Private Pensions and Equity in Ireland and the U.K

The strong link between private pensions and employment status means that there is little interest in the equity of private pension arrangements since it is expected that inequality in earnings will be reproduced in inequality in pensions. Nevertheless, the equity of private pensions is an issue as governments in mainly English speaking OECD countries subsidise their provision through the tax system and governments in a number of EU countries are now considering this policy as a way of coping with increases in long-term pension costs due to ageing of their populations. The favourable tax treatment of private pensions provided in Ireland and the United Kingdom is outlined and compared with the tax treatment of private pensions in OECD countries. It is shown that the annual cost of tax expenditure on pensions amounted to over 1 per cent of GDP in both countries in 1997, that it substantially exceeded the cost of their means-tested social assistance schemes and amounted to two-thirds of direct expenditure on social insurance pensions in Ireland and to one-third in the U.K. Evidence relating to the distribution of pension tax expenditure shows that the present tax treatment of private pensions is inequitable as about two-thirds of the benefits accrue to the top two income deciles in both countries and 3 per cent or less to the bottom two deciles. Proposals for containing the cost of public pension systems in Europe by relying on greater private pension provision in the future can learn from experience in Ireland and Britain that using tax incentives to promote private pension provision could impose substantial costs on the Exchequer. The regressive nature of such incentives means that all taxpayers have to pay more taxes to provide benefits which accrue overwhelmingly to higher income taxpayers.