Tax Benefits in Non-State Pensions
| Published date | 01 June 2000 |
| Date | 01 June 2000 |
| Author | Adrian Sinfield |
| DOI | 10.1023/A:1010098721113 |
| Subject Matter | Article |
European Journal
of
Social Security, Volume 2/2, 137-167,2000.
©Kluwer Law International (KLI). Printed in the Netherlands.
ADRIAN SINFIELD*
Tax Benefits in Non-State Pensions
137
Abstract: The significance of the tax system in assisting the development and
expansion
of
non-state pensions has received very little attention at a time when
concern has been generally increasing over the costs
of
public social security pro-
grammes, and particularly their pension systems. However,
the
limited evidence
available indicates that the amount
of
tax revenue foregone in promoting this par-
ticular form
of
saving can be considerable. The distributive implications
of
the var-
ious tax reliefs also tend to be neglected, even though they play an important part in
reinforcing inequalities in old age. This article seeks to explore the published infor-
mation on the nature and scale of fiscal privilege for non-state pensions across coun-
tries and examines the way in which one country, the United Kingdom, estimates the
costs
of
these tax benefits. Examination
of
the detailed evidence raises questions
about the workings of these tax benefits in terms
of
equity and privilege,
of
cost and
value for money.
It
supports the case for the development
of
more visible and pub-
licly accountable estimates of these tax benefits, comparable across countries (as
with public expenditure), as well as the better integration
of
tax and public spending
in meeting needs during retirement.
1. INTRODUCTION
In recent years there have been increasing demands in line with those from OECD:
'spending on public pensions, health and long-term care must be contained'
(OECD, 1998, p. 13, emphasis in the original). Along with 'the overriding impor-
tance
of
curbing [this] growth', there is strong support for
'a
growing role' for 'other
sources' to ease the pressure on public spending (ibid.). Particular significance is
given to private pensions schemes including occupational or supplementary
schemes (see also World Bank, 1994). However, very little attention is given to the
*Professor Emeritus, Department of Social Policy, University
of
Edinburgh, Adam
Ferguson Building, George Square, Edinburgh, EH8 9LL, Scotland. E-mail: adrian.sin-
field@ed.ac.uk. An earlier version
of
this paper was presented to a seminar
of
the
European Network for Research into Supplementary Pensions at the Free University
of
Amsterdam in October, 1999. 1 am very grateful for the comments
of
the participants. I
particularly wish to thank Phil Agulnik, Gerard Hughes, Jon Kvist, Dorothy Sinfield,
Sue Ward and staff in the Statistics and Economics Division
ofthe
Inland Revenue who
more than once painstakingly helped me in my difficulties with the intricacies of the
published statistics.
EUROPEAN JOURNAL OF SOCIAL SECURITY
138
resultant growth in revenue which is lost because of the special tax provisions relat-
ing to non-state pensions which most countries have. Although generally neglected
in pension policy debates, the fiscal arrangements usually provide a significant
stimulus to investment in these pensions. A comparative analysis
of
pension funds
by a Bank of England economist in the early 1990s listed 'taxation' as the first of
'the main determinants of the scale of benefits and advantages
of
pension funds as
a means
of
saving' (Davis, 1991, p. 381, emphasis in theoriginal).
When certain activities or resources are treated differently from others for the
purposes of taxation, tax is foregone that would otherwise have been collected. Over
40 years ago, in an essay called 'the social division of welfare', Richard Titmuss
introduced the expressionfiscal welfare to indicate such revenue lost through reliefs,
exemptions, rebates and allowances from taxation (1955, published in 1958, Chapter
2). A few years later, Stanley Surrey started using the term tax expenditure to make
explicit the contrast with public expenditure (see Surrey, 1973). The tax system
functions as another form
of
intervention, 'running spending programs through the
tax system' (McDaniel and Surrey, 1985, p. 6).
It
is as much government controlled
and organised as the welfare state; and, like the welfare state, it distributes and redis-
tributes resources between different groups in society. However, the recognition and
measurement of tax expenditures varies substantially across countries (OECD, 1996,
p. 9). What some may both acknowledge and measure, others do not. In conse-
quence, the term tax benefits is used in this paper to indicate these advantages from
the operation of tax systems, whether the particular country recognises them as tax
expenditures or not (Kvist and Sinfield, 1997).
2. COMPARATIVE EVIDENCE ON PENSION TAX BENEFITS
In most countries, the most generous tax benefits are those related to retirement.
They are also the most expensive in total for the government. There is much varia-
tion in the pattern oftax reliefs (Kvist, 1992; Fuery, 1988;Dilnot, 1992), but usual-
ly no taxes are raised on:
i. pension contributions made by the employee and the employer (although there
is often a maximum level for the employee);
11. the investment income from any funded arrangement (or it is taxed at a prefer-
ential rate); and,
iii. any lump sum payable on retirement (although there is normally a limit to its
size related to earnings).
The pension in regular payment is usually taxed at the standard rate.
Given the importance
of
these tax benefits, it is surprising that there is no clear
evidence on their scale and impact. For some countries, but by no means for all, fig-
ures can be dug out
of
official statistics
if
one knows where to look. However, there
is considerable argument about whether these benefits constitute tax expenditures
and, if they do, how they are to be measured.
EUROPEAN JOURNAL OF SOCIAL SECURITY
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