Ireland has joined the increasing number of EU states that have begun seizing or taxing private pension funds to plug their budget deficits. Under the Irish plan, a 0.6% tax will be levied against private pensions for the next four years, in order to fund a stimulus package. Note that this will be a tax on the capital itself, not the gains.
The plan is, of course, ludicrous: classic "gombeen economics", in the words of the Irish Times's commentator (gombeen is an Irish word for a corrupt wheeler-dealer), that will only make Ireland's situation worse. And stimulus packages are a Keynesian folly. At best they do nothing, at worst they bankrupt countries and lead to lost decades of stagnation. And the principle of raiding people's savings, made on good faith, to pay for a government project is immoral in and of itself. But, however much we might sympathise, that is Ireland’s challenge. The real danger is that we might see the same kind of thing over here.
From next year private sector workers will be automatically enrolled into a pension fund. A tax similar to the Irish levy wouldn't yield the government a huge amount, but it would plug a hole in its finances. If the recovery that the government expects doesn’t come through, it isn’t hard to foresee a “temporary” levy on pension pots. Like the Irish levy, it might start small. But remember: the first income tax was just 2%, and was originally introduced to fund the Napoleonic Wars. Small, temporary taxes have habit of sticking around and growing.
Even a tiny pension confiscation would have a seismic impact: just as the Irish government’s levy has broken the good faith in which Irish pension holders invested their money, so would the faith that Britain’s system relies on. It may be coincidence that pension contributions are being made mandatory at the same time that this is happening abroad, but the inability to disengage from private pensions would free the government’s hands to raid these funds. Such a tax would be deceitful, deter investment, and undermine people's ability to provide for themselves in their old age – yet another step away from self-sufficiency, towards dependence on the state.
How likely is this to happen? Sadly, it may be inevitable. Hungary, Poland, France and other EU states have carried out straightforward pension seizures, and a levy might be presented as a “lucky escape”. Yeah, right. Some might say, optimistically, that a pension tax would be politically unfeasible in Britain. But if a strong recovery doesn’t take place (and so far, growth figures have undershot the government’s projections), and the government continues to buckle to special interest pressure, the pensions nest egg might be too tempting to resist.