Colm’s columns

Colm Rapple
Irish Mail on Sunday, January 27, 2008

There are almost a million workers in Ireland facing retirement with nothing more to live on than their social welfare pensions. Should they be forced into pension schemes or simply encouraged to save? That’s a question that has been exercising the mind of welfare minister, Martin Cullen in recent months. It was one of a range of issues, raised in a discussion paper on pensions published by the Government last year. They are currently the subject of ongoing consultations with the social partners and the pensions industry.

Mr Cullen has promised to unveil policy initiatives before the summer.

It’s time to do something. Our population is ageing and, while the recent influx of immigrants may have slowed the process, it is being forecast that by 2031 there will only be 3.3 workers for everyone over 65 compared to 5.6 now.

It’ possible to make an argument in favour of letting the problem sort itself out by adopting a pay-as-you-go approach and encouraging people to retire later, but it hasn’t got much support up to this. The conventional wisdom is that we need to get more people to put more money aside for their retirement.

That has been official government policy for some time.

Employers are against any form of compulsion and, while he hasn’t said so, that’s likely to be Mr Cullen’s preference too. But the current turmoil on the world’s stock markets has greatly enhanced the case for compulsion. It has graphically illustrated the fact that investment values can go down as well as up thereby making voluntary saving much harder to encourage even with greater incentives.

Irish pension fund values fell by about 3% on average during 2007 and have fallen by a further 10% so far this year. Slightly differing figures are given by different analysis but those are about the orders of magnitude. Actually the performance is not as bad as it seems. You need to take a longer term view.

Pension fund values rose by about 13% in 2006 so, in short, fund values are back about where they were two years ago at the beginning of 2006. But values had jumped by over 20% during 2005 and by 10% during 2004. Even taking account of the current sharp down-turn, the average pension fund has achieved an annual growth rate of 6% plus over the past three years.

It’s not massive but it is a positive return. The fact is that pension fund investments have given good returns over the longer term. Put tax relief into the mix and the returns are brilliant. So good, indeed, that those many self-employed individuals who invested heavily in pension funds last October are still showing gains despite the sharp stock market downturn.

Assuming tax relief at 41%, every €100 invested only cost them €59. It will take a 41% drop in the value of the pension fund investment before they suffer a real loss. Those who only get tax relief at the standard rate of 20% are more vulnerable, of course. And that’s part of the problem.

Most of those million or so workers who are not in pension schemes are only paying tax at the standard rate. The tax relief on pension contributions is less attractive for them than for those able to claim at the top rate.

Martin Cullen may be able to do something about that. He has been pushing the notion of an SSIA-type incentive on the grounds that an easily understand top-up is more attractive than a less transparent tax-relief. But he would need to do more than to simply repackage the current tax relief.

Tax relief at 20% is equivalent to the one-for-four top-up that was paid on SSIAs but tax-relief at 41% is the same as a top-up of €1 for every €1.4 contributed. Take €100 through your pay packet and you end up with €59 after tax. Put it into a pension schemes and the full €100 goes in. The Exchequer has effectively topped up your €59 with another €41.

That incentive needs to be marketed better but making it more transparent would also highlight the inequity. It would be difficult for Mr Cullen to introduce an alternative top-up without removing the current bias in favour of the higher paid. And would it encourage more saving? It’s doubtful.

These incentives have existed for decades, as has the Government’s desire to extend pension coverage. Yet little or no progress has been made. The truth is that no matter how well the carrot is repackaged or even improved, it will not be enough to encourage significant numbers of low paid workers to save for their retirement.

That’s been evident for a long time but the facts are ignored. Some employers such as Tesco have had relatively low take-up of voluntary contributory pension schemes which offer very attractive top-ups for workers who opt to join. Not only does the worker get tax relief on his or her contributions but also benefits from a company top-up contribution.

What Mr Cullen and the employers have in mind, is nothing more than that type of plan. It may be packaged differently but it wouldn’t be any more successful in encouraging people to save.

It has become very clear that the only way to extend pension coverage is by compulsion. The easiest, cheapest and most effective solution would be to simply extend PRSI. The collection system is in place and operated by all employers, while the existing National Pension Fund is an ideal investment vehicle. That’s the approach that should be advocated by the trade unions but private sector pensions has never been one of their strong points.

Colm Rapple
Irish Mail on Sunday, January 21, 2008

This is a good time to claim a tax rebate in respect of any medical expenses you incurred last year, or indeed, at any time since 2004. It has never been simpler to make such a claim. You can ring 1890 30 67 06 and leave a message asking for the relevant forms to be sent to you.

Alternatively you can register for the Revenue on-line service that has been extended to PAYE taxpayers. Just log-on to www.revenue.ie and follow the links. For this high-tech option you’ll need your Revenue PIN number, which you should have got in the post. If you can’t find it, you can make use of the Revenue’s new phone texting service. Simply text the word PIN followed by your PPS number to 51829 and your PIN number will be posted out to you.

Included will be details of how you use the texting option to claim relief for union dues, age credit, local authority charges, dependant relative or home carer’s relief.

The relief for medical expenses has to be claimed either on-line or using a reclaim form. If you are entitled to it, make sure to claim it, but recognise while doing so, that it is a very inequitable way of helping people to meet their medical expenses.

Those liable for tax at 41c in the euro get 41% of their medical expenses back. Those lower income earners who are liable for tax at the standard rate only get a 20% refund while those who are not liable for tax at all because of their low incomes, have to bear the full cost of their medical expenses.

Of course, some people on low incomes are entitled to medical cards but there are many people with incomes too high to qualify for even a “doctor visit” medical card and yet low enough to keep them out of the tax net.

The differences between those three groups can be significant in money terms.

Let’s take an example of three individuals each of whom incurred medical expenses of €1,000 last year.

James, a senior executive on €200,000 a year, can claim a tax rebate of €410.

John, who is an average earner on €40,000 a year, can only claim €200 since he is paying tax at the standard rate.

Joe, a married pensioner who retired a couple of years ago, has pension income of €35,000 a year. He’s not liable for income tax, so can claim no tax relief.

So James, the high earner, gets €1,000 worth of medical treatment for €590. It costs John, the average earner, €800 while Joe pays the full €1,000. That can’t be equitable.

There are many people low income earners besides pensioners who have to bear their full medical costs without any recourse to tax relief. An individual on the minimum wage is not liable for income tax. A couple, both of whom are on the minimum wage are on an annual income of about €35,100 and even with only basis tax credits, they could have an income of €36,600 before entering the tax net. That’s before taking account of other tax reliefs such as those on rent, trade union subs, expenses etc.

But such a couple, even if they have two children, are unlikely to qualify for a medical card, not even one of the second-class doctor visit cards. Medical card eligibility is determined by a means test, the thresholds of which haven’t been changed for over two-years. Health Minister, Mary Harney, promised to extend eligibility this year but it’s likely to be later rather than sooner.

On the basis of the current means-test thresholds a couple with two children need to have an income of no more than €17,810 to qualify for a full medical card and less than €26,728 to qualify for the doctor visit card that simply covers the cost of GP visits and nothing else.

Those are the basic thresholds. They are increased to take account of rent or mortgage repayments, and expenses related to travelling to work and childcare but it’s unlikely that the couple in our example, with joint earnings of €35,100 would qualify either card.

Without a medical card they would have to pay the full cost of any GP visits and up to €90 a month for prescribed medicines. The fact that they are not liable for income tax on €35,100 a year is obviously an advantage but it also means that they have no way of reclaiming any of their medical costs.

If their costs escalated they might qualify for a medical card on hardship grounds but if they have to pay €200 for a couple of visits to the doctor plus a prescription, they can claim none of it back, while James, our €200,000 a year executive, can get a tax rebate of €82 on a €200 medical bill.

The same sort of inequity applies to the tax relief on pension contributions with the State paying 41% of the pension costs of a high rate taxpayer, 20% for a standard rate payer and nothing towards the pension benefits of a low income earning not liable for tax. This inequity has been recognised and there are proposals to do something about it, primarily because the pensions industry and the Government want to encourage low earners to save for their own retirement.

One idea is to replace tax relief with an SSIA-type top-up to pension contributions.

So why not dispense with the tax relief on medical expenses and simply give everyone a refund of, say, 30%. Someone might run with that idea if we ever get back to issue politics.

Colm Rapple
Irish Mail on Sunday, 13th January 2008

The Congress of Trade Unions (ICTU) is partly to blame for the fact that this week’s benchmarking report confined most of its few pay awards to higher paid public servants by recommending the use of average rather than real pension costs.

All public servants enjoy reasonably good pension benefits – the sort that everyone should aspire to – and the more you earn the more you get. A report prepared for the benchmarking body concluded that the cost of providing a public sector pension varied from a low of 12.4% in the case of special needs assistants to a high of almost 33% in the case of gardaí.

The Public Services Committee of ICTU submitted that average pension cost be applied in all cases. That was accepted and an average value of 20% of pay was applied to all public sector workers covered by the benchmarking process. That obviously favoured those with more costly pension benefits and worked against those with less costly pension entitlements who tend to be the lower paid.

The report only gives pension value figures for a limited number of worker categories. The estimated costs, as a percentage of pay, for workers who joined after 2004 are as follows:

Special needs assistant 12.4%
Staff nurse 13.8%
National school teacher 19.4%
Engineer 20.8%
Civil servant 21.3%
Garda 32.9%

On the basis of those figures the benchmarking body concluded that, on average, public sector pensions cost 20% of pay. The average for the private sector was calculated to be as low as 3%. That takes account of the fact that only about one-in-three private sector workers enjoy occupational pension benefits. That 3% is a valid average but it was decided to apply an average of 8% as being about the cost to private sector employers actually providing pension benefits.

So the benchmarking body concluded that, in order to compare like with like, it was necessary to add 12% to a public sector worker’s pay when doing a comparison with a private sector counterpart. But on the basis of its own figures the differential is under 6% in the case of Staff Nurses and under 5% in the case of Special Needs Assistants.

The differential is obviously low in the case of most, if not all, lower paid public sector workers. The lower the pay, the larger the proportion of pension that comes from the State Contributory Pension. The half-pay entitlement includes the State social welfare pension to which most workers are entitled.

The benchmarking body is at pains to stress that even had it used the true, rather than the average, cost of pensions in its calculations on Staff Nurses and Special Care Assistants, it wouldn’t have recommended any pay increases. But that may not have been true for many of the low paid categories of public sector workers.

The decision to use the average rather the actual cost of pensions in these calculations is clearly inequitable and indefensible. It’s difficult to understand how ICTU could have recommended such a course of action. But it did, and the benchmarking body uses that recommendation as justification for its own actions.

Perhaps the trade union establishment wanted to hide the true value of the better public sector pensions because of its singular failure to stop the erosion of pension entitlements in the private sector. The comparisons between private and public sector entitlements are stark.

That 12% differential used by the benchmarking body is between the average cost of public sector and private sectors pensions (20% minus 8%) taking no account of the fact that two-thirds of private sector workers aren’t in pension schemes. It is estimated that only 474,000 of the 1.4 million private sector workforce enjoy any occupational pension benefits. So in most cases the average differential between public and private sector workers is the full 20% and even more if you take account of the higher cost of some public sector pensions.

Gardaí enjoy pension benefits worth almost €1 for every €3 they earn as outlined above. A private sector employer wanting to finance such benefits for employees would need to contribute 33% of payroll to a pension fund.

The gardaí, of course, are a special case. The high cost of their pension benefits reflects to some extend the fact that they qualify for a full pension after only thirty years service but, given the arduous nature of their job, there is a case for encouraging early retirement.

That doesn’t apply to administrative civil servants who need forty years service to qualify for a full pension. That brings down the cost but it is still equivalent to just over 21% of pay. That’s what it would cost a private sector employer to finance a civil service type pension.

There’s a lot more information in this week’s reports than there was in the original benchmarking report back in 2002. But there is no hint of how much the remuneration of some public sector workers exceeds those of their private sector counterparts. We have the recommendations for those few categories of worker who are to get pay increases but what about those who are to get nothing. Nobody is going to suggest that their pay should be cut but they are hardly exactly on a par with their private sector counter parts.

The fact that they are getting no pay increase is going to leave them angry while their private sector workers have every right to believe that they are being hard done by. We’re heading into an interesting round of pay talks.

mail@colmrapple.com

Colm Rapple
Irish Mail on Sunday 5th January 2008

“Scrappy, inconsistent and unfair” was how health minister, Mary Harney described the current system for financing nursing home care and, if anything, that’s an understatement. It was to be changed from January 1 but the necessary legislation hasn’t even been published and the HSE isn’t ready to administer the new scheme.

Ms Harney outlined her plan over a year ago labelling it “a fair deal”. On the face of it, it’s an improvement on the current wholly inadequate system. But she doesn’t get the detail right, the new could prove an iniquitous as the old.

There may still be a degree of means testing that could be used by the unscrupulous to encourage elderly people to dispose of their assets. The departments of health and social welfare are well aware of the potential for this form of financial abuse of the vulnerable but it still exists in many of our health and social welfare schemes.

There are also potential for inconsistency in the definition of assets and income that will be used to calculate the contribution that nursing home residents will have to make towards the cost of their care.

While change is to be welcomed and long overdue, it may be as well that Ms Harney is taking her time. Although the current inequities are nothing short of scandalous, it is equally scandalous that it has taken so long to bring about change. All of the anomalies in the current system were highlighted in a report presented to the Department of Health in 2001 by Professor Éamon O’Shea of UCG. It wasn’t published for two years and even then it was ignored.

It highlighted the inequity whereby someone who qualifies for a public bed is currently paying at most €120 a week while someone sharing the nursing home room can be paying as much as €1,000. Many “public” beds are in private nursing homes rented to the HSE.

This anomaly in the provision of State aid to those in need of nursing home care is only part of the problem. The current system also creates an incentive for those in need of such care to stay in hospital until a public nursing home bed becomes available. This has added greatly to hospital overcrowding in recent years.

Those not lucky or persistent enough to get a “public” bed, can qualify for a State subvention but it’s only €300 a week and nursing homes cost an average of €700 a week and as much as €1,000. The HSE can pay more than €300 but only in special circumstances and in all cases means, including the value of a home, are taken into account.

Many people have been forced to sell their homes to pay for their nursing home care.

That will no longer be necessary under the new scheme,. Those assessed as being in need of nursing home care will pay a maximum of 80% of their disposable income towards the cost and in addition up to 5% of their assets each year including the value of their home. So someone with a house worth €500,000 and savings of €100,000 would have to contribute up to €30,000 a year (5% of €600,000).

That contribution would be paid for at most 3 years so a maximum of 15% of the assets would go towards nursing home care. The payment will be deferred until the person and his/her spouse have died.

This new system will provide the elderly and their families with a degree of certainly that is not present in the current system. But it is open to some criticism.

Firstly it is not as generous as it may first seem. The vast majority of residents are in nursing homes for less than three years and in many cases the 5% of assets will cover the full cost of care. But Ms Harney hasn’t pretended that the new system is much more than a fairer reallocation of existing resources.

Others view the new charge as a tax on death that will bear heaviest on those with the most assets. But that’s hardly unfair although the IFA has been pushing to have farm assets excluded. The 5% is a maximum charge on the assets. Someone with a house worth €1 million, for instance, and no income could be subject to an annual charge of €50,000 – about as much as a nursing home is likely to cost. That same charge of €50,000 would equally apply to someone with assets worth €2 million.

In the case of a couple, both of whom are in nursing homes, the maximum charge will be 7.5% of asset value but in all cases the payment can be deferred until after death of both spouses and any other dependants living in the house. It’s not clear whether the value will be calculated at the time the care is given or at the time the due sum is paid.

To qualify a person will first have to be assessed as in need of nursing home care and Ms Harney has expressed the view that 20% of those currently in care would be better off at home. She’s undoubtedly right and has promised extra resources to help people maintain their independent. But there’s a danger that the assessment of nursing home need may be based on bed availability rather than on what’s best for the applicant.

Ms Harney has promised that entry to this new system will be optional. Some existing nursing home residents could benefit from a switch while others would lose out. Hopefully each case will be examined to ensure the best outcome for each individual.