New savings vehicle will use corporate tax to defuse pensions time bomb

At the moment it has the very bland title “a proposal for a long-term savings vehicle” but Department of Finance officials insist they will come up with something snappier. They are referring to the new plan for excess corporation tax receipts which officials are busy working on, and which Minister for Finance Michael McGrath plans to bring before Cabinet in the coming weeks, possibly later this month.

Until recently the plan was to simply hive off a certain amount each year and place it in a rainy-day fund as per a pledge made in the programme for government but this was criticised as somewhat ad hoc. Some €6 billion has already been transferred to the National Reserve Fund (NRF).

Two things happened last year which suggested a more strategic approach was necessary.

First the Government made a decision – criticised by many – not to increase the State pension age, a move that will heap further financial pressure on the public purse in the coming decade. The Republic’s ageing population combined with other financial pressures related to climate and digitisation are expected to cost the exchequer an additional €7-€8 billion in “standstill” costs by 2030. Increasing the retirement age might have softened that bill but that is off the table for now at least.

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The second trigger was the tax receipts themselves: they got boomier.

Up to last September the department estimated that €4-€6 billion of total receipts could be defined as “windfall” – in other words potentially temporary. However, a surge in the final months of 2022 lifted receipts to a new record of €22.6 billion for the year, 50 per cent up on the previous year. The department now estimates that over €10 billion of this is “windfall” and therefore cannot be relied on into the future.

Increased financial pressure arising from the decision on the pension age combined with an even bigger windfall from the business tax has prompted the creation of a new savings vehicle or State investment fund. It is expected to be “actively managed” along the lines of the former National Pensions Reserve Fund (NPRF) and used to try to help pay for the very hefty age-related costs coming down line.

Whether it will subsume the existing NRF, which already contains €6 billion and has a cap of €8 billion, has yet to be determined.

In a recent report the Irish Fiscal Advisory Council (Ifac) proposed the establishment of a separate State pension fund with the Government being required to put in place credible plans about how to finance it “on a very long-term basis, drawing on international best practice”.

One approach looked at by the budgetary watchdog was to set a constant rate of social insurance that balances the fund over the long run. This would require PRSI rates to rise by about 3.5 percentage points over their current level – half the increase required under the Pension Commission proposals. Ifac insists raising rates in the next couple of years and taxing the baby boomers while they are still working would avoid larger tax increases in later years.