PRSI reforms will lead to gains for the government but more raises may be required, ESRI says

The Economic and Social Research Institute said that while these moves are progressive, additional measures will be required beyond 2028 to 'ensure the continued viability of the Social Insurance Fund'

The ESRI found the main difference between the Total Contributions Approach (TCA) and its predecessor, the Yearly Average Method (YAM), is that the TCA has led to a large increase in the proportion of women qualifying for the maximum pension rate, from 54% to 75%.

Planned increases to pay-related social insurance tax (PRSI) could lead to government gains of €1.6bn a year by 2028, but further reform will “likely” be required, research has found.

The Government has committed to a set number of reforms in an effort to keep the State pension age from ticking upwards of 66 years and avoid significant future shortfalls in the Social Insurance Fund (SIF), out of which the State Pension is paid.

However, the Economic and Social Research Institute (ESRI) said that while these moves are progressive, additional measures will be required beyond 2028 to “ensure the continued viability of the SIF.” 

Doctor Karina Doorley with the ESRI said the Government has not included in its plans “some of the larger PRSI reforms recommended by the Commission on Taxation and Welfare and the Pensions Commission, such as abolishing or minimising exemptions based on age or income source and equalising the treatment of employee and self-employed income”.

The Government is currently committed to raising all rates of PRSI by 0.7% in the next four years which will affect mainly high income earners rather than poorer households.

The ESRI estimated that households will see their annual disposable income fall by 0.6% by 2028 and this fall is larger at 0.9% for those on the higher end of the earning spectrum.

Losses also may be steeper, the think tank said, “if some or all of the proposed increases to employer PRSI are passed on to employees in the form of lower wages.” 

Men are set to be most affected by the reforms due to their higher participation in the labour market. However, women are catching up in this regard, according to recent figures by the Central Statistics Office which showed the popularity of flexible working arrangements post-pandemic has led to more women in the workforce.

In relation to age, those between 25 and 54 are expected to carry most of the burden of these tax reforms with smaller income losses for those aged under 25 or between 55 and 65, who are at either the beginning or end of their professional life and likely have less disposable income.

ESRI research

The ESRI published its findings in a research paper titled Increasing Pay Related Social Insurance to fund the State Pension: Incidence and Effectiveness, which was published ahead of its annual Budget Perspectives conference.

The ESRI published a separate paper, titled State Contributory Pension reform: Winners and Losers, that also focuses on policy issues relating to the national budget ahead of its event.

In the second paper, the ESRI examined how the Total Contributions Approach (TCA) has affected workers since it was introduced in 2018.

The ESRI found the main difference between this system and its predecessor, the Yearly Average Method (YAM), is that the TCA has led to a large increase in the proportion of women qualifying for the maximum pension rate, from 54% to 75%.

The previous system, YAM, was criticised by the OECD as being a complex way to calculate pensions and resulted in “inequitable treatment for people who have contributed for the same amount of time”.