The self-employed get fantastic value from PRSI

Brendan Burgess

Brendan Burgess

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I was shocked today when I realised that I will qualify for a contributory OAP, although I have been self employed most of my life. I have been paying 4% prsi while employees are paying 4%, and their employers are paying a further 10.75%. Yet we get the same pension benefits. I lose out on 9 months of Jobseekers Benefit and Sick Benefit.


Brendan
 
Point 5 on Social Insurance and the Self-Employed
explains the differences in benefits between Class A for most employees for whom, 14.75% is paid, and Class S for self-employed and directors, for who 4% is paid.

Both get

  • Widow's, widower's or surviving civil partner's (contributory) pension
  • Guardian's payment (contributory)
  • State pension (contributory)
  • Maternity benefit
  • Adoptive benefit
For the extra 10.75%, Class A get

  • Jobseeker's benefit
  • Illness benefit
  • Health and safety benefit
  • Invalidity pension
  • State pension (Transition)
  • Treatment benefit
  • Occupational injuries benefit
  • Carer's benefit

I had not realised that the self-employed are entitled to maternity benefit. I presume that most self-employed women do know that though.
 
From Social Insurance and the Self-Employed

6. What "return on investment" do self-employed contributors get out of PRSI?

The state pension (contributory), in particular, is a very valuable benefit. The current maximum rate of state pension (contributory) is €230.30 per week or almost €12,000 per year; this does not include the value of (means-tested) increases for qualified adults, or other additional benefits which recipients might also receive.


The market cost of an inflation-linked annuity with €12,000 a year in initial benefits is in excess of €300,000. This value is without any associated survivors' benefits, which are available with the state pension. It should be noted that the state pension (contributory) increased in excess of inflation and earnings growth in the period up to 2010 while annuities offer CPI-linked increases at best.


It may be noted that, in 2008, 90% of self-employed contributors had incomes of less than €50,000 – meaning that in building entitlement to a state pension each of these contributors will have paid less than €1,500 per annum in contributions – in most cases substantially less
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This is crazy. A self-employed person paying €1,500 a year for 40 years would contribute a total of €60,000 and get a fund worth €300,000.
I think that this is the equivalent of a return of 7% a year.
 
I think you are underestimating the benefit to the employed of the various illness payments available which are not there for the self employed. Long term illness for a self employed person can seriously limit their earning ability or finish it altogether, even short term is a hard one with no income coming in.

Carer's benefit is another useful one to have, in an ideal world I would cut back on my work to give a family member more help but I can't as money must be earned but if I could apply for carer's benefit it would allow me to keep the business ticking over with the 15hrs pw of work allowed and yet spend some time with them.

I know I would certainly be willing to pay more prsi to avail of all the benefits, all I can avail of it from it at the moment is the pension should one be lucky enough to get that far and realistically the means tested one is very little less for those who haven't paid a penny prsi or very little.
 
Monbretia said:
I think you are underestimating the benefit to the employed of the various illness payments available which are not there for the self employed. Long term illness for a self employed person can seriously limit their earning ability or finish it altogether
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Most of us will claim about 20 years of pension.
Very few will claim the long term illness benefit. A self-employed person can probably take out insurance for this.

, even short term [illness] is a hard one with no income coming in.
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Yes, but a self-employed person can save for that.


Carer's benefit is another useful one to have, in an ideal world I would cut back on my work to give a family member more help but I can't as money must be earned but if I could apply for carer's benefit it would allow me to keep the business ticking over with the 15hrs pw of work allowed and yet spend some time with them.
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I had not been aware of carer's benefit before. If I understand it correctly, it's two years maximum at €205 per week or €20,000. I would prefer to save up for that, than to pay insurance for it.


I know I would certainly be willing to pay more prsi to avail of all the benefits,
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Would you be prepared to pay 10.75% of your income as insurance for these benefits? If your self employed income were €10,000 a year, maybe so.


realistically the means tested one is very little less for those who haven't paid a penny prsi or very little.
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This is very interesting. What people manage don't qualify for the contributory old age pension?
 
Brendan Burgess said:
A self-employed person can probably take out insurance for this [long term illness benefit]

Yes, but a self-employed person can save for that [short-term illness benefit].

... it's [carer's benefit] two years maximum at €205 per week or €20,000. I would prefer to save up for that, than to pay insurance for it.
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Not sure too many self-employed people have the capacity to save/provide for all that
 
Let me try to get my head around this.

A self-employed person earns €37,500 a year. They pay €1,500 a year in PRSI contributions and get a pension worth €300k at the end of it. That is a return of 7%.

If they could opt out...

On €37,500 a year, they are unlikely to have much savings by retirement, so they will get the means tested pension which is only €10 a week less. So they should opt out.

Of course the same argument holds for the Employer's PRSI
If an employee could opt out, they would save 14.75% of their salary.

They would miss out on 9 months' Jobseekers Benefit, but they would qualify anyway for the Jobseekers Allowance. So little loss there either.
 
Take a self-employed person on €100k a year.

They would pay €4,000 a year to get a benefit for €300,000.

That is a return of 3%. So that is good value.

Actually, it might not be, because the after-tax value is only €150,000

Tentative conclusion
1) PRSI is poor value for the self-employed.If they earn very little, they will get a pension anyway. If they are high earners, the cost of prsi outweighs the benefit.
2) But PRSI is terrible value for employees.
3) The self-employed should be delighted that they are not treated as badly as employees
 
Well I don't know the actual stats as to how many claim what but I suppose my view has been coloured by doing voluntary work where I come across so many self employed who are in dire straights due to illness and various other things and they are unable to get any illness benefit and a fair old fight to get any means tested benefits. I'm not mixing with the right people who are on the income you give examples of. Most of those I meet have no capacity to save, including myself, for any of the eventualities mentioned.

In contrast to that I see those that have never worked a day in their lives or who have paid minimal into the system able to get practically the same pension entitlements not to mind all the other benefits. I never realised our social welfare system was actually as good as it is, there are many little perks to benefits out there that working people don't know about.
 
Brendan.
1. {PRSI poor value for self-employed}
Not necessarily so , a lot of self-employed build up assets yet earn little eg small farmers.In their case the 500 they pay every year means they get a Contributory pension without having the value of their business assessed and thus lowering their pension.
2. {PRSI terrible value for employees} Agreed , the alternative is a proper Tax Code.
3. {self-employed should be delighted} Having been (caught) in both PRSI/Tax systems I ain,t so sure?
PRSI needs an overhaul , what odds on that happening?
 
Take childminder in own home , claiming 15k tax free allowance scheme, PRSI €500 whether you earn 4k or 14k, unfair, another reason so few declare their income....

self employed women would be aware of maternity leave but being self employed many back at work in some capacity within weeks of birth...
 
The current pension paid is high.
However, given the ageing population, future ratio of workers to non workers, I think/know the pension rates will be significantly less.
So, the fund value does not apply to people aged, say below 45 years.
 
I thought it might be useful to summarise the Department of Social Welfare's estimate for 2014

Here are the most expensive items. I have omitted the many small schemes, except where they have been mentioned in this thread.

.Insurance fundGeneral
.€million€million
Income from contributions7,6810
Expenditure
State pension; Contributory, non -contributory4,162943
State pension - transition68.
Widow's pension1,354.
Jobseekers Benefit; Allowance4782,787
Child benefit.1,923
Illness benefit580.
Invalidity pension; allowance6781,163
Supplementary Welfare Allowance.109
Community Employment.357
Tús.119
BTWA.112
Jobbridge.75
Back to Education.182
Maternity Benefit258.
Redundancy91.
Carer's Benefit;Allowance21557
Rent Supplement.349
MIS.18
Total7,90210,375

So what does the 14.75% pay for?

Pensions5,584
Illness and invalidity 1,258
Jobseekers478
Maternity258

The self-employed get the pensions and maternity bit for 4%
Employees pay 14.75% to get the other bits.

It's totally disproportionate.

As Conan points out, it's even better value for a self-employed couple.
 
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This was the pension from 65 - 66, like the OAP but a person getting could not work while in receipt unlike the OAP.

It was abolished by the Gov. AFAIK, perhaps someone could confirm?
 
Brendan,
It's worth pointing out that for a couple, the total State Pension is circa €22,600. p.a. (with adult dependant over age 66). Even ignoring any future indexation (questionable in the near term), the capital cost of buying an annuity of €22,600 (reducing to say €10,000 on the 1st death) is circa €500,000. If we were to assume even 3% indexation, the capital value is circa €750,000
On that basis I guess even Paul Murphy and Ruth Coppinger will want to tax such "rich" people retiring with a capital value of €0.5m/€0.75m.
 
Hi Brendan

We actually covered a lot of this ground a couple of months ago in the context of this thread:
http://www.askaboutmoney.com/showthread.php?t=189728&page=6

I certainly do not think it is true that the self-employed get fantastic value for their PRSI contributions relative to the benefits received by employees for their contributions. However, I would agree that the ratio of contributions should be changed such that the rate of employers' PRSI contributions is lowered (to more accurately reflect the relative value of the non-pension benefits accruing to their employees) and/or the rate of employee and self-employed PRSI contributions should be increased (to more accurately reflect the relative value of the pension benefit). However, I suspect that any such changes would be difficult (impossible?) from a political perspective.

I am also of the opinion that all unfunded state pension liabilities (public sector pensions, contributory OAP and means tested OAP) are unsustainable in the medium term at current levels given the demographic changes taking place and this problem is being exacerbated by current government policies.
 
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