Brian Lenihan Jnr (Dublin West, Fianna Fail)

I thank Deputies for their contributions. We have had a useful debate. I look forward, as the Bill progresses through the House on Committee and Report Stages, to a fuller engagement on the many issues relating to the Bill that have been raised. This emergency legislation has been drafted and introduced in the House over a short period of time. That is the nature of emergency legislation. I intend to table a number of amendments on Committee Stage. In particular, I propose to clarify elements of the Bill to avoid any doubt about what is intended by the Government in the application of the deduction. I propose to introduce a "removal of doubt" section in this legislation, similar in purpose to section 15 of the Public Service Superannuation (Miscellaneous Provisions) Act 2004, on which elements of this Bill are modelled.

Many Deputies have queried how these measures will operate. There is an understandable eagerness to know who will be covered, what elements of income will be included, what rates will apply and what the ultimate effect on the take-home pay of those affected will be. This debate gives me an opportunity to bring clarity to some of these issues. I want to respond to a number of specific points this evening.

Deputy Bruton queried the arrangements introduced in 2004 for those whom he feels may, through the integration of their occupational benefit with the social welfare system, qualify for little or no occupational pension despite being subject to the deduction. Although this issue is likely to come up again on Committee Stage, it might be useful to provide some detail in respect of it on the record now. I will begin by explaining how the integration system, whereby pensions are calculated for public service employees who are insured for full PRSI and are members of public service pension schemes, works. Some years ago, the Commission on Public Service Pensions made recommendations on the treatment of part-time employees and employees on lower levels of pay. With effect from 20 December 2001, the pension system for part-time employees was modified to a pro rata basis, by reference to the remuneration of whole-time employees. A new system of calculating pensions for employees insured for full PRSI was introduced with effect from 1 January 2004.

The new system delivers increased pensions to members of public service pension schemes whose full-time salary is less than three and a half times the contributory State pension. At present, this amounts to €40,000. The new integration formula takes into account the value of the contributory State pension in calculating occupational pensions. The method of calculating a pension for public service employees who qualify for benefits on or after 1 January 2004 is, for that part of the employee's pensionable remuneration which is less than or equal to three and a half times the current rate of the contributory State pension, one two-hundredth of the pensionable remuneration multiplied by the number of years of reckonable service; and, for any part of the employee's pensionable remuneration which exceeds three and a half times the contributory State pension, one eightieth of the pensionable remuneration multiplied by the number of years of reckonable service. The maximum number of years of reckonable service is 40.

The new formula is used in all cases of retirement on or after 1 January 2004. Pensions in course of payment on 1 January 2004 were revised by reference to the new formula in cases where this produced an improvement for the pensioner. The revised system improved the position for people on lower rates of pay and ensured that everyone who met the requirements of the pension scheme got an occupational pension, regardless of income. The new pension related deduction will confer no additional pension benefit and will be deducted from gross pay before income tax, PRSI and health levies are calculated. As the new integration system ensures that everyone who meets the eligibility criteria of the pension scheme gets an occupational pension, regardless of income, there are no consequences to the interaction of the pension related deduction with the integration system.

Deputy Bruton also asked about an actuarial valuation of public servants' pension costs. The latest full valuation of the value of the public service pension was carried out by the benchmarking body. The estimated costs of pensions for the representative public service groups chosen by the body are 26% for a civil servant or engineer; 18.7% for a staff nurse; 38% for a garda, who has fast accrual terms in so far as his or her pension is earned in 30 years rather than 40 years; 24.5% for a national school teacher; and 16.5% for a special needs assistant.

The value of the ill health benefits and death in service benefits is not included in the figures I have listed. Once allowance for these additional benefits is made, the cost of public service benefits for the specimen groups range from around 18% to almost 40%. These costs represent the expected cost to the state of providing these benefits. However, the value to individual public servants of a public service pension is well above the costs shown. For example, no allowance is made for the substantial expenses that would be incurred by an individual in the private sector who wishes to attempt to provide for a similar level of pension.

There is a further benefit associated with a public service pension that is not quantified in the figures. Pensions for public servants are underpinned by the State. The security provided by this is a valuable additional benefit to public servants. Deputy Bruton also referred to those on low pay. A person on pay of €30,000 per year who is subject to integration will now pay a total contribution of 9.5% of pay. It is clear from the figures that the value of public service pension benefits is well in excess of the contributions public servants make. When we could afford it over the past ten years, we progressively reduced the tax burden on the lower paid to a point where 40% of all income earners are now outside the tax net. According to the latest figures, a married one-income couple with two children on average earnings in Ireland continues to have the lowest tax wedge in the entire OECD. When tax benefits from the State are taken into account, such families face a negative tax burden for the sixth consecutive year, receiving more money in cash transfers from the State than they pay out in income tax and social security contributions.

In Britain, all income above €6,860 is subject to income tax at 20%. In this State, workers can earn €18,300 before they start paying tax, PRSI or the income levy. Our minimum wage is the second highest in the EU. When it was introduced in 2000, it was subject to income tax and PRSI. It is now well outside the tax net. I want to put this on the record, because of the many inaccurate arguments advanced constantly about the unfairness as to who bears the burden of income tax. All public service workers are paid above the minimum wage, which is an hourly rate. Anyone earning below €18,000 in the public service is in that position because he or she is a part-time worker. I recognise that the pension levy is a burden on lower paid workers, but it must be remembered that those on low pay who work for the State do not pay tax.

It has also been claimed that some public servants will pay more in contributions than the benefits they will receive upon retirement. That claim takes no account of the considerable service benefits attached to public service pensions. For example, if a public servant dies in service, his or her family receive a death gratuity of a minimum of one year's pay. In addition, a pension is paid to the public servant's spouse and dependent children. These are valuable features of public service employment that must be taken into account in this debate. Public servants also receive a pension lump sum, which is a tax free payment made in retirement which equals three eightieths of the final salary of the retiring officer for each year of service. Someone retiring with 40 years' service and a final salary of €50,000 receives a lump sum of €75,000.

Deputy Bruton stated that someone earning €30,000 would pay a higher percentage of his or her salary than someone earning €45,000. In terms of gross income, no public servant will pay more in pension levies than a higher paid colleague. Seeming anomalies may arise when tax relief is taken into account. In a progressive tax system such as ours, the more one earns, the higher the tax rate one pays, but this also works in the opposite direction. If the amount of an individual's taxable income is reduced, as will be the case when the new pension levy is applied, the individual will pay less in tax and will suffer less of a net reduction in pay than someone who is not moved from liability to a higher tax rate to a lower liability as a result of the deduction in wages. Taking all the deductions into account, our tax system remains highly progressive, and those who earn the most, pay the most. Taking account of taxes and other mandatory stoppages, such as income tax, PRSI, the standard pension contribution, the health and income levies and the new pension related deduction, an unmarried civil servant earning €20,000 per year will pay 11% of his or her gross income on total deductions when the new deduction is introduced. This compares with 43% of gross income for an equivalent civil servant earning €100,000 per year. The only way to avoid anomalous positions in the pension levy is to have one income tax rate and no tax credits, or not to give tax relief on the levy. The point is that the overall system is progressive, and this is as it should be.

For someone earning €20,000 a year, the net reduction in take-home pay as a result of the Bill is around €11 per week. For someone on €50,000, which is close to the average salary in the public service, the reduction is around €38 per week. These figures are substantial and we recognise that it will not be easy for people, but they have to be seen in the context of the situation facing the economy.

Deputy O'Donnell asked me to confirm whether a freeze on the increments due to public sector employees in 2009 is built into the sum of €1.4 billion. That figure, which is a full year's saving, is made up as follows. A total of €1.35 billion comes from the pension related deduction across the public service, with the remaining €50 million relating to other savings, mainly reductions in travelling and subsistence rates. There is no freeze on increments and consequently no such element is built into the figures. Stopping the payment of increments, as has been suggested by Deputy O'Donnell's party, would bear disproportionately on lower grades in the public service.

Deputy O'Donnell also asked about section 8 which gives the Minister for Finance the power to alter the extent of the deduction if there are materially distinguished classes of public servants. I do not anticipate the need to use this authority, but it is wise to make such a provision when legislating for such a wide and varied group.

I pay tribute to those in other Departments and offices who have worked at short notice to produce this Bill. The Department of Agriculture, Fisheries and Food, the Office of the Revenue Commissioners, the Department of Health and Children and the Office of the Attorney General have all assisted staff in my Department in drafting the Bill and in the myriad tasks that accompany emergency legislation such as this. This is not to mention those in every public service body, who have to work on the practical arrangements arising from the measures in the Bill.

On the issue of overall fairness, I must once again emphasise the seriousness of the situation facing the public finances and the nation at large. Many people working in other sectors of the economy have had to face pay cuts, shorter working weeks and redundancy. Everyone in this House knows how redundancy has stalked this land in recent weeks. For those still at work, many who had made pension provisions have seen the value of their investments suffer because of the devastating effects of the international downturn in equities, and Irish blue-chip equities in particular. Against that background, we ask those in a position of secure pensionable employment and with Government-guaranteed pensions, to make their contribution towards addressing both today's difficulties, and the longer-term sustainability challenges facing public service pensions.

I accept that this is not an easy pill to swallow and that for many, the financial contribution will mean a significant drop in their take-home pay. Some of this effect will be ameliorated by the falling prices forecast for the remainder of this year. Falling interest rates have fed through to lower mortgage repayments for householders, and a similar correction in fuel prices has reduced the cost at the petrol pumps and in terms of home heating for many. While I do not expect that this will necessarily satisfy the public servants affected, the drop in the cost of living we are seeing in the economy must be taken into account in assessing the effect on the overall circumstances of individuals.

Ultimately, this is not the time for equivocation. It is not the time for evasiveness or for woolly thinking and vague half measures. There are no popular initiatives that will deliver the savings needed to meet the day-to-day demands of the Government, and in particular the growing cost of providing for those currently out of work. The country is facing some of the most difficult times in living memory. Serious and difficult decisions are called for. We have gone beyond point-scoring. We must take action now to deal with the problems we confront. On that basis, I commend the Bill to the House.

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