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Economic Problems of Ireland in Europe - incorporating 2 other Papers The Cost and Distribution of Tax Expenditure on Occupational Pensions in Ireland by G Hughes and The National Pensions Reserve Fund: Pitfalls and Opportunities by Philip R Lane

  • Feldstein, Martin

Economic Problems of Ireland in Europe: This paper uses the recent controversy between the European Union and the Irish Republic to discuss the more general relationship between the European Union, the EMU and the member countries. Despite outstanding economic growth and budget surpluses, Ireland has been criticised by the European Commission because it has reduced taxes in the context of a relatively high rate of inflation. The first part of the paper considers the ways in which the EMU is likely to affect inflation and cyclical unemployment in the member countries over the longer term. The second part deals more specifically with the current Irish situation and the reasons for an EU reprimand of a very small country. That part suggests that an alternative standard, based on the principle of 'do no harm,' would have lead to a different outcome. Finally, the paper describes a policy of creating investment-based personal retirement accounts that would allow Ireland to share its future budget surpluses with taxpayers in a way that does not contribute to inflationary pressures. The Cost and Distribution of Tax Expenditure on Occupational Pensions in Ireland: The pensions industry's argument that the favourable tax treatment of occupational pension funds amounts to tax deferment rather than tax exemption is evaluated using a net present value approach to estimate the cost of the tax forgone in taxing employee pension contributions on a consumption tax basis, rather than an income tax basis. It is shown that the net present value estimate and the Revenue Commissioners cash flow estimate are in close agreement if tax rates for workers and pensioners are the same and that the Revenue Commissioners estimate is conservative if tax rates for pensioners are lower than for workers. A comparison is made of the trend in the cost of tax expenditure on occupational pensions since 1980 relative to the trend in the cost of direct expenditure on social welfare pensions and it is shown that the cost of tax expenditure has grown from around 10 per cent in 1980 to 66 per cent in 1997 and that the Exchequer support for the average participant in an occupational scheme has risen from one-quarter to more than one-and-a-half times Exchequer expenditure for the average participant in the social insurance scheme. The assumption, therefore, that pensions can be provided at less cost to the Exchequer through private financial institutions is questionable given existing pension tax arrangements. The distribution of the tax incentives provided for members of occupational pension schemes is evaluated and it is shown that most of the benefits accrue to those at the top of the income distribution. The National Pensions reserve fund: This paper analyses some key issues concerning the new National Pensions Reserve Fund. We briefly review the basic demographic and economic trends that motivate the establishment of the Fund. We consider the pitfalls facing the operation of the Fund and argue that a complete ban on domestic investment would minimise the politicisation problem. At least initially, the Fund should adopt an aggressive investment strategy, with a large equity allocation. We further argue that asset allocation should take into account the co-variation of returns with domestic macroeconomic and fiscal variables. Finally, we discuss the organisational structure of the Fund and its implications for optimal performance.

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This book is provided by Economic and Social Research Institute (ESRI) in its series Research Series with number GL31 and published in 2001.
ISBN: 0707002001
Handle: RePEc:esr:resser:gl31
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