Jill Kerby

CAN MERGING THE USC WITH PRSI SAVE THE STATE PENSION?

A government working body is considering merging the much-detested USC with the pay related social insurance that workers and employers pay.  Do you know how much USC and PRSI you pay?  You should.

At the heart of this consideration is the urgent need to reform the multi-pillared pension system in this country, each part of which – state pensions, private pensions and public sector pensions, is unsatisfactory and economically unsustainable.

With private pension membership falling every year – it stands at only c40% of adult workers, while it remains at nearly 100% in the civil and public sector – the government claims to be committed to the idea of introducing an auto-enrolment private pension scheme by 2021.

If it is modelled on similar schemes like Nest in the UK, it will involve signing everyone up in companies that don’t already have an occupational pension scheme in place. Opting out will be permitted, but only about 10% of workers ever do so. In the UK workers and employers also continue to pay social insurance contributions and collect the state old age pension.  

Contributions to auto-enrolment schemes – in the UK and other countries where similar ones operate, like Australian (‘the Super’) and New Zealand (‘KiwiSaver’)  - start off very low with a tiny percentage of salary paid in by the workers, employers and state. Savings rates have increased over the years and so far have provided their citizens a decent retirement pot.

Here, plans are still at embryonic stages and no one knows what kind of soft-mandatory pension scheme will emerge or how much it will cost.  Recently however, the Minister for Finance, responding to a suggestion that the new pension might incorporate the existing contributory state pension (now worth  €243.30 a week or €12,636 per annum) said he was committed to keeping the old age pension a separate entity.

We’ll see.

The government does know it has to boost the value of the Social Insurance Fund (SIF), worth just over €9.2 billion a year, out of which more than half is drawn down to pay for the state old age pension. It is on course to have a massive annual funding shortfall of c€21.2 billion by 2066, just as today’s youngest workers will retire.

The latest idea is that the USC, the much detested universal social charge that was introduced on January 1, 2011 (and replaced an emergency income tax levy from January 2009) will be merged with PRSI, increasing the SIF by c€4 billion.

The fund currently pays – just about – for the weekly pensions that retirees collect, as well as unemployment benefits, child benefit, family income support payments, parental leave benefits, disability payments, etc .

USC is not a single rate, but five different rates, 0.5%, 2%, 4.75%, 8% and 11%, paid on escalating bands of income. The 11% rate only applies to income over €100,000 earned only by the self-employed.

No one who earns less than €13,000 a year pays USC. Pensioners over the age of 70 whose aggregate earnings are under €60,000 pay at reduced rates of 2% ad 4% as does any full medical card holder, aged under 70 with income of less than €60,000. (Pensioners do not pay PRSI.)

A worker on a €50,000 income pays about 3.3% USC or €1,662 a year.  Unlike the c4% of €2,000 worth of PRSI contributions that they also pay, USC is only paid by workers and not by employers: they pay PRSI of c10.85% of their employee’s earnings into the Social Insurance Fund.

USC was supposed to be abolished when the economy ‘recovered’, but that was always unlikely. Inevitably, the government has found a new purpose for the tax – to underpin the shaky Social Insurance Fund and especially the surge cost of old age pension claims.

Many pension experts believe that an ideal pension income of 2/3rds of a person’s final salary – whether from one or multiple sources - needs to be an annual salary contribution of at least 20% (or €10,000 a year if you earn €50k.) Can the combination of PRSI, USC and any soft-mandatory private pension contributions meet that benchmark?

This debate is finally – I hope – getting underway. It won’t go away, no matter how badly politicians, employers and workers (who always have other spending priorities) want it to.

Adding another €4 billion of funding will certainly more than meet the state pension cost at today’s values for many years into the future, but not out to 2066, especially not at the rate our population is ageing and living longer.

This PRSI/USC merger is essential, but it won’t be enough to ensure a sustainable state pension.

Anyone interested in exploring just how precarious the state pension and Social Insurance Fund is – especially if you haven’t started a private pension yet - can download an excellent review done by KPMG for the Department of Social Protection that was published last September. http://www.welfare.ie/en/downloads/actrev311215.pdf 

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.