WITH IRELAND’S HOUSE of cards-esque pension system looking increasingly rickety these days, there are lots of dark mutterings about ‘sustainability’.
As things stand, the entire system looks like it could be heading towards disaster. One of the measures being put forward to avoid this, however, is to remove the current exemption from paying PRSI for those aged 66 and over on all income they earn other than their social welfare payments.
The hope is this would give a new source to fund the state pension.
That’s why it was proposed by the Commission on Taxation and Welfare, which hopes this could ease the pressure on the working population.
However, a report published during the week by the Committee on Budgetary Oversight shows this proposal will likely face the same fate as many others: being talked to death.
The committee, which reviews fiscal issues that form part of budget considerations, was not exactly enthused at the suggestion.
It recommended that a “detailed analysis” be carried out on the impact such a measure could have on older people’s incomes.
Knowing the history of the government’s approach to pension reform, a final decision on this should be expected some time in the next decade – maybe.
But what is happening here? With many older people struggling with the cost of living, why would the government consider getting rid of the PRSI exemption?
The PRSI problem
Well, the main reason is what PRSI is used for. PRSI is a tax levied on income which is paid into the state Social Insurance Fund.
This fund is primarily used to meet the cost of paying out the state pension. Ensuring there is still money in the fund in the coming years is the primary motivator for the proposal.
In regards to the state pension, Irish people often like to think that their taxes pay for their own retirement pot.
So if they pay X amount in PRSI over the years, the thinking goes that they will be entitled to Y worth of a state pension by the time they’re retired.
Unfortunately, it doesn’t work like that. That X in PRSI contributions from a worker isn’t invested to pay out to them in 30 years, or whenever they retire. The funds are paid out immediately to current pensioners.
Future pensioners are effectively relying on future workers to continue doing the same for them.
The problem: Ireland’s population is ageing. This means there will be fewer workers and more pensioners. If the current system was maintained, it would mean younger people paying far more in tax to fund current pensions.
The Irish Fiscal Advisory Council has estimated that keeping the state pension age at 66 will require big bumps in PRSI payments over the next 25 years.
It calculated people with an annual salary of €35,000 will have to contribute the equivalent of an extra €1,800 a year in PRSI payments. Obviously, not great for an age group with, on average, far less wealth built up and bearing the brunt of the housing crisis.
So the idea of removing the PRSI exemption for those aged 66 and up is to raise contributions from older workers while they are still working in order to avoid a disproportionate burden being placed on younger taxpayers.
While this by itself would not solve all the problems with the state pension system, it would make a contribution towards making it more sustainable.
U-turns and no solutions
The government is also well aware that PRSI will have to rise.
It had planned to raise the state pension age from 66 to 67, in a move which would save the state several hundred million euros a year.
However, the government performed a u-turn after getting heavy political blowback.
After another review last year, Social Protection Minister Heather Humphreys said that in order to retain the state pension at 66, PRSI increases “will be needed in the future”.
Finance Minister Michael McGrath has also said PRSI will have to go up “to protect” the state pension age.
This again brings the question of the PRSI exemption for those 66 and over into focus.
With social welfare payments left untouched in either scenario, scrapping the exemption would mean the tax would only apply to supplementary pension income.
There are some more nuances to consider – the Irish Congress of Trade Unions raised the fact that workers who joined the civil service before 1995 don’t have the same entitlement to a state pension as those who joined after do, and could be hit harder.
While problems such as these would have to be ironed out, most groups which made submissions to the Committee on Budgetary Oversight supported the principle of removing the PRSI exemption for many of those 66 and over to improve “intergenerational fairness”.
But supporting it in principle is one thing. Actually following through is another.
Much as the government is loath to deal with the issue, Ireland’s population is ageing. PRSI will almost certainly go up.
At some point, the question will have to be tackled – how will the burden be shared around?
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