# Pension/PRSA Coverage



## Freddie Kruger (30 Aug 2001)

Does anyone else get the feeling that PRSAs will not have the desired effect, as regards coverage, and that it is only a matter of time before retirement funding will become compulsory?


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## Joe Public (30 Aug 2001)

Hi Freddie,

I believe that early indicators from across the water are that only 20% of employees sign up for stakeholder pensions when the employer doesn't contribute. When the employer does chip in, the take up is closer to 66%.

I agree with your conclusion - PRSAs look like a stageing post on the way from today's occupational regime to a system of mandatory employer contributions. The government has made no secret of going the mandatory route if PRSAs don't lead to higher pension coverage.


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## UDS (30 Aug 2001)

There's already compulsory retirement provision - the social insurance retirement pension.

If that is felt to be insufficient, far and away the most efficient way of providing a higher level of universal provision would be to increase the social insurance retirement pension, and increase social insurance contributions to cover the extra cost.  This would certainly be cheaper than providing the same level of pension through a personal or occupational scheme.

Having two separate compulsory universal pension arrangements strikes me as probably not a good idea.


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## Freddie Kruger (11 Sep 2001)

Is it not beyond the realms of possibility that the social insurance pension may be the method that will become defunct or do I need to take myself into a corner and have a good little chat with myself?


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## UDS (11 Sep 2001)

Hi Freddie

Interesting thought.

My initial reaction is that it's very unlikely, and probably undesirable.  The social insurance system is vastly more efficient than any private pension (in terms of admin costs as a % of benefits paid) and a pound paid into the social insurance system will produce more pension than a pound paid into any occupational or personal pension scheme.  That's not necessarily true on the individual level but, in the aggregate, it certainly is.  Hence if your objective is to maximise retirement income in the community, you will acheive this more efficiently through a social insurance system than through a univeral private funded system.

What would be the arguments in favour of terminating the social insurance system?


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## Brendan Burgess (12 Sep 2001)

I could think of a few arguments in favour of scrapping the social insurance scheme.

The benefits are not related to the contributions. There is a maximum social welfare pension - there is no maximum rate of PRSI. Highly paid employees pay far more that the cost of the pension.

The state pension is full of inconsistencies. I can't remember the details, but someone with a few years continuous work can get a full pension, whereas someone with many years work split over a longer period would earn a reduced pension. This used to be the case, I don't know if it still is. 

As a general principle, I would be in favour of replacing the social welfare pension with privately funded pensions.  I don't know if it is practical. There would also have to be a non contributory pension for those whose employment contributions didn't qualify them for an adequate pension.

(I can sense this thread moving in the direction of the Great Debates Forum ...)

Brendan


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## Liam D Ferguson (12 Sep 2001)

I've just had a brilliant idea - why don't I move this topic to the Great Debates forum?


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## UDS (13 Sep 2001)

Hi Brendan

<!--EZCODE ITALIC START-->_ “The benefits are not related to the contributions. There is a maximum social welfare pension - there is no maximum rate of PRSI. Highly paid employees pay far more that the cost of the pension.”_<!--EZCODE ITALIC END-->

This looks more like an argument for restructuring the SW pension (by introducing an earnings-linked pension or by restoring a cap on the earnings by reference to which contributions are calculated or by funding it out of general taxation) rather than for abolishing it.  Your essential objection here is that the SW pension is redistributive (i.e. it transfers wealth from higher earners to lower earners), but surely

(a) all pensions do that to some extent, and

(b) it’s is a legitimate social policy, and

(c) if it isn’t, it can be abandoned without abolishing the SW pension.

After all, income tax is redistributive, but that’s hardly an argument for abolishing it.

<!--EZCODE ITALIC START-->_ “The state pension is full of inconsistencies. I can't remember the details, but someone with a few years continuous work can get a full pension, whereas someone with many years work split over a longer period would earn a reduced pension. This used to be the case, I don't know if it still is.”_<!--EZCODE ITALIC END-->

I think this is much less true than it used to be, but probably still true to some extent.  But, again, surely the appropriate response is to eliminate these inconsistencies rather than abolish the pension altogether?

<!--EZCODE ITALIC START-->_ “As a general principle, I would be in favour of replacing the social welfare pension with privately funded pensions. I don't know if it is practical. There would also have to be a non contributory pension for those whose employment contributions didn't qualify them for an adequate pension.”_<!--EZCODE ITALIC END-->

It’s practicable, but it’s bloody expensive.  There would be winners and losers, but it would certainly mean higher contributions overall or lower benefits overall or (probably) a bit of both, so there would be more losers than winners.  I’m not sure what advantages would be thought to accrue to the community as a whole.

You could argue for the abolition of the insurance element of the SW pension, replacing it with a universal age pension funded out of general taxation.  Whether that amounts to the abolition of the SW pension and its replacement by something completely different or just to its radical restructuring is a point you could debate.  A variation is to introduce a universal <!--EZCODE ITALIC START-->_ but means-tested_<!--EZCODE ITALIC END--> old-age pension funded out of general taxation – this is what they have done in Australia.


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## Brendan Burgess (15 Sep 2001)

Hi UDS

Don't get me wrong - I strongly support some redistribution of wealth. I support the tax and social welfare system. It's just that you had asked:

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> What would be the arguments in favour of terminating the social insurance system? <hr></blockquote><!--EZCODE QUOTE END-->

So, I thought that I should list out some of the arguments. 

I do agree that it should be reformed and not abolished.

Brendan


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## Freddie Kruger (25 Sep 2001)

I wonder if the following gives any insight on how things may evolve in the near future.

UK - State Earnings Related Pension Scheme (SERPS)

Goverment scheme introduce in April 1978 which enables employees(but not self-employed) to top up the basic pension they receive on retirement with additional pension payments based on their earnings.

Employees make payments to SERPS by way of Class 1 National Insurance contributions. They can 'contract out' of SERPS and pay Class 1 contributions, via a rebate, which may be reinvested in an occupational pension or a personal pension plan.

SERPS is being replaced in April 2002 with the 'State Second Pension' which is designed to give more to the lower paid and middle earners,carers and the long-term disabled with broken work records. Whereas with SERPS, the more you earn the higher your pension, S2P operate a flat rate which means that higher earners will be better off opting for private pension schemes.

Does anyone think there may be food for thought here?


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## Galileo (25 Sep 2001)

Hi Freddie,

Our Governement seems to be committed to the PRSA initiative for extending coverage to atypical workers in particular.

They have made no secret that if voluntary PRSAs do not significantly increase coverage they will make them compulsory.

If they are made compulsory it could well be that, like SERPS on the Mainland, the State itself might provide PRSA Defined Benefits as competition to the industry's Defined Contribution offerings.:smokin


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