Monthly Archives: February 2016

Pensions shouldn’t be an easy target

In the general cut and thrust of politics and the formulation of public policy, it is generally accepted that proposing any measure that impacts on the living standards of old age pensioners is an act of political suicide.

It is therefore ironic that changes to how pensions are accrued and taxed are rarely controversial.

For instance, the current Government introduced a private pension levy in 2014 which skimmed 0.15% off the value of private pensions funds. This was withdrawn after 2 years, but still represented a system of double taxation that only applied to the holders of private pensions funds. The move did provoke a certain backlash, but many commentators welcomed it, and there was none of the outrage that followed the withdrawal of the medical card for all over-70s, millionaires and paupers alike.

The reason for this seems to stem from a mistaken view of what private pensions are. The system under which a taxpayer is allowed to deduct their pension contribution from their income before that income is subjected to the calculation of PAYE is referred to has a “relief”, as if the State is cutting the taxpayer some slack for saving for their retirement. Indeed, arguments in favour of this measure and frequently framed in the context of rewarding and incentivising people to save for the future.

This view of private pensions is also promoted by frequent media references to the pension arrangements of senior private and public sector executives, as if to suggest that the only people who have private pensions are people who are already well-heeled and not in need of any more “relief” from the State.

This understanding of private pensions if mistaken, and in promoting it, the media is doing no favours to large sections of middle and low income earners.

Firstly, not having to pay PAYE on your pension contribution is not a “relief”. If you make a pension contribution, you don’t pay tax on that income in the current year because you are deferring that income until after your retirement, when you will pay tax on it. The State isn’t doing you any favours here. You’re just making an agreement with the State to defer your income and its associated tax liability to a later time. If you weren’t allowed make the deduction, you’d be paying tax on the same income twice: once in the current year and once when you draw down your pension.

Secondly, private pensions are not the sole reserve of the elite. Figures regarding how many people working in the Irish economy have pensions vary, but none put the figure at below 50%. A recent Friends First survey put the figure at 67%.

This level of engagement brings some of the proposals of the political parties contesting the General Election into sharp relief.

Several parties are proposing converting the Universal Social Charge, which was designed as an emergency measure, into a permanent feature of the taxation system.

Unlike PAYE (income tax), USC is charged on all your earnings, including any income you decide to defer until after your retirement (your pension contribution), and for retired people, any income they receive from private pensions. If the USC were a temporary measure, this would be logical, as you wouldn’t be paying it a second time further down the road when you draw down your pension, and if you’re a pensioner, you wouldn’t have paid it when you were building your pension: ie, everybody is paying it only once.

However, if the USC is to be made permanent, and continues to be chargeable on both all your income in the current year and income from private pensions, everybody who has a private pension will be paying it twice: once in the current year and once when you draw down your pension.

None of the parties proposing retention of the USC have addressed this anomaly, again reflecting the general view that private pensions are a “privilege” and therefore a soft target for rhetoric driven policy.

If the USC anomaly were not bad enough, one party is going even further.

Sinn Fein is proposing to standardise the tax “relief” given for private pension contributions. This is a somewhat obscure concept that doesn’t register easily, but it involves a significant drain on income for anyone earning more than €33,800 per annum (where the higher rate of income tax kicks in) who is making a contribution to a private pension.

Currently, if someone earns €36,000 per annum and makes a pension contribution of €1,000, their PAYE calculation begins at €35,000, not €36,000.

They then pay tax of 20% on €33,800 and 40% tax on the remaining €1,200. They don’t pay 40% tax on the €1,000 they used to contribute to their pension, which is income they deferred to pay tax on at a later time. As such, their tax liability is reduced *in the current year* by €400.

Sinn Fein has positioned this as a “gift” from the State to the taxpayer, and want to claw it back. What they propose is that the person in question pays tax of 20% on €33,800 and 40% on the remaining €2,200, without making any allowance for the income deferred to a later time.

Instead, they will give the taxpayer a refund of 20% of the pension contribution, which in this case will be €200. This represents an increase in income tax for that person of €200 per year (which is greater than their annual liability for water charges).

What is particularly unfair about this proposal is that it means 2 people with the same net income in a given tax year will pay differing amounts of tax depending on whether or not they have made a pension contribution.

Someone who earns €35,000 and doesn’t make a pension contribution will pay €200 less tax than someone who earns €36,000 and makes a pension contribution of €1,000, even though the person making the contribution will pay tax on the €1,000 they have deferred when they draw it down.

It also means that the minimum rate of tax on income on many pensions would be 40%, even if the total income from that pension is less that than €33,800 (the standard rate cut off point). Pensioners who earn more than €33,800 from their pension could be paying as much as 60% tax, depending on how their pension fund was accrued.

The intricacies of the tax system don’t often emerge in the heat of a general election campaign, but on this occasion, they probably should.

10 reasons why Sortition is better than Elections

A lottery instead of a ballot?

A lottery instead of a ballot?

Sortition is the process of choosing public representative by lottery rather than by ballot.

While sortition might seems like a strange way to choose the people who govern us, it actually makes a lot of sense.

1. Election promises

Because elections are a popularity contest, getting elected means making promises, most of which are discarded after the candidate and their party is elected. This is hugely frustrating for voters, and undermines the credibility of the political system.

In Sortition, no promises are required, as every candidate has the same chance of being elected as every other candidate.

2. Political parties

Political parties are an essential feature of any democratic system based on elections. To provide the electorate with relevant choices, politicians need to be organised in groups that can campaign during the electoral campaign. This organisation is also required in the parliament, when one group of politicians governs and another provides opposition to whatever the group of governing politicians do and says. Parliamentary organisation is also needed to ensure that individual parliamentarians act in line with party policy, rather than according to their own views or beliefs, to underpin the stability of the sitting government.

There are certain advantages to this, but political parties are also breeding grounds for corruption. Membership of a party provides a conduit to those other members who govern, and decisions taken in this regard are invisible to the general public.

In Sortition, there is no need for such organisation. There are no elections, so no organisation around that activity is required. In parliament, members are free to vote how they choose, as they consequences of a vote being defeated does not undermine the Government, as the Government is chosen from all members of the parliament, rather than the political party with the most seats.

3. Corruption

No political system can guarantee against corruption. If an individual is given power, there will always be another individual willing to pay them to use that power by proxy.

Democracy based on elections is particularly prone to corruption, because money is almost essential to political success. Democracy also encourages corrupt people to seek election, because success can be achieved with money. Democracy allows people who want power most to obtain power, when in fact those are the people who should never be in power.

A public representative who obtains power via a lottery system would still be exposed to corrupt influence, but the incentive to be corrupt is greatly reduced. Money confers no advantage on public representatives appointed via Sortition, so there is nothing to be gained politically from taking money to act in a particular way.

4. Fairer and more diverse representation

Because of the nature of electoral politics, the people who are elected tend to come from a restricted subset of demographics, income brackets and professions.

Wealthier people tend to fair better. People who have been involved in trade unions tend to fair better. People in professional occupations (solicitors, doctors, accountants) tend to fair better. Teachers (who have time off during election campaigns) tend to fair better.

Conversely, mothers tend not to participate. People from low-income backgrounds tend not to participate. People in 9-to-5 jobs tend not to participate. Farmers tend not to participate. In fact, a huge portion of the average population is generally excluded from representation.

In Sortition, none of this true. Anyone who wants to can add their name to the list of eligible candidates. No campaigning or money is required, and mothers, people on low incomes, 9-to-5ers and farmers are just as likely to be made members of parliament as anybody else.

5. Clientelism

Clientelism describes the phenomenon where elected public representatives act as advocates for their constituents who are faced with personal issues. This is a particular problem in multi-seat constituencies, where each politician competes with every other politician to see who can provide the best “service”.

This is not why we elect public representatives. We elect public representatives to consider evidence pertaining to national issues and make decisions based on that evidence. The ability of a public representative to do this effectively is greatly curtailed if they have spend half their time in their local area dealing with issues that should be dealt with by local agencies.

In Sortition, this problem doesn’t exist. The is no competition, so public representatives can focus entirely on national issues.

6. Electoral fraud / manipulation

In a democratic system based on elections, significant resources have to be deployed to protect against fraud. Agencies have to be established to monitor spending, to ensure balance in the media, to ensure that polling stations are secure, to ensure that votes are counted correctly, to ensure that the electoral register is valid and accurate, to ensure that only people who are entitled to vote can vote. This costs a lot of money, and fraud and manipulation still occur.

In Sortition, the system is simple. People who want to be considered put their name on a list. All the names go into a “hat”, and a fixed number are drawn. The process takes no more than an hour, and once it is done in public, is virtually incorruptible.

7. Universal participation in the legislative process

In typical democratic systems based on elections, legislation is drafted by the government and passed by a majority of the government representatives in the parliament. Members of the parliament who are not members of the governing party suggest changes to the legislation, some sensible, some just to get their name in the papers, but these changes are almost universally ignored, as conceding to such changes is seen as an admission by the government party that the other parties have sensible things to say, which is then used by those parties when the next election comes around.

This means that a very large number of public representatives in a parliament have no input into legislation for the 4 to 5 years they spend in the parliament.

This isn’t a feature of Sortition. There is no government party, and no elections, so public representatives who put forward legislation can accept changes and improvement to legislation without having to worry about how this makes them look or how it impact on their electoral prospects.

8. Political geography

In order for voters to feel like their local areas are getting a fair deal in the distribution of resources, decisions around public spending are often made on the basis of electoral impact rather than actual need. This leads to systems that are disjointed and poorly planned, in which valuable resources are wasted.

In Sortition, there are no elections, so public representatives can consider decisions entirely on what matters, leading to more efficient systems that can be planned with a long term perspective.

9. Politicians Pay

Because democracy is essentially a popularity contest, its a lot easier to succeed when you have money. The more football kits you sponsor, the more rounds you buy in the pub, the more donations you give to charity, the more ads you put in the paper etc etc the more popular you are amongst voters. That puts people who have less money, who are generally the people who need most representation, at a disadvantage. To re-balance this situation, elected politicians are paid well, to remove the temptation for them to obtain money from people who would seek to influence the way they act (ie corruption).

In Sortition, there is no competition. Everybody has the same chance of becoming a public representative as everybody else, so money is no advantage. It therefore isn’t necessary to pay politicians well.

10. Early pensions

Attracting capable people into politics is difficult. It takes a lot of work to build up your profile to the point where you can win an election, and even if you do get elected, you could lose your position within a couple of years, often through no fault of your own.

People who have built up careers in particular professions or who are self-employed are reluctant to sacrifice that to enter politics. Someone who spends 10-15 years as an elected representative is unlikely to be able to pick up where they left off after they leave politics.

To remove this disincentive, politicians are paid their pension earlier than people in normal careers.

In Sortition, a person chosen by lottery to be an elected representative would only serve a single term of 5 years. They would not have to sacrifice any more of their career than that, and their position would be secure during that 5 years. It would therefore not be necessary to pay them an early pension.