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\n Paul O’Donoghue<\/p>\n
WITH SUMMER OFFICIALLY over and evenings starting to close in, we could all use some cheering up.<\/p>\n
So let\u2019s talk proposed PRSI increases.<\/p>\n
It\u2019s a subject we\u2019ve returned to time and again \u2013 as the population ages, how will Ireland fund state pension payments?<\/p>\n
This question keeps civil servants up at night in a cold sweat. In attempting to find an answer, they are looking at ways to boost how much money the state gets through PRSI.<\/p>\n
In a new proposal, civil servants have recommended raising the threshold for PRSI benefits for low paid workers. The suggestion is likely to cause some angst, although the impacted group would likely be very small. But before we dive into that, let\u2019s quickly set the scene.<\/p>\n
PRSI (Pay Related Social Insurance) is a tax levied on employees, employers, and self-employed people to fund the country\u2019s Social Insurance Fund (SIF).\u00a0<\/p>\n
It is currently 4.2% of gross weekly earnings for most workers, although this will rise to 4.35% on October 1<\/a>.<\/p>\n Most of the money from the SIF is used to pay out state pensions, which accounts for about 60% of spending from the fund. The SIF is also used to fund other social welfare payments, like illness and carers\u2019 benefits. But today, we\u2019ll focus on pensions.<\/p>\n We\u2019ve established before that people paying PRSI are not \u2018saving\u2019 for their own state pension.<\/p>\n The system works on a \u2018Pay As You Go\u2019 basis. Today\u2019s PRSI payments into the SIF are immediately used to fund state pension payments to current retirees. Today\u2019s workers are relying on the workforce of the future to do the same for them down the road.<\/p>\n The problem is that it looks like this arrangement won\u2019t work anymore in the coming decades.<\/p>\n At the heart of this is the country\u2019s ageing population. Currently, Ireland has about 4 workers for every one retiree. That is expected to fall to about 2 per worker in 25 years<\/a>.<\/p>\n This means it will be much harder for the country\u2019s workforce to keep the SIF funded and, by extension, pay out the state pension. It\u2019s predicted that PRSI will only cover about 63% of the SIF\u2019s expenditure in the coming years<\/a>, meaning the state will need to find tens of billions per year to cover the shortfall.<\/p>\n Okay, so that\u2019s the problem. Which brings us back to what the government plans to do about it.\u00a0<\/p>\n The most obvious avenues are to reduce SIF spending, or raise PRSI. Which brings us to the core of this article \u2013 a new proposal to increase the PRSI threshold for low paid workers.<\/p>\n What\u2019s it all about?<\/p>\n Currently, employees who earn at least \u20ac38 per week (about \u20ac2,000 per year) get PRSI benefits. The most obvious one being they will eventually qualify for a full state pension, which pays out about \u20ac300 per week, or roughly \u20ac15,600 per year.<\/p>\n This is despite the fact that they don\u2019t actually pay any PRSI at all \u2013 the charge only kicks in once workers earn at least \u20ac352 per week.<\/p>\n In a report presented to the government ahead of Budget 2027<\/a>, officials from the Department of Social Protection have said that this is a \u201cdisproportionate\u201d benefit.<\/p>\n Pointing to the minimum wage of \u20ac14.15 per hour, they highlight that an employee earning \u20ac38 per week \u201cnow only has to work less than three hours per week, for access to all [PRSI] benefits\u201d.<\/p>\n \u201cAn entry threshold equivalent to less than half-a-day\u2019s work facilitates employees with negligible attachment to the workforce to access the full range of social insurance benefits funded by the Social Insurance Fund,\u201d the officials said.<\/p>\n The Department also states that the PRSI entry threshold of \u20ac38 \u201chas not changed since 1994\u201d.<\/p>\n It now wants to raise the threshold from \u20ac38 to \u20ac112, so that employees will have to work at least one full day on minimum wage to qualify for PRSI benefits.<\/p>\n The Department also suggested linking the PRSI threshold to future minimum changes. For example, if the minimum wage went to \u20ac16 per hour, the new PRSI qualifying threshold would be \u20ac128 per week.<\/p>\n But perhaps even more significantly, the Department wants these low paid workers to chip in for PRSI. Remember how we said PRSI only kicks in once workers get at least \u20ac352 per week?<\/p>\n Officials want to set a minimum PRSI charge of 0.95% of gross weekly earnings for those earning \u20ac112 per week. This would gradually rise to the normal rate.<\/p>\n Why?<\/p>\n The idea with these changes is twofold.<\/p>\n One: By raising the minimum PRSI threshold, you reduce SIF spending for a (admittedly small) group of people.<\/p>\n Two: By levying PRSI on low paid workers who used to be exempt, you give the SIF a (small) boost.<\/p>\n The Department estimates the changes would bring in \u20ac115 million annually to the SIF.<\/p>\n Now, this is barely a rounding error for a fund which spends about \u20ac15 billion per year<\/a>. But the idea is that every little helps.\u00a0<\/p>\n Officials also proposed two other major changes. First, increasing the PRSI paid by businesses in some cases.<\/p>\n Currently, employers pay PRSI contributions at a rate of 9% on wages up to \u20ac552 per week. Above that, they pay 11.25%.\u00a0<\/p>\n The Department has suggested removing the staggered rate and implementing a flat 11.25%.<\/p>\n \u201cThe rationale for the lower employer rate of PRSI was to reduce the cost of employing low wage workers during recessionary periods. At a time of full employment, it is arguable that this provision is no longer necessary,\u201d it said.<\/p>\n It estimates the change would net the SIF approximately \u20ac247 million per year.<\/p>\n Finally, they suggested hiking the minimum annual PRSI contribution for the self-employed from \u20ac650 to \u20ac900, estimating this would be worth about \u20ac24 million annually.<\/p>\n The modifications would be to go along with multiple other tweaks to boost the SIF which officials have either introduced, or want to.<\/p>\n The most obvious of these is the move to raise the general rate of PRSI paid by employers, employees and the self-employed by 0.7% by 2028.<\/p>\n This is being done, in part, because the government does not want to raise the retirement age (which the government explicitly says itself<\/a>).<\/p>\n