Effectiveness of Increasing Pay-Related Social Insurance for State Pension Funding
"Explore the potential impact and effectiveness of increasing Pay-Related Social Insurance (PRSI) contributions to secure the sustainability of the State Pension system amidst population aging. Discover the research findings on revenue generation, distributional implications, poverty impact, and work incentives. Dive into the methodology used to model the proposed PRSI reforms over the next four years. Stay informed about the government's commitment to PRSI increases and the roadmap for securing the State Pension system."
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INCREASING PAY RELATED SOCIAL INSURANCE TO FUND THE STATE PENSION: INCIDENCE AND EFFECTIVENESS Karina Doorley Dora Tuda Budget Perspectives 2025 13 June 2024 www.esri.ie @ESRIDublin @ESRIDublin #ESRIevents #ESRIevents #ESRIpublications www.esri.ie #ESRIpublications
Introduction Sustainability of State Pension system at risk due to population ageing Funded on a Pay-As-You-Go basis Ratio of working-age to pension-age people will decrease from 5 in 1991, to 3.5 in 2031 and 2.3 in 2051 (CSO) Potential policy solutions include Increasing the State Pension age Reducing State Pension payments Increasing Pay Related Social Insurance (PRSI) contributions and/or Transfers to the Social Insurance Fund (SIF) from the Exchequer www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 2 21 March 2025
Introduction Government has committed to a Roadmap of Increases to PRSI, which will occur between 2024 and 2028 Further review planned for 2028 after next Actuarial Review of the SIF 2023 2024 2025 2026 2027 2028 Employer PRSI Class A: Lower rate Employer PRSI Class A: Higher rate Employer PRSI Class J Employee PRSI Class A Self-employed Class S 8.8 8.9 9 9.15 9.3 9.5 11.05 11.15 11.25 11.4 11.55 11.75 0.5 4 4 0.6 4.1 4.1 0.7 4.2 4.2 0.85 4.35 4.35 1 1.2 4.7 4.7 4.5 4.5 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 3 21 March 2025
This research Evaluate the effect of the proposed PRSI reforms over the next four years Revenue raised Distributional impact (income quintile, gender, age) Poverty impact Impact on work incentives www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 4 21 March 2025
Methodology SWITCH v7.1 models the 2024 tax-benefit system Including employee (class A), employer (class A and J) and self-employed (class S) PRSI Linked to 2019 SILC data with incomes uprated to 2024 levels Two assumptions for employer PRSI increase Not passed on or Fully passed on to employees www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 5 21 March 2025
Methodology Each reform modelled as in place for full calendar year (rather than October start) Compared to indexed 2024 baseline. Assumption of no behavioural responses to proposed reforms www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 6 21 March 2025
Reforms will raise an additional 1.6bn p.a. by 2028 2024 96 15 99 -2 209 2025 196 31 204 -3 428 2026 350 55 364 -7 762 2027 510 80 530 -10 1,110 2028 728 114 757 -15 1,583 Employee PRSI Self-employed PRSI Employer PRSI Welfare Net Revenue www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 7 21 March 2025
Reforms are progressive No pass-through Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Total 0.0% % change in disposable income -0.2% -0.4% -0.6% -0.8% -1.0% -1.2% -1.4% -1.6% -1.8% 2024 2025 2026 2027 2028 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 8 21 March 2025
Household losses are larger if employers pass on PRSI increases Full pass-through Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Total 0.0% % change in disposable income -0.2% -0.4% -0.6% -0.8% -1.0% -1.2% -1.4% -1.6% -1.8% 2024 2025 2026 2027 2028 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 9 21 March 2025
Losses are slightly larger for men Men Women Q1 Q2 Q3 Q4 Q5 All Q1 Q2 Q3 Q4 Q5 All 0.0% 0.0% -0.2% -0.2% % change in disposable income % change in disposable income -0.4% -0.4% -0.6% -0.6% -0.8% -0.8% -1.0% -1.0% -1.2% -1.2% -1.4% -1.4% -1.6% -1.6% -1.8% -1.8% No pass-through Pass-through No pass-through Pass-through www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 10 21 March 2025
Losses are more concentrated among those aged 25-54 18-24 25-34 35-44 45-54 55-64 66+ 0.0% -0.2% % change in disposable income -0.4% -0.6% -0.8% -1.0% -1.2% -1.4% -1.6% -1.8% No pass-through Pass-through www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 11 21 March 2025
Poverty effects are relatively small Change (percentage points) No pass-through AROP rate gap 0.11 0.01 Pass-through AROP rate 0.26 AROP rate (%) 13.53 Poverty gap (%) 2.85 Poverty Poverty gap 0.03 Whole Population Working Age Population Elderly Population Child Population Disabled Population 12.94 2.79 0.13 0.01 0.28 0.04 14.07 14.30 19.92 2.41 3.08 3.65 0.00 0.17 0.03 0.00 0.01 0.00 0.00 0.42 0.19 0.00 0.05 0.02 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 12 21 March 2025
Work incentives worsen, particularly for low- income households METR PTR 3.5 3.0 2.5 2.0 1.5 % change 1.0 0.5 0.0 -0.5 -1.0 -1.5 Decile 1 Decile 2 Decile 3 Decile 4 Decile 5 Decile 6 Decile 7 Decile 8 Decile 9 Decile 10 All www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 13 21 March 2025
Discussion Commission on Pensions recommended that any proposals by Government to reform PRSI or the pension age be subject to gender, equality and poverty proofing We assess that the Roadmap of reforms to PRSI is progressive, impacts men more than women, concentrates losses among those aged 25-54 & slightly increases AROP rates. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 14 21 March 2025
Discussion The Roadmap may also reduce work incentives, especially among low-income households Revenue gains increase from 209m p.a. in 2024 to 1.6bn p.a. in 2028. Is this enough, is it fair? www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 15 21 March 2025
Discussion SIF projected to be in deficit by 2035 ( 0.4bn p.a.), deficit expected to grow exponentially ( 3.5bn p.a. in 2040, 32.2bn p.a. by 2077) In short-medium term, these reforms may be enough In long-term, more reform likely to be needed & fairness of levying on same population must be considered. www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 16 21 March 2025
Discussion Other possibilities suggested by CoTW, CoP: Levying PRSI on those aged 66 and over, Equalising the treatment of employee and self- employed income Putting the State Pension age back on the table www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 17 21 March 2025
