Edit to add:
It is certainly true that the State receives less overall revenue due to the fact that no employer's PRSI is paid by or in respect of a self-employed individual. Is that your point? This seems entirely reasonable because the State incurs a greater potential liability in respect of an employee (e.g. if he/she ceases to be employed). To put it another way, a self-employed person receives less benefit from the State for his/her PRSI contributions. Bear in mind that PRSI was designed as a form of social insurance - as with all insurance, increased cover requires higher premiums.
You must have missed my post in reply to BB’s
Good point. The self-employed have much lower entitlements than employees.
No they don't. The contributory pension is by far the most costly benefit provided - probably 65% of the cost of providing all PRSI-covered benefits (5.3B of 8.3B) - and that's current cost - accruing costs will be much higher for the contributory pension.
If you look at Welfare's cost to provide each benefit and compare the 13 benefits provided for Class A and the 5 benefits provided for Class S, Class S contributors are entitled to benefits costing about 70% of the total. And Class S pays 4% whereas Class A pays (or has paid on their behalf) 14.75%.
So which is better value:
14.75% of income to provide all covered benefits?
Or
4% of income to provide 70% of covered benefits?
Hmmm...
The State does incur a greater liability for employees compared to the self-employed but it is 40% to 50% greater – not the multiples that would warrant total PRSI of 14.75% vs. 4%.
The self-employed (particularly the lower paid) get an absolutely fantastic deal for their PRSI (that dwarfs whatever extra taxes they have to pay). The contributory pension is by far the most expensive benefit provided by PRSI contributions – yet all you ever hear is moans of ‘but we don’t get JSB if our business goes belly-up…’. JSB costs less than 7% of the cost of benefits provided under PRSI.
If you look at the economics of the contributory pension:
You can earn a full 12K contributory pension with 30 years of PRSI contributions.
So for each year of PRSI contributions, a pension of €400 pa in retirement is accrued. The usual valuation factor for pensions is at least 20 and probably closer to 30/35. So that €400 pa pension is valued at somewhere between €8,000 and €14,000. Even allowing for a fully contributing 50 year career, each year of PRSI contributions accrues €5,000 + of pension value.
Just think about that for a minute (although not for too long or you will realise how unsustainable it is…) – for every year a person works and pays PRSI, whether they earn 20K or 200K, they accrue a benefit with a value of 5K to 14K…
And for this the self-employed pay 4% of income (so, e.g. €800 on a 20K income). Between employers and employees PRSI, the state receives just under €3,000 in respect of an employee on 20K. Still not enough (but that’s the joy of a hugely progressive tax system) but getting close in orders of magnitude.
Even a self-employed person on 100K only pays 4K in PRSI – still not anywhere near enough to fund their contributory pension. For an employee on 100K, the state receives just under 15K – just about enough.
So, overall, IMHO, the self-employed get a fantastically brilliant deal from their PRSI and they are generally very unaware of it preferring to focus on cheaper benefits that they don’t get.