Sinéad Pentony: Last week, Professor Teresa Ghilarducci's spoke at a pensions seminar co-hosted by TASC, TCD Pension Policy Research Group and the INTO. See her presentation here. Professor Ghilarducci is the Bernard and Irene Schwartz Chair of Economic Policy Analysis and the Director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research, New York.
Her presentation focused on the 401k pension system and showed that pension tax reliefs, as presently structured, result in a significant increase in inequality in the US and that a change in the balance of pension provision in favour of public rather than private pensions is necessary to provide a guaranteed income in retirement. As Ireland starts the process of implementing the National Pensions Framework, we need to take a step back and examine the experience in other jurisdictions. The 401k system has clearly not worked in the US, yet we are proposing to go down a very similar road here.
Ghilarducci’s research on the 401k (defined contribution) system of pension provision clearly shows that this system has failed to provide an adequate replacement income in retirement for millions of Americans. This system of pension provision is similar to Ireland’s PRSAs and they tell a very similar story:
• They are voluntary.
• They have failed to increase pension coverage - half of all workers in Ireland do not have a private pension and 64 million Americans at retirement age are without adequate pension provision.
• They are costly - because of the fees and charges of private providers.
• Tax reliefs have failed to increase pension coverage and they disproportionately benefit high earners -in Ireland 80 per cent of pension tax reliefs accrue to the top 20 per cent of earner; in the US, Ghilarducci contends that while pension tax reliefs in the USA are regressive, they are less regressive than in Ireland.
• They fail to provide an adequate income in retirement - as increasing the value of pension funds is largely dependent on the performance of the stock market and to a large degree, the gains in value are eroded by fees and charges, which is the case in both Ireland and the US.
Having researched 30 years of defined contribution pensions in the USA, Ghilarducci has developed a proposal for a Guaranteed Retirement Account (GRA), which resonates very stongly with the TASC/TCD model of pension provision. Her proposal highlights the importance of the social security pension, as this is what most people rely on for an income in retirement.
Her proposals are:
• A supplementary, mandatory and state-led system that requires all workers and employers to contribute through the social insurance system.
• The state also contributes through tax credits.
• Investments are managed by the State.
• People are provided with a guaranteed income (adjusted for inflation) in retirement.
Ghilarducci has estimated that state contributions to GRAs would be cost neutral if tax reliefs were redistributed (through tax credits) in favour of low and middle income earners.
The aim of the National Pension Framework is to deliver choice – but real choice can only be delivered if people are given the option of saving in a state-led and state-guaranteed supplementary system of pension provision. The evidence clearly supports the need for such a system. The proposals set out in the NPF are centred on a pension system based on tax reliefs which are costly, inefficient and inequitable, even at 33%; and managed by the private pension industry – an industry that has demonstratably failed to deliver security for many Irish workers in retirement.