating (20%)
Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline Gini (change)
47% 51% €350m -€314m 57.2 (-3.4)
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Hybrid rate (31%)
Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline Gini (change)
18% 24% €542m -€121m 57.2 (-3.4)
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An earnings limit (€72,180) & relief at the marginal tax rate
Mean Relief Median Relief Tax Forgone Cost Change v 2014 baseline Gini (change)
7% 16% €620m -€44m 58.2 (-2.4)
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6. Conclusion
• Looking at a corner stone of pension policy
• Large state resources involved
• Low levels of active participation & low contributions…effectiveness questions re current policy approaches
• Skewed distribution of tax relief (fiscal welfare)
• Potential to change…and fund alternative policy measures
• Ireland = there is time to adopt changes…need for policy innovation
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Tax Supports on Pension Contributions
Outcomes, Costs & Examining Reform
IGESS ConferenceDublin Castle, 8th June 2017
Micheál CollinsGerry Hughes