Retirement Savings in a United Ireland – Slugger O’Toole
One theme that I see coming up again and again is the issue of pensions in a united Ireland. On such an important topic, there seems to be a lot of misinformation out there. The ongoing “civil talk” hasn’t really addressed it, and sadly there has even been academic papers trying to brush the issue away.
Most people assume that the UK government will take over these pensions after reunification as they have been paying social security contributions to the UK all their lives. Finally, the UK government pays pensions to UK pensioners living abroad. Wouldn’t the same principle apply?
The answer is: no, the same principle does not apply. There are two main reasons for this.
Contrary to what many believe, when you pay your Social Security contributions, the money doesn’t go into a big pot that’s paid out when you retire. Instead, according to government policy, the money is spent immediately. Northern Ireland receives part of this expenditure. Not only is it paid out to existing retirees, but it’s also spent on other things: infrastructure, public buildings, doctors, teachers, police officers and everything else. In other words, this money has already been invested in Northern Ireland.
If or when reunification takes place, the new Irish state will receive areas that have benefited from UK Public Expenditure investments that include these contributions. The level of investment would have been lower if part of these funds had been earmarked for future pension financing. The UK Government will therefore argue that continuing to pay pensions to pensioners in Northern Ireland would effectively mean spending the same tax contributions twice.
The second aspect to consider is the source of the pension funding. As I just mentioned, the pensions paid today are funded (more or less) from the taxes collected today. However, after reunification, the part of the tax base that exists in Northern Ireland will be transferred to the new Irish state, which will immediately start collecting revenue from it. The UK will argue that it is not fair to have to pay pensions or other welfare benefits in a region where it no longer has any income.
Therefore the analogy with British pensioners abroad does not apply either. Normally it makes little difference to the UK Treasury whether a pensioner is resident in the UK or not. But in the scenario where part of the tax base goes to another country, there are other considerations.
Some argue that a cash injection should be expected from the UK government as part of a reunification deal, or that money may be available from the US and EU. Maybe they will. After all, it is in everyone’s interests that any future unitary state work and be stable, and everything will be on the negotiating table.
In principle, however, the British government is unlikely to address the question of where responsibility for funding social assistance will lie within the new state.
How do I know? It’s simple: the precedent has already been set. In the run-up to Scotland’s independence referendum, the UK and Scottish governments reached a number of agreements on how independence would be implemented if the referendum were successful. Regarding the pensions, it was decided:
For those in Scotland who were drawing the British State Pension at the time of independence, the responsibility for paying that pension would pass to the Scottish Government.
For people of working age living and working in Scotland at the time of independence, the UK pension entitlement they acquired before independence would become their entitlement to a Scottish State Pension.
I think it is unlikely that the UK Government will propose a more generous model for Irish reunification than Scottish independence, especially if Irish reunification is paramount.
There are other political complications that would arise if the UK government continued to pay pensions. For example, what would happen if the UK government decided to change its pension policy? In recent years, the UK government has made several changes – raising the retirement age from 65 to 68; raising the retirement age for women from 60 to 68; and lastly tampering with the triple lock of the pension. It may well make other decisions about how retirement income is taxed.
After reunification, pensioners would have no voice and no vote in the UK Parliament when it considered these matters.
At the same time, what would happen if the Irish government increased their pension benefits? Currently Irish pensions are paid from age 66 and in the UK before age 68. The pension is €253.30 for persons under 80 years of age. At current exchange rates, this equates to around £211, compared to the standard UK pension of £179.60. This would pose a political problem as Irish taxpayers paying the same taxes would receive different benefits. Irish citizens in six of the counties would receive lower pensions than their southern neighbors. The division would indeed live on for many decades after the fact.
To sum up, the idea that the British government will continue to pay pensions to residents of the former Northern Ireland after reunification is not only politically unfeasible within Ireland, it is also likely to be considered by the British government during the negotiations that will be part of it will not approve the reunification process, either before or after a referendum.
Instead, the public pension liability will have to be settled by the Irish government as part of the debt recovery it will assume as part of the reunification process.
The cause of Irish unity would certainly be better served by abandoning fantasy economics and imaginary grants from foreign governments and focusing on a more honest and direct debate about what the real costs and benefits are likely to be.
The author is a member of the Alliance Party but writes in a purely personal capacity and does not speak for or represent any other person or organization
Centre-left Waffler who works in IT and lives in Belfast
Allianz, but writing in a purely personal capacity.