In principle, this scheme is aimed at getting workers to sleepwalk their way into contributing to a retirement where they are not solely reliant upon public finances, all with very little engagement with their pension which can be administratively complex.
On a phased basis, workers over 22-years-of-age who are not contributing to an employer’s pension scheme already where that scheme provides higher contribution levels or is a Defined Benefit Scheme, will be enrolled automatically and within 10 years the individual and employers will each be contributing six per cent a-piece. The system is quasi-mandatory because opt-out opportunities are narrow, time-bound, and ultimately result in re-enrolment meaning it is designed to keep entrapping employees despite frustratingly persistent attempts to withdraw.
A masterstroke
In the small print, it reads that actually it is employers are the ones that are absorbing the burden of bankrolling the looming pensions deficit. The government didn’t think it was enough to actively court younger workers or those without an existing pension into retirement planning. So, they went one step further and added six per cent to the costs of employment on an already stretched SME sector. A masterstroke has been pulled and barely a whisper from enterprise groups.
Business owners welcome the structure that auto-enrolment brings, and most would fundamentally believe it will benefit society and indeed their employees. The administration is simple and accessible meaning there are no additional admin costs to be borne. But why is it that employers are expected to match employee contributions and what about the impact on them?
The government say that they have thought of this and engaged with business leaders and lobby groups who have largely, apparently, supported the scheme. They say that salary inflation over the next 10 years will subsume the additional six per cent employer’s costs and will form part of remuneration negotiations. In the context of today’s skilled labour market deficits, I think we can all agree that is highly unlikely. Or it may well be true for highly skilled workers working for deep-pocketed multinationals, but for Mary and John in the corner shop employing staff on minimum wage, that is certainly not going to be the case.
Micro companies, big problems
Little to no consideration has been given to small and micro enterprises where proprietary directors earn what is left in the business after bills and salaries have been paid. Effectively, this cost reduces their capacity to earn a wage by up to six per cent and in some low-margin businesses, may make continuing on simply untenable. The very people who take the risk of creating jobs for themselves and others, who have no job security, no income certainty and who are vulnerable to market fluctuations and recessions like no others, have been hung out to dry.
By stealth, Government have made employers bear the cost of providing for the nation’s retirement. Who cares if they can afford it?
While sustainability of public finances into the future is a key consideration, so too must be encouraging entrepreneurship. The burden that this mandatory six per cent matched contribution, coupled with the other slew of anti-business measures the government has overseen, do anything but make Ireland a good place to start and run your own business. The scheme discriminates directly against small and micro enterprises in a surprising way – auto enrolment pensions contributions by employers can be offset against corporation tax liabilities. The offset is estimated to cost the exchequer €200 million in tax expenditures. Of course, this means virtually no difference to large profitable companies, but small business-owners usually take in salary what is left in the company after costs, often having no corporate tax bill so they will effectively be paying the per cent employers contributions for their staff out of their own pockets. Government cleverly ensured they didn’t rock the FDI boat by avoiding increasing the actual cost of employment to mobile Big Tech companies, but instead targeted immobile indigenous companies.
There is little or no understanding among policy makers about the reality of owning and operating a company and never was it more obvious than in this decision.
There are also the unintended consequences of this scheme. Employers will target teens and young adults that don’t fall into the auto-enrolment scope to remain viable. Those jobs will become more transitory and the gap between entry-level service industry roles and white collar will widen.
Workers will have less disposable income (six per cent less net income is not insignificant) to spend on discretionary items which will damage businesses. Small and micro businesses will need to increase their prices to absorb the extra pensions cost but there will be less money to buy those products/services. It will be harder to save for a mortgage or even get a mortgage-banks already frown upon pensions contributions as additional outgoings. People may choose not to save for their short-term at all as they’ll be left with next to no choice but to save for their long-term through auto-enrolment. This could accelerate that trend of renting over homeownership which ultimately leads to higher risk of state dependency in old age to fund rents as well as an adequate income.
Crucially though, this policy could very well make small businesses unsustainable, cause job losses, and widen the gap between the wealthy who can afford a home, and low-paid workers who may now have to sacrifice homeownership to provide for their retirement. The difference between taking up employment and being an employer will make it so unattractive own a company that small and micro enterprises could gradually recede to nothing.
The government’s approach to taxation is reminiscent of Louis XIV’s first minister, Jean-Baptiste Colbert, who said “the trick is to pluck as many feathers as possible with the smallest amount of hissing”. When is this goose going to hiss?