Portable pension


Date 26.10.2000 Ė Financial Times


First Bolkenstein, the European Union's internal mark commissioner, has lofty ambitions regarding the taxation of private pensions across Europe. He wants all EU countries to agree to give tax relief for pension contributions and tax pensions when they are paid.

            He has a point. Granting tax relief on pension contributions guarantees that an individualís pension will not be electively taxed. And the different tax rules across the EU imply that for individuals moving to a different country retirement, some will have to pay taxes on their pensions contributions and on their pension income while other, luckier people get tax relief at all times.

            As private pensions become more important, these crossboarder issues will increasingly inhabit mobility of labour and may even become as important a barrier to movement as language or housing.

            But, in calling for European countries to unify their tax systems for pensions, Mr. Bolkestein taking a rather large sledgehammer to crack a nut. He is also ignoring many more important issues on pension reform, on labour mobility and on taxing savings.

            First, Mr. Bolkesteinís concentration on tax differences ignores much more important distortions within national pension systems. Features of the murky German private pension system are much more deserving of rapid reform than tax. For example, employees have to contribute for up to 10 years before they are entitled to benefit from many German occupational pension schemes.

            Second, there are just as many anomalies within national tax systems as they apply to pensions as there are between them. Labour mobility within countries is much higher than between countries, so reform here would bring greater benefits.

            Third, pensions should not be viewed as products separate from other savings vehicles. All savings boost potensial retirement income, so the logic of Mr. Bolkesteinís comments would imply a much wider tax harmonization. After the wrangle over the EU withholding tax, this is inconceivable.

            Fourth, many cross-boarder difficulties could be resolved on a bilateral basis in tax treaties. It would be far easier for individual countries to agree conventions on the tax treatment of pensions than to try for unanimity among EU member states.

            Governments are always slow at reforming pensions. The immediate cost to their popularity is large and benefits are often far down the road. Mr. Bolkestein is right to highlight his concerns but he must avoid a heavy-handed approach. It will fail.