# The self-employed get fantastic value from PRSI



## Brendan Burgess (17 Dec 2014)

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


----------



## Brendan Burgess (18 Dec 2014)

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.


----------



## Brendan Burgess (18 Dec 2014)

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.
> 
> ...


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.


----------



## Monbretia (18 Dec 2014)

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.


----------



## Brendan Burgess (18 Dec 2014)

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



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.


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.



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,



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.



This is very interesting. What people manage don't qualify for the contributory old age pension?


----------



## jhegarty (18 Dec 2014)

Brendan Burgess said:


> From  Social Insurance and the Self-Employed
> 
> 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.




What's the difference between the non-contributory and contributory pension ?

Because that is the real benefit involved.


----------



## DB74 (18 Dec 2014)

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.



Not sure too many self-employed people have the capacity to save/provide for all that


----------



## Brendan Burgess (18 Dec 2014)

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.


----------



## Brendan Burgess (18 Dec 2014)

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


----------



## Monbretia (18 Dec 2014)

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.


----------



## Gerry Canning (18 Dec 2014)

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?


----------



## Sandals (18 Dec 2014)

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...


----------



## monagt (18 Dec 2014)

> State pension (Transition)



Abolished?


----------



## Brendan Burgess (18 Dec 2014)

I don't know. It is still on that document I linked to.  It doesn't take from the overall argument though.

Brendan


----------



## Protocol (18 Dec 2014)

jhegarty said:


> What's the difference between the non-contributory and contributory pension ?
> 
> Because that is the real benefit involved.




Cont SP, full-rate = 230.30 pw

Means-tested non-cont SP = 219 pw


----------



## Dec05 (18 Dec 2014)

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.


----------



## Brendan Burgess (18 Dec 2014)

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€millionIncome from contributions7,6810ExpenditureState pension; Contributory, non -contributory4,162943State pension - transition68.Widow's pension1,354.Jobseekers Benefit; Allowance4782,787Child benefit.1,923Illness benefit580.Invalidity pension; allowance6781,163Supplementary Welfare Allowance.109Community Employment.357Tús.119BTWA.112Jobbridge.75Back to Education.182Maternity Benefit258.Redundancy91.Carer's Benefit;Allowance21557Rent Supplement.349MIS.18Total7,90210,375

So what does the 14.75% pay for?


Pensions5,584Illness and invalidity 1,258Jobseekers478Maternity258 

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.


----------



## monagt (18 Dec 2014)

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?


----------



## Conan (18 Dec 2014)

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.


----------



## Sarenco (18 Dec 2014)

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.


----------



## Brendan Burgess (19 Dec 2014)

Hi Sarenco 

Thanks for reminding me of that. I had made a few contributions to that thread, but I got confused by all the discussion back and forward. 

I might be missing something. 

But for 4%, a self employed person gets the full contributory old age pension ( Cost to the state in in 2014: €5.5 billion) 

For an extra 10.75%, the employed person gets €1.7 billion in illness, invalidity and jobseekers. 

I don't know what the solution is, but I think that the benefits should be brought into line with the costs. 

Put the 4% paid by the self employed into a fund, and pay them a pension out of what they have accumulated. 

Charge those who qualify for Jobseekers a premium for it. It would be a lot less than 10.75%. 

Brendan


----------



## Brendan Burgess (19 Dec 2014)

Of course a self-employed barrister earning €500k, pays €20k into the fund. 

A PAYE worker earning €20k a year, has €3k paid into the fund on his behalf. 

The PAYE worker gets more benefits. 

Brendan


----------



## Purple (19 Dec 2014)

Brendan Burgess said:


> Of course a self-employed barrister earning €500k, pays €20k into the fund.
> 
> A PAYE worker earning €20k a year, has €3k paid into the fund on his behalf.
> 
> ...




The higher your tax contribution the lower the relative value of return you get. That's hardly a news.


----------



## Sarenco (19 Dec 2014)

Brendan Burgess said:


> Hi Sarenco
> 
> Thanks for reminding me of that. I had made a few contributions to that thread, but I got confused by all the discussion back and forward.
> 
> ...



Hi Brendan

No, I don't think you're missing anything and the previous thread covered a number of different issues so is understandably difficult to follow.

My point is really that the self-employed and employees pay PRSI at the same rate - 4 per cent - and qualify for various benefits, the most valuable of which is clearly the contributory OAP.  Employees qualify for various additional benefits but they don't pay any additional PRSI for these benefits - their employer (who may well be self-employed) pays for these additional benefits.  

I certainly wouldn't argue that the rate of employer PRSI contributions is commensurate with the value of the additional employee benefits but I think your figures are somewhat misleading.  Bear in mind that the vast majority of individuals qualifying for the contributory OAP are former employees and not retired self-employed individuals.

In the US, social security contributions are evenly split between employers and employees.  The self-employed have to make double the contributions of employees but this is deductible for tax purposes in such a manner that employees and the self-employed ultimately make the same level of (net) contributions for the same level of benefits.

I personally have no problem with a high earner, whether an employee or self-employed, being a net contributor to the social fund (taking less out in benefits than they contribute by way of PRSI payments).  It is social insurance at the end of the day!


----------



## Purple (22 Dec 2014)

Sarenco said:


> Employees qualify for various additional benefits but they don't pay any additional PRSI for these benefits - their employer (who may well be self-employed) pays for these additional benefits.


Of course the employee is paying for it. It is taken out of their wages before their pay slip is printed but it is income foregone. If the tax wasn't there then employers would have more money to pay staff and so the market would demand higher wages.


----------



## Sarenco (22 Dec 2014)

Purple said:


> Of course the employee is paying for it. It is taken out of their wages before their pay slip is printed but it is income foregone. If the tax wasn't there then employers would have more money to pay staff and so the market would demand higher wages.



If employers did not have to make PRSI contributions on behalf their employees, there would certainly be more resources available to pay staff.  Equally, there would be more resources available to hire new employees or to re-invest in the business or to simply distribute additional profits to the business owners.  All else being equal, employers will pay their staff no more than the market demands but I don't follow the argument that the market will demand increased wages simply because an employer has additional resources available to meet such demands.  An employer's primary obligation is to maximise profits for the owners of a business - not to maximise the remuneration of employees of that business.


----------

