The retirement plan

Press, 28 July 1989, Page 12

The retirement plan

The Government has grasped the nettle of the inevitable blow-out in national superannuation payments. It has announced a revised Guaranteed Retirement Income. The new scheme, which will begin on April 1 next year, will still be a pay-as-we-go scheme; the pensions to be paid in any one year must be met from tax revenue raised in the same year. There will not be a growing fund to provide for a part of the pension payments and the proposal is more costly than some other schemes considered by the Government. It will lie a universal scheme with a payment to all who have reached the qualifying age, which will stay at 60 until the year 2006. A big difference from the taxpayers’ point of view will be that, by earmarking a portion of general taxation specifically as a retirement tax, the Government will identify the cost of the scheme. This will require an annual reassessment of the probable costs over the ensuing 30 years, and it will mean an appropriate adjustment to income tax rates in each Budget. For the first year, 7.5 cents in each tax dollar will be earmarked for the payment of the G.R.1., as National Superannuation will become. In each year from now on, the amount required for the G.R.I. will be adjusted according to population changes and changes in the level of the benefit. This level will, in time, be tied to the level of the universal benefit that the Government will introduce to replace the range of social welfare benefits at present available. ; The initial level of the retirement tax, 7.5 cents in the tax dollar from personal and company income is an uncanny reminder of the old Social Security Tax — one and six in the pound. Although similar in concept, the retirement tax will not be, strictly speaking, a separate tax, but an identification of part of existing income taxes. The old Social Security Tax was meant to pay for both pensions and the health system, whereas the retirement tax identifies only the cost of pensions for the elderly; and the retirement tax will be required by law to reflect the actual cost of those pensions. The old Social Security Tax never raised more than 65 per cent of the bill for which it was intended and was topped up by transfers from the general account. The result of this is that the State’s contribution to retirement income will be highly visible in future. At the initial level of the retirement tax, half of the tax paid at the s lowest income tax rate will jbe an earmarked scontribution tothe costs of retirement. It also

means that the Government can readily increase this portion of its tax gathering when needed, though the Minister of Social Welfare, Dr Cullen, predicted last evening that the tax would not need to rise above 7.5 per cent before the year 2020. If this proves true, the time that an increase will be required, therefore, will be well into the period of adjustment, from 2006 to 2025, during which the age of eligibility for the Guaranteed Retirement Income will be increased from 60 to 65; and it will also come after the level of payment of the G.R.I. has steadily come into line with the new Universal Benefit. Any demand for higher benefits will imply an immediate increase in tax rates under this scheme to isolate the tax for retirement. The Government has made a concession on its highly unpopular tax surcharge on national superannuation payments, by exempting from the surcharge from April, next year, half of the income from registered pensions or annuities. This move should help to encourage people to provide for their own retirements by way of pension schemes; but it will also dissuade them from other investments such as rentable property or shares, which traditionally have been a means of retirement provision but which will continue to attract the full surcharge. Because the G.R.I. eventually will be set annually in a band between 65 per cent and 72.5 per cent of the average after-tax wage, private saving will still be important for people to maintain a comfortable standard of' living after retirement. On the figures given last evening, the Government is planning for a reduction in superannuitants’ relative spending power of 15 per cent over the next 20 years. One of the boldest moves in , the rearrangement of social welfare payments is the decision to reduce the number of benefits payable, which vary in levels of payment and requirements for eligibility. The rationalisation of the benefit system is long overdue and the creation of a Universal Benefit will enable a fairer link to be made between all forms of State support for the individual, including the Guaranteed Retirement Income and accident compensation payments. In these two aspects of social welfare — the Universal Benefit and the G.R.I. — the Government appears to have succeeded in finding the middle ground between excessive beneficence and harsh economic management.