Workers could face tax hikes in the next Budget as the Government considers increasing PRSI to top up funds to pay for future pensions.
It comes after the budget watchdog, the Irish Fiscal Advisory Council (IFAC), has urged the government to take steps now, including increasing PRSI, to ensure the younger, working population, does not have to pay more to fund the retired population in years to come.
Social Protection Minister Heather Humphreys is expected to bring proposals to Cabinet in June on the social insurance fund and has indicated “small, gradual increases” in PRSI will be required.
Ms Humphreys informed Cabinet this week that the social insurance fund is almost €3bn in surplus.
Taoiseach Leo Varadkar told thethat IFAC has made the point that the sooner the government increases PRSI, the better.
He said this is something the government will have to consider between now and the Budget in October.
“Because we have decided not to increase the pension age, PRSI will have to go up but we will make a decision as a government in advance of the budget as to whether we need to start that in this budget or whether we can do it in the future budget,” Mr Varadkar said.
The Taoiseach said the social insurance fund is likely to stay in surplus for at least another ten years.
There are around four people of working age for every retired person in the State.
But by 2050 there will be just under two working-age people for every retired person.
Under the current PRSI model, there will be far fewer working people paying into the pension system through their contributions than there will be retired people receiving pension payments.
Chairman of IFAC, Sebastian Barnes, said increasing PRSI contributions now to a flat rate would see contributions increase by around 3%.
He said the current pension scheme will come under a lot of pressure as the population ages and it is now time to improve the scheme for future generations.
Ms Humphreys reaffirmed that the pension age will remain at 66, with a flexible approach where workers can work longer to get a bigger pension or to make up for missed PRSI payments.
Responding to IFAC’s recommendations, Ms Humphreys said she has to be conscious of what’s happening in the wider economy and “has to be mindful” of the cost-of-living crisis facing households.
“I brought a report to Cabinet this week to show the social insurance fund is actually almost €3bn in surplus so that is good because obviously we’re at full employment and people are contributing to the social insurance fund.”
She said she has always said that long-term “this is an issue we have to deal with” but added that “what we need is small, gradual increases" in PRSI.
IFAC also suggested setting aside some of the windfall receipts of corporation tax which might lower the overall cost of pensions.
Finance Minister Michael McGrath said he will be establishing a separate fund that will be set aside to pay for pensions into the future.
"Since coming into office as Minister for Finance, I have been working with my officials on developing a proposal for a longer-term fund to underpin the resilience of the public finances into the future.
"I am particularly conscious of the need to put windfall corporate tax receipts to good use, and in my view, this requires new structures to be put in place."
He said the National Reserve Fund, which currently holds €6bn, serves a "useful purpose in the short-term" but he believes a new fund is needed to meet the costs of an ageing population and other pressures that will arise in the future.
"I intend to seek government approval in the coming weeks for a longer-term fund which could be drawn down over time as age-related and other structural expenditure pressures arise in the future," said Mr McGrath.