As Ireland faces an aging population, the need for reforming the Pay Related Social Insurance (PRSI) system has become more pressing. The government has proposed a series of gradual increases to PRSI contributions from employees, employers, and the self-employed in order to maintain the State pension eligibility age at 66. However, there are growing concerns that these reforms may not be sufficient to ensure the sustainability of the State pension system and could even have unintended consequences, particularly for families and those with children.
The Need for PRSI Reform
Currently, individuals in Ireland are eligible to receive the State pension at age 66. However, to qualify for the full pension, individuals must continue contributing to PRSI throughout their working lives. If they have not reached the required contribution level, they can continue working until the age of 70 to accrue additional contributions, which will increase their pension benefits.
Given the pressures of an aging population, the government has proposed a PRSI roadmap to secure the future of the State pension. This roadmap includes gradual increases in PRSI rates, which will apply to all classes: employees, employers, and self-employed individuals. The goal is to finance the State pension system without raising the pension age.
The PRSI Roadmap
The government’s plan calls for small, incremental increases in PRSI contributions over the next several years. These increases are designed to help fund the State pension system while maintaining the eligibility age of 66. The schedule for these increases is as follows:
- 0.1% increase by October 2024
- 0.1% increase by October 2025
- 0.15% increase by October 2026
- 0.15% increase by October 2027
- 0.2% increase by October 2028
For the average worker, the initial 0.1% increase is expected to cost approximately 90 cents per week.
Findings from the ESRI Report
The Economic and Social Research Institute (ESRI) recently published a report on the PRSI roadmap, highlighting both the potential benefits and drawbacks of the proposed increases. The report indicates that by 2028, the increases could generate up to €1.6 billion in annual government revenue. While the reforms are expected to be largely progressive, meaning that higher-income households will contribute more, the ESRI also raised concerns about the impact on disposable household incomes.
According to the report, households will experience a 0.6% drop in disposable income on average by 2028, with the top 20% earning households seeing a 0.9% decline. However, the impact may be more severe if employers pass the additional costs onto employees in the form of lower wages.
One of the most concerning findings of the ESRI report is the potential for an increase in poverty rates, especially child poverty. The report suggests that child poverty could rise slightly, from 0.2% to 0.4%. This is because the individuals most affected by the PRSI increases (those aged 25-54) are also the ones most likely to have children, who may be disproportionately impacted by the reduction in household income.
Recommendations for Further Reforms
The ESRI report also notes that the proposed PRSI reforms may not be enough to mitigate these negative impacts. Dr. Karina Doorley, one of the authors of the report, suggested that further measures be considered to address the issues raised by the increases. These measures could include adjustments to age or income-based PRSI exemptions, as well as changes to how self-employed income is treated for PRSI purposes. The Commission on Taxation and Welfare and the Pensions Commission have made similar recommendations, and incorporating these suggestions into the PRSI roadmap could help alleviate the burden on households that are most affected by the reform.
Conclusion
While the proposed PRSI increases are necessary to maintain the State pension age at 66 in light of an aging population, the ESRI’s report highlights several potential challenges. Although the reforms are progressive, they may inadvertently lead to higher poverty rates, particularly among children. This is due to the disproportionate impact on households with children, especially those in the 25-54 age group.
To avoid exacerbating these issues, the government should consider additional measures, such as those suggested by the Commission on Taxation and Welfare and the Pensions Commission. These steps could ensure that the PRSI reforms do not unduly burden vulnerable groups, allowing the State pension system to remain sustainable while minimizing negative effects on families.
If you have questions about the State pension or would like advice on planning for your retirement, the National Pension Helpline offers free consultations with qualified pension advisors.