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There are in fact two economies operating in Ireland. In one, the average annual industrial wage is 30,200 and pay rose at a rate of 2.1% in 2005. In other sectors, pay is rising at multiples of this rate and in the construction sector, average pay is almost 40,000. With the National Pension Reserve Fund for future public sector pensions currently valued in excess of 16 billion, isn't it time to take action and introduce a mandatory pension system that would be funded by both employers and workers? There is no shortage of funds to ease some of the adjustment pain, in the short-term. Last week, the chairman of the Pensions Board Tiarnan O'Mahoney who is a former Chief Operating Officer at Anglo Irish Bank, said that raising the age of retirement to 70 or 75 to plug pension gaps is "simply not practical." O'Mahoney said that he personally endorsed some form of mandatory pension, although competitiveness must be protected. Brian Cowen,T.D. Minister for Finance said on Thursday last that weak cost-competitiveness can remain a persistent and intractable problem and a major obstacle to economic and social development. Cowen said that some EU countries have responded very forcefully to the challenge of restoring their international competitiveness. In Germany, for example, which accounts for almost 30% of the eurozone economy, employee compensation in the business sector has increased by only a half of one point eight per cent (+1.8%) over the past three years, according to OECD figures. This has enabled Germany to regain its position as the worlds leading exporter. Over the same period in the eurozone area overall employee compensation has increased by five per cent (+5%) while the figure for Ireland is over two and a half times greater at thirteen and a half per cent (+13.5%). Median hourly pay in the private sector for selected European countries: February 2006
Source: FedEE Pay in Europe 2006 report * Figures expressed as a percentage of gross hourly pay in Denmark (Denmark = 100) ** Pay inclusive of 13th/14th week payments and holiday pay enhancements, net of tax and social security and corrected for differences in spending power between countries. Figures expressed as a percentage of real net spending power in Denmark (Denmark = 100). Cost-competitiveness and Wage costs Wage competitiveness in the traded goods sector is not a problem for Ireland. Both hourly pay and social security costs in particular, that are borne by employers, are much lower than in other Western European countries. Hourly compensation costs, 2004
There is now significant competition in financial services but booming property prices, falling standards in education and despite several Competition Authority reports, the lack of commitment at government level to promote competition in the service sector, are the biggest threats to the economy. For SMEs, the annual cost of providing for mandatory pensions, could be phased in over a number of years through support from the Pensions Reserve, while from 2007, the funds that are allocated to SSIAs, could be used to subsidise employee contributions for a number of years. Employer social insurance expenditures and other labour taxes as a percent of hourly compensation costs, 2004
Irish pension coverage was only 51.5% of workforce in 2005 The CSO reported on Jan 31, 2006, that the pension coverage rate for all persons in employment aged between 20 and 69 in the first quarter of 2005 was 51.5% representing a slight decrease from the 52.4% reported in the first quarter of 2004. These figures are based on a survey update module on pensions, which was included in the Quarterly National Household Survey in the first quarter of 2005. Note: For the purposes of this module, entitlement to a contributory or non-contributory State pension does not, on its own, count as having pension cover. In 2005 pension cover for employees remained higher than for the self-employed with the overall coverage rates for both groups remaining more or less unchanged over the year. The coverage rate for employees in 2004 was 54.4% while the rate recorded in 2005 was 53.3%. The coverage rate for the self-employed and those assisting relatives in 2004 was 43.1% and 43.0% in 2005. The proportion of employees covered only by an occupational pension increased from 40.4% in 2004 to 44.7% in 2005. In contrast the percentage of employees with only a personal pension fell from 6.3% to 5.1% over the same period. There was also a fall from 7.7% in 2004 to 3.5% in 2005 in the percentage of employees who reported both occupational and personal pension cover. NOTE: In the 2004 survey, the introduction of questions on PRSA (Personal Retirement Savings Account) pension cover may have influenced how respondents interpreted the questions on the type of pension cover they held. This issue was rectified in the 2005 survey. Thus some of the change noted in the last paragraph above may be due to a lack of strict comparability between the two surveys. The comparability of the overall pension coverage rates from the two surveys has not been affected by the introduction of these questions. See Methodology in background notes. Pension coverage for females increased from 46.8% in 2004 to 47.5% in 2005. Even though the male coverage rate fell between 2004 and 2005 (56.3% to 54.2%) males continued to have a higher rate of coverage than females. Between 2004 and 2005 coverage rates fell among all age groups, with the exception of those aged between 45 and 54, whose cover increased from 59.8% to 60.0%. As in 2002 and 2004, workers aged between 35 and 44 have the highest rate of coverage (61.3%). Irish Public Sector Pensions Public service pensions are linked to the wage deals negotiated by government employee unions, not inflation. When Ministers and the rest of the public service got special increases in recent years because it was falsely claimed that differentials with pay in the private sector had fallen, public service pensions also went up. It's the equivalent of a company that improves its earnings through developing new markets, increasing productivity etc., paying resulting increases also to past workers. A private sector worker can provide for the equivalent of a public service pension for a maximum of two-thirds of final salary for retirement. However, 28% of salary would have to be put aside every year for 40 years to do so. How many companies and individuals can afford to save this amount?? The solution that is available to the small few who get top positions in the private sector, is to have their company agree to set aside large amounts in a pension fund as funding of 28% for four decades is only something a public servant could dream of, without worrying about who was doing the paying. Even where the private sector pensioner ends on the same salary as a public sector counterpart, the latter will continue to be a winner because of the earnings link. Public Sector and Private Sector Earnings A report by DKM consultants for the Department of Environment, Heritage and Local Government that was published on May 5th, says that wages in the B&C (Building & Construction) sector are higher than any other sector in the private economy. The average earnings growth figure in B&C of almost 8% per annum compares with 3.8% in industry, 4.3% in Banking, Insurance and Building Societies and 4% in Distribution and Business Services, according to CSO data. DKM says that the very positive growth prospects for B&C output over the next twelve months suggest that earnings growth in the sector will continue to buck the trends elsewhere in the private sector.There are more than 250,000 directly employed in the Irish construction sector compared with about 290,000 in Production Industries. When an estimated 80,000 in financial and business service jobs that are dependent on the construction sector are added to direct employment, we get a total of 330,000 - just short of 20% of the private workforce according to Central Statistics Office (CSO) figures. Business service jobs have increased by 100,00 in recent years. Not alone are there more construction related jobs than industrial jobs in the economy, average annual earnings in construction are almost 40,000 compared with 30,200 in industry - a difference of 33%. In addition, direct construction workers participate in an employer/employee funded pension scheme, while most private sector workers beyond the foreign-owned sector do not have a pension scheme. The average hourly wage in the Manufacture of food products sector was 13.09 in December and was highest at 28.74 in the Electricity, gas, steam and hot water supply sector that is dominated by two State companies.On February 1st, the CSO reported that average weekly earnings in the Public Sector (excluding Health) rose by 5.7% in the year to September 2005. The index of average earnings, which excludes some effects of changes in employment composition, rose by 5.7% for the same period.
The average weekly earnings for the total public sector (ex Health) was 848.87 - 44,000 annually. The average in the Semi-State sector was 901.53. The average weekly earnings for all employees in the Industrial Sector including Managerial staff in December, was 693.95 - 36,000 annually. In December 2000, a Public Service Benchmarking Body, established under the Programme for Prosperity and Fairness (PPF), was asked to undertake a fundamental examination of the pay of public service employees vis-a-vis the private sector. Former Davy Stockbrokers' economist Jim O'Leary was a member of the body for a period but he resigned before it reported. In 2004, O'Leary who had joined the Department of Economics at Maynooth University, published with two of his colleagues, the results of six months' rigorous and painstaking research into public-private sector pay differentials in Ireland - Public-Private Wage Differentials in Ireland, G.Boyle, R.McElligott and J.O'Leary, ESRI Quarterly Economic Commentary, Summer 2004. O'Leary and his colleagues wanted to discover whether similar people in similar employment circumstances were better or worse off working in the public than in the private sector. In order to do this, they had to control for attributes like age, experience, gender and education, and also for job characteristics like occupation, type of contract and size of establishment. As the CSO data does not permit this kind of analysis, the dataset that they had to use is one based on a large-scale survey conducted by the Economic and Social Research Institute (ESRI) and used for much of its research into poverty and inequality. The core finding was that on average, public servants earned 13 per cent more than their private sector counterparts on a like-for-like basis in 2001. The researchers also discovered that the size of this margin (the public sector premium) in 2001 was not significantly different from what it had been in 1994, suggesting that pay increases in the public sector had kept pace with the private sector throughout the Celtic Tiger period. Another discovery was that the margin by which public service workers outearned their private sector counterparts tended to be significantly larger at the bottom of the income distribution than at the top. A particularly striking finding was that the estimate of the public sector premium for Ireland was more than twice as large as the available estimates for other countries. The Public Sector Benchmarking Body recommended pay increases which averaged 9 per cent across the grades examined and cost 1.2 billion a year. Government Departments introduced aspirational targets for staff that would make a laughing stock of a manager in the private sector who emulated the farcical exercise. O'Leary says that the Public Sector Benchmarking Body never published its research results and at no stage in its 278-page report did it explicitly state or opine that public sector pay had fallen behind that in the private sector.
Conclusion Can there be a better time than now to address the scandal of the low occupational pensions coverage of the workforce? The public megaphone is usually held by workers in big companies such as Aer Lingus where for example, they not only own part of the company, but in the event of redundancy, get a multiple of what most private sector workers receive, when they lose their jobs. It's time to take action on behalf of those who not only are earning less but face poverty in old age. RELATED Finance Bill 2006: Cowen plans pension bonus scheme Irish Pensions Board launches National Pensions Review Report © Copyright 2007 by Finfacts.com |
