The Tax Strategy Group paper on Pay Related Social Insurance (PRSI) examines proposals to scrap the minimum wage threshold for paying PRSI as well as abandoning the lower employer PRSI rate.
This is all in the context of a looming future deficit in the Social Insurance Fund of between €500 billion and €1 trillion.
The Tax Strategy Group is comprised of officials and advisors from across different government departments.
It's chaired by the Department of Finance and examines possible options when it comes to taxes in the upcoming Budget.
The papers are published annually in advance of the Budget.
The PRSI paper examines the issue of the 'step' which happens when workers start to earn more than €18,304 a year and go from paying no PRSI to paying 4% on all their income.
This has been alleviated by an employee PRSI credit which smooths over the impact on rising incomes. It costs the Social Insurance Fund €47 million a year which also means it provides a benefit of the same amount to low-income workers.
Employers also go from paying a PRSI contribution of 8.8% on incomes of up to €441 a week to 11.05% on incomes above that.
The paper says the lower employer PRSI rate was once seen as a protection for lower income workers but ‘the necessity for such a provision is questionable during a period of full employment and in any event no longer reflects the composition of the Irish labour force.’
The paper also suggests the two-tier PRSI rate is an incentive for employers to divide the hours given to employees to keep their incomes below the higher rate threshold.
The paper also notes that Ireland has the lowest combined employer and employee social insurance contribution rates in the EU.
The paper says the Social Insurance Fund, where PRSI contributions go, will come under strain as the population ages.
It quotes from a recent actuarial review of the Fund which expects it to record surpluses up to 2033 but deficits thereafter.
If there are no changes to rates, the review expects annual deficits to reach €0.5 billion by 2035 and €3 billion by 2040. By 2076, it projects deficits to accumulate to €500 billion.
It builds in a 'shock' test where the war in Ukraine continues, the economy goes into a multi-year recession and long-term growth forecasts are lowered. This scenario could see the deficit in the Social Insurance Fund balloon to just over €1 trillion by 2076.
Some of the options considered by the Paper include scrapping the PRSI credit and abandoning the policy of raising the threshold on paying PRSI to leave out incomes equivalent to a full-time job on the minimum wage.
The paper quotes research by the ESRI suggesting that many on the minimum wage work part-time and therefore 'it is questionable if the policy of linking the threshold directly to full-time minimum wage levels is truly progressive.'
The paper says this should be examined in the context of the Government’s commitment to move towards the Living Wage and also the consideration of a ‘working age payment.’
It also says consideration should be given to scrapping altogether the lower employer PRSI rate for lower income jobs.
