EXEMPTING old-age pensions from income tax might result in lower pensions or increases in Social Security contributions, according to Social Security Minister Lyndsay Feltham.
Deputy Feltham also warns that the move could adversely affect the Long-Term Care Fund, and substantially increase the funding requirement for means-tested benefits.
The minister’s comments are contained in a report on the implications of exempting pensions from tax, which was prepared after Paul Troalic’s petition passed the 5,000 threshold to trigger an in-committee debate in the States Assembly.
Such debates do not directly affect the outcome of government policy but they allow members to express their views on issues which have attracted popular support.
Last month, Treasury Minister Elaine Millar set out her department’s opposition to the petition and now her counterpart at Social Security has published her own comments on the impact that such a move could have on her department.
Deputy Feltham notes that the Social Security Fund is sustained not only by the contributions of employees and employers but also from a grant of around £90m paid out of tax receipts.
The Treasury Minister had argued that the loss of revenue from tax on pensions could only be dealt with by cutting that amount, a move Deputy Feltham says “would have serious long-term consequences” for the Social Security Fund.
With a reduction of more than £20m from the fund, Deputy Feltham argues that consideration would have to be given to reducing the value of pensions, or increasing the contributions paid by employers and employees, or a combination of the two.
In addition, she says that there would be a consequential loss of £1.5m to the Long-Term Care Fund.
She states: “Pressure on long-term care costs is increasing from year to year as a direct consequence of the increasing number and proportion of older people in the population… A reduction in income of about £1.5 million a year will bring forward the point at which a contribution rise is required.”
The minister also argues that discounting old-age pensions as taxable income would have the effect of making more pensioners eligible for means-tested benefits, increasing the funding requirement for her department by more than £2.5m annually.
“In summary, a decision to exempt old-age-pension income from overall tax liability would need to take into account the requirement to provide additional tax funding to support the additional costs associated with a significant increase in the number of pensioner claims to means tested benefits,” Deputy Feltham writes.
