Was Mark Twain thinking of pensions with his celebrated "lies and statistics" quote?
A Twain, Statistics” Lies, Particular Has Relief Phrase “there And Are Resonance Pensions For Coverage Around Lies Mark Statements And Tax Whose Damned
, of Independent Trustee Company, looks at some recent jaw-dropping statistics used to inspire people to invest in pensions
A phrase often attributed to Mark Twain says, “there are lies, damned lies and statistics”. Whilst the origin of the phrase is disputed, its meaning is clear. Statistics can be managed to prove anything.
It is arguable that statistics are abused more often in relation to pensions than in any other walk of life. Let’s look at some recent examples in relation to pensions coverage and tax relief.
The following statement appears on the website of the Department of Social Protection: “Two-thirds of all private-sector employees in this country have no workplace pension and are not saving for their retirement."
This is a horrendous scenario creating visions of mass poverty in retirement. It has led to the proposals for an auto-enrolment system to be introduced in Ireland. If people won’t save voluntarily, then we will make them do so.
The first caveat to be applied to this statement is that it ignores Social Welfare pensions. 100% of persons should qualify for either a contribution-based or a means-tested pension under this system.
The Social Welfare system is very good at eliminating the risk of poverty. The Melbourne Mercer survey of international pensions systems typically ranks Ireland in the top 5 in the world for pensions adequacy often exceeding the Nordic countries and others noted for their comprehensive welfare systems.
This is borne out by local statistics (that word again). The Household Finance and Consumption Survey 2018 states: “More than six out of every ten households (65.8%) where the reference person is 65 or older have a net wealth value greater than the national median value (i.e., they are in the top 50% of net wealth).”
Not only are pensioners not facing mass poverty — they are typically better off than the rest of the population.
Of course, these statistics reflect the current position — perhaps as the Department of Social Protection alleges people “are not saving for their retirement”.
The Department’s assessment is based on formal pension schemes and ignores the degree to which individuals accumulate assets outside of these schemes.
Consider the following statistic from the CSO Household Finance and Consumption Survey 2018: “More than nine out of every ten households (94.9%) own some form of financial asset e.g., savings, shares, voluntary pensions.”
Some 95% of households have savings – just not necessarily savings in pension schemes.
However, as the earlier comment on household wealth shows – these savings are leading to those in retirement having a higher-than-average net wealth.
Statistics from the CSO raise a more troubling problem for the Department’s position. In commenting on pensions coverage, it states: “In Quarter 3 2020, 64.7% of all persons in employment aged between 20 and 69 years had supplementary pension coverage.”
From all these statistics we can reach two conclusions:
- Most people have some supplementary pensions — just not “workplace pensions”.
- Almost all households have savings — just not “savings for their retirement”.
When auto-enrolment is introduced in Ireland, it is entirely possible that the outcome will be to divert money from a general savings pot into a retirement savings pot without any increase at all in the volume of savings.
The only winners in that regard will be the pension industry (of which I am part) who can look forward to a State-managed increase in new business.
The second area of Pension Statistics that deserves consideration relates to tax relief on pension schemes. In practice, the focus here tends to be on tax relief on pension contributions whether those are made by an individual or by an employer.
The official system is riddled with inconsistencies and contradictions.
Consider the following (extreme) example which will illustrate these points.
Three individuals agree to work for one year from age 64 to 65 in return for benefits of €20,000 which will be provided to them at the end of the year. All are on the marginal rate of tax.
Individual A elects to receive his as a payment in salary at the end of the year. His pension tax relief is nil.
Individual B works in the public sector, and she elects to receive her payment as a pension benefit from her employer. Her pension tax relief is nil.
Individual C works in the private sector, and she also elects to receive her payment as a pension benefit. Her pension tax relief amounts to €8,000.
Both B and C can, under Revenue rules on pensions, withdraw the full pension amount (subject to full income tax) and both chose to do so.
The net effect is that all three individuals receive the same amount of gross benefit (€20,000), the same amount of net benefit (€12,000) at the same time but only one is deemed to have received tax relief.
In practice, all three were granted tax deferral; i.e. tax was not assessed until the individual received the money.
In calculating pension statistics Individual B is still treated under the tax deferral system — there was no question of tax until the benefit was received.
For individual C however, the State believes it has a right to tax private-sector workers on the promise given at the start of the year. When it subsequently decides to give Individual C the same treatment as the other 2 individuals — this is granting tax relief.
The recent Report of the Interdepartmental Pensions Reform and Taxation Group estimated that the value of the tax foregone in respect of the group of individuals represented by Individual C amounted to €0.7bn in 2018.
This statistic ignores the fact that Individual C’s benefit was fully taxed when received i.e., no tax was foregone — it was just deferred.
The statistic also does not include a tax figure for the group represented by Individual B. Although the benefit promised has the same value and delivers the same net income it is somehow not regarded as a cost to the State until it is paid.
Statistics in relation to Pensions Coverage and Tax Foregone are key parts of the decision-making apparatus of the State.
It is clear that the limited nature of these statistics and their misrepresentation in relation to policy decisions has enormous implications for all individuals. For many individuals, it confirms their worst suspicions of the whole pension apparatus. They take control of the situation by having savings outside the formal pension system or by moving their pensions into self-administered structures that they control.
If the State is really serious about improving pensions it needs to start by cleaning up its own statistics and the use to which they are put.