Paul O'Donoghue

WITH SUMMER OFFICIALLY over and evenings starting to close in, we could all use some cheering up.

So let’s talk proposed PRSI increases.

It’s a subject we’ve returned to time and again – as the population ages, how will Ireland fund state pension payments?

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.

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’s quickly set the scene.

PRSI (Pay Related Social Insurance) is a tax levied on employees, employers, and self-employed people to fund the country’s Social Insurance Fund (SIF). 

It is currently 4.2% of gross weekly earnings for most workers, although this will rise to 4.35% on October 1.

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’ benefits. But today, we’ll focus on pensions.

We’ve established before that people paying PRSI are not ‘saving’ for their own state pension.

The system works on a ‘Pay As You Go’ basis. Today’s PRSI payments into the SIF are immediately used to fund state pension payments to current retirees. Today’s workers are relying on the workforce of the future to do the same for them down the road.

The problem is that it looks like this arrangement won’t work anymore in the coming decades.

At the heart of this is the country’s 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.

This means it will be much harder for the country’s workforce to keep the SIF funded and, by extension, pay out the state pension. It’s predicted that PRSI will only cover about 63% of the SIF’s expenditure in the coming years, meaning the state will need to find tens of billions per year to cover the shortfall.

Okay, so that’s the problem. Which brings us back to what the government plans to do about it. 

The most obvious avenues are to reduce SIF spending, or raise PRSI. Which brings us to the core of this article – a new proposal to increase the PRSI threshold for low paid workers.

What’s it all about?

Currently, employees who earn at least €38 per week (about €2,000 per year) get PRSI benefits. The most obvious one being they will eventually qualify for a full state pension, which pays out about €300 per week, or roughly €15,600 per year.

This is despite the fact that they don’t actually pay any PRSI at all – the charge only kicks in once workers earn at least €352 per week.

In a report presented to the government ahead of Budget 2027, officials from the Department of Social Protection have said that this is a “disproportionate” benefit.

Pointing to the minimum wage of €14.15 per hour, they highlight that an employee earning €38 per week “now only has to work less than three hours per week, for access to all [PRSI] benefits”.

“An entry threshold equivalent to less than half-a-day’s work facilitates employees with negligible attachment to the workforce to access the full range of social insurance benefits funded by the Social Insurance Fund,” the officials said.

The Department also states that the PRSI entry threshold of €38 “has not changed since 1994”.

It now wants to raise the threshold from €38 to €112, so that employees will have to work at least one full day on minimum wage to qualify for PRSI benefits.

The Department also suggested linking the PRSI threshold to future minimum changes. For example, if the minimum wage went to €16 per hour, the new PRSI qualifying threshold would be €128 per week.

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 €352 per week?

Officials want to set a minimum PRSI charge of 0.95% of gross weekly earnings for those earning €112 per week. This would gradually rise to the normal rate.

Why?

The idea with these changes is twofold.

One: By raising the minimum PRSI threshold, you reduce SIF spending for a (admittedly small) group of people.

Two: By levying PRSI on low paid workers who used to be exempt, you give the SIF a (small) boost.

The Department estimates the changes would bring in €115 million annually to the SIF.

Now, this is barely a rounding error for a fund which spends about €15 billion per year. But the idea is that every little helps. 

Officials also proposed two other major changes. First, increasing the PRSI paid by businesses in some cases.

Currently, employers pay PRSI contributions at a rate of 9% on wages up to €552 per week. Above that, they pay 11.25%. 

The Department has suggested removing the staggered rate and implementing a flat 11.25%.

“The 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,” it said.

It estimates the change would net the SIF approximately €247 million per year.

Finally, they suggested hiking the minimum annual PRSI contribution for the self-employed from €650 to €900, estimating this would be worth about €24 million annually.

The modifications would be to go along with multiple other tweaks to boost the SIF which officials have either introduced, or want to.

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.

This is being done, in part, because the government does not want to raise the retirement age (which the government explicitly says itself).

The move would be quite an impactful one, worth about half a billion euros annually for each year the age is raised (ie, raising the age from 66 to 67 would save the state about €500 million per year in pension payments).

While the government previously planned such an increase, it u-turned following public backlash. So officials are now on the lookout for other ways to boost the SIF.

More hikes 

None of these changes are urgent right now, with the SIF still recording large surpluses while the workforce is (relatively) large and young. Which means the government could decide to forego these unpopular measures, if it chooses to do so.

But as the years go on, the SIF numbers will likely look tighter and tighter. As that happens, expect even more sniffing around from Department officials looking at ways to shore up the fund. 

The government has clearly signalled it prefers raising PRSI to increasing the state pension age.

More hikes in the future, even beyond what’s already planned, are likely.