Self-employed to get option of paying higher prsi to qualify for more benefits

[orka]

This isn't the purpose of the "social insurance fund" though Brendan. It's rather like saying after paying car insurance for 40 years that you feel your friend should genuinely have a higher payout (benefit) then someone who has only paid car insurance for 10 years.

It's like any insurance policy - you pay in, you are a member and it should be there for you to access it if you need it and invariably if you need one part, as in unemployment benefit or illness benefit, then there are other benefits that kick in, rent allowance, access to education (mature student), medical card etc.

It's not supposed to "give you back" what you put in.

The insurance analogy would work if the 'premiums' were in any way related to the 'risk' (payout). Or even if they were community related like Irish health insurance. But higher earning PAYE and very high earning self-employed subsidise lower earners and most of the self-employed. That's taxation, not (social) insurance.

Pretty much every country with a social insurance system has a strong pay-related component so there is a link between what you pay in and the benefits you expect to receive. Either contributions are capped or benefits are increased (or a combination) - why should Ireland be so different?

 

[ppmeath]

Child benefit is not part of the social insurance system. [From the report Sarenco referenced above: Social Welfare expenditure totalled €20.8bn in 2010, comprising €9.5bn in Social Insurance expenditure. By way of background, of the remaining €11.3m Social Welfare expenditure (unrelated to the Social Insurance Fund), the two biggest components were Jobseeker’s Allowance of €2.8bn and Child Benefit of €2.2bn.]

But it is a Social Welfare payment.

Still not totally fair as it is number of contributions rather than amount of contributions but better than the current average system. Under the total contributions system, someone will qualify for a full pension once they have 30 years of contributions (whether that is from age 18 to 48 or 38 to 68) - additional years working and contributing don't 'buy' any extra pension.

Agree, it is a fairer system, but can I refer you back to this part of your previous post:

"So for the sum of €15,000 (30 years of €500 contributions), a self-employed person can accrue a full pension which is generally accepted to be worth in the region of €300,000. My view that this is the bargain of the century (which it is...) is tempered by our fantastic system which gives pretty much the same benefit (albeit means-tested) to someone with no contributions..."

And if they pay another 20 years, then this a total of 25k in contributions over their entire working life - or two years of the state pension at today's rate?

 

[ppmeath]

The insurance analogy would work if the 'premiums' were in any way related to the 'risk' (payout). Or even if they were community related like Irish health insurance. But higher earning PAYE and very high earning self-employed subsidise lower earners and most of the self-employed. That's taxation, not (social) insurance.

Pretty much every country with a social insurance system has a strong pay-related component so there is a link between what you pay in and the benefits you expect to receive. Either contributions are capped or benefits are increased (or a combination) - why should Ireland be so different?

No, I disagree, that is the very basis of "social" insurance. In Germany, for example, your benefit is based on your income (which of course defines your contributions), if memory serves, you receive about 75% of your last pay, but only for a defined period, I think it's 9 months, although it could be 12.

Then your benefit is reduced to a living benefit payment, so the incentive is there to return to work as soon as you can.

 

[Brendan Burgess]

Take a mid-career dentist, with his own practice, as an example. Ideally, he would like to invest all his net profits in a new dental chair, which he believes will benefit his practice and increase his earnings in the long term. However, if the State dictates that he has to invest X% of his net profits in a range of other businesses every year he will not be free to deploy his capital in a manner that he calculates will benefit him most.

A dentist is a very good example of what I am proposing.

They generally have high incomes.
Their costs are low relative to their income.
Their need to invest in their business is particularly low.
I presume that they don't buy a new chair every year.

I know quite a few who have invested stupidly and are in financial difficulty and might be dependent on the state for their pension after years of high earnings.

I would have no practical or ideological problem with forcing them to put 10% of their earnings into a pension fund.

Brendan

 

[Brendan Burgess]

This isn't the purpose of the "social insurance fund" though Brendan. It's rather like saying after paying car insurance for 40 years that you feel your friend should genuinely have a higher payout (benefit) then someone who has only paid car insurance for 10 years.

It's like any insurance policy - you pay in, you are a member and it should be there for you to access it if you need it and invariably if you need one part, as in unemployment benefit or illness benefit, then there are other benefits that kick in, rent allowance, access to education (mature student), medical card etc.

It's not supposed to "give you back" what you put in.

It is not remotely like car insurance. I drive a modest car and pay a modest premium. I have no problem at all with that. I hope I never claim.

Pay Related Social Insurance is not pay related and it's not insurance.

Most people would accept that those of us who save more should be able to enjoy those higher savings in retirement. I presume you agree with that.

If the benefit is defined as " €300 a week for 18 months illness or unemployment", then charge everyone the same premium.

But it's unfair to charge an employee earning €100,000 a year €14,750 each and every year, and limit his claim to €300 a week for 18 months.

That is why I think that a personal account would work very well. Everyone would be encouraged to work.

 

[orka]

But it is a Social Welfare payment.

Yes but that doesn't make it a PRSI benefit which is what this thread is about.

Agree, it is a fairer system, but can I refer you back to this part of your previous post:

"So for the sum of €15,000 (30 years of €500 contributions), a self-employed person can accrue a full pension which is generally accepted to be worth in the region of €300,000. My view that this is the bargain of the century (which it is...) is tempered by our fantastic system which gives pretty much the same benefit (albeit means-tested) to someone with no contributions..."

And if they pay another 20 years, then this a total of 25k in contributions over their entire working life - or two years of the state pension at today's rate?

Great. 25K contributions for 300K benefit. That'll give the high earners the warm and fuzzies.

Lots of things might or might not happen but there's no escaping the fact that this is a system where a person can accrue a full pension for 15K.

No, I disagree, that is the very basis of "social" insurance. In Germany, for example, your benefit is based on your income (which of course defines your contributions), if memory serves, you receive about 75% of your last pay, but only for a defined period, I think it's 9 months, although it could be 12.

Then your benefit is reduced to a living benefit payment, so the incentive is there to return to work as soon as you can.

You disagree but then your example agrees? In Ireland benefits have no link to income except at the very lowest levels of income. PRSI is just another form of taxation so we might as well just roll income tax, USC and PRSI into one system - at least it would save costs.

 

[Sarenco]

I presume that they don't buy a new chair every year.

Well, my dentist might do so if he was proposing to open a chain of dental clinics...

But my point is really that the most efficient deployment of capital is best left to business owners - not the State.

I know quite a few who have invested stupidly and are in financial difficulty and might be dependent on the state for their pension after years of high earnings.

Is the State also going to decide how to invest these contributions (to avoid people making "stupid" decisions)? Maybe we should go the whole hog and nationalise the whole economy!

 

[Sarenco]

Lots of things might or might not happen but there's no escaping the fact that this is a system where a person can accrue a full pension for 15K.

As things currently stand, part-time employees earning as little as €38 per week can qualify for a full contributory state pension and they don't have to contribute anything at all to the fund.

Also, many higher income earners are actually employed by the State - no employer contributions there.

PRSI is just another form of taxation so we might as well just roll income tax, USC and PRSI into one system - at least it would save costs.

That sounds very sensible.

 

[ppmeath]

You disagree but then your example agrees? In Ireland benefits have no link to income except at the very lowest levels of income. PRSI is just another form of taxation so we might as well just roll income tax, USC and PRSI into one system - at least it would save costs.

I disagreed with this part of your post, those who earn more subsidise those who earn less, that is a "Social insurance" - not taxation.

"But higher earning PAYE and very high earning self-employed subsidise lower earners and most of the self-employed. That's taxation, not (social) insurance"

In Ireland benefits have no link to income except at the very lowest levels of income. PRSI is just another form of taxation so we might as well just roll income tax, USC and PRSI into one system - at least it would save costs.

I don't disagree that the system needs to be looked at, which is why I gave the German example, but it will mean higher contributions.

It is not remotely like car insurance. I drive a modest car and pay a modest premium. I have no problem at all with that. I hope I never claim.

Pay Related Social Insurance is not pay related and it's not insurance.

Two questions, the first is if you never claim do you expect a refund?

If you claim do you expect what you put in to be paid out? If you were insured for a year and had to claim? Would you settle for your modest premium returned?

Of course you wouldn't - you would be paid the value of your car and who do you think "subsidises" that? All the other people paying modest premiums who haven't claimed.

PRSI is insurance in the very same way - if you need it then it absolutely should be there for you - but if you can go through your life in a well paid job and live a good life without having to "claim" it then isn't this also a good thing?

 

[Brendan Burgess]

Is the State also going to decide how to invest these contributions (to avoid people making "stupid" decisions)? Maybe we should go the whole hog and nationalise the whole economy!

No need at all for that. They could be managed by the funds industry. At the moment, people are paying huge prsi and it's just going to pay current welfare payments.

Brendan

 

[Brendan Burgess]

PRSI is insurance in the very same way - if you need it then it absolutely should be there for you - but if you can go through your life in a well paid job and live a good life without having to "claim" it then isn't this also a good thing?

It's not remotely like insurance other than the word "insurance" is in the name.

If the people who designed prsi designed car insurance, everyone would pay the same premium. A 20 year old male, with a bad claims record, driving a Porsche would pay the same premium as a claims free 60 year old driving a Skoda.

I have no problem with a genuine social insurance product. I don't even mind if it's community rated. So we all pay €1,000 a year and if we claim we get €300 a week for 18 months. But anything above €1,000 a year goes into a pot with my name on it which will pay me more than the €300 and a higher pension.

Brendan

 

[ppmeath]

If the people who designed prsi designed car insurance, everyone would pay the same premium. A 20 year old male, with a bad claims record, driving a Porsche would pay the same premium as a claims free 60 year old driving a Skoda.

Well............ He wouldn't get insurance Brendan, and that is the why the word "social" is in the name because it's inclusive.

I have no problem with a genuine social insurance product. I don't even mind if it's community rated. So we all pay €1,000 a year and if we claim we get €300 a week for 18 months. But anything above €1,000 a year goes into a pot with my name on it which will pay me more than the €300 and a higher pension.

Higher then 233.30 or just higher then someone who didn't contribute as much? Just curious?

 

[orka]

But my point is really that the most efficient deployment of capital is best left to business owners - not the State.

That's just a fancy way of saying I'd rather pay less tax because I will look after my money better than the State will (which I whole-heartedly agree with!). I would love to choose not to pay PRSI and for my employer to give me their employer's PRSI contribution instead of giving it to the state (I'll even split it with them so they are net better off too!). I'll look after my pension and insurance arrangements myself.

Unfortunately, that's not an option - but the self-employed are part way there in contributing less than an employed person's total employer and employee contributions.

As things currently stand, part-time employees earning as little as €38 per week can qualify for a full contributory state pension and they don't have to contribute anything at all to the fund.

Their employer will contribute PRSI (€168 per annum) but I agree this is another massive bargain for the person.

Also, many higher income earners are actually employed by the State - no employer contributions there.

Another topic which vexes me greatly – I won’t rant about public sector pensions here though…

I disagreed with this part of your post, those who earn more subsidise those who earn less, that is a "Social insurance" - not taxation.

You don’t seem to understand what insurance is and how it is priced. Insurance pricing will either be risk related (high powered car insurance is more expensive than modest car insurance) or community rated like Irish health insurance. In both cases there are varying degrees of cross subsidy. High powered car premiums generally subsidise other high powered cars etc – there’s a relationship between what you pay in a year and what you (as a group of high powered car owners) expect to receive. In community rated health insurance, the young/healthy subsidise the old/sick and there’s a lifetime relationship between what you pay and what you (as a group) expect to receive. Great if you don’t need your benefits but as a group you have received value.


Insurance premiums are never related to pay unless benefits are also related to pay.


In your German example, contributions are related to income and benefits are related to contributions and income. There is a cap on contributions because there is a cap on benefits (we used to have that here when employee PRSI contributions were capped). That makes sense and it’s fair and it’s close to being true insurance.


The Irish systems bases contributions on income but benefits are (largely) flat – that is taxation.

 

[ppmeath]

You don’t seem to understand what insurance is and how it is priced. Insurance pricing will either be risk related (high powered car insurance is more expensive than modest car insurance) or community rated like Irish health insurance. In both cases there are varying degrees of cross subsidy. High powered car premiums generally subsidise other high powered cars etc – there’s a relationship between what you pay in a year and what you (as a group of high powered car owners) expect to receive. In community rated health insurance, the young/healthy subsidise the old/sick and there’s a lifetime relationship between what you pay and what you (as a group) expect to receive. Great if you don’t need your benefits but as a group you have received value.

Of course I do orka, you seem unable to understand that we belong to "a system of compulsory contribution to enable the provision of state assistance in sickness, unemployment, etc."

 

[Sarenco]

They could be managed by the funds industry.

Fair enough but that comes at a cost.

One of the key criticisms of the Chilean system is that it is very expensive to run and performance has been poor (relative to private pension funds). There are obviously administrative costs per contributor and workers with lower incomes (about half the workforce) find it more challenging to accumulate significant capital and ultimately have to fall back on the (means tested) system that runs in parallel. In practice, this ultimately this get you back to something resembling our own system in terms of its net result even though our current system, at least in theory, is a form of risk pooling, with a significant "social" element.

 

[orka]

Of course I do

Of course? Interesting. Most people don't.

you seem unable to understand that we belong to "a system of compulsory contribution to enable the provision of state assistance in sickness, unemployment, etc."

I and my bank balance are very aware of the system...

Ireland has a very good social safety net. We also target a flat rate pension for workers after 30-50 years of working (or the social safety net of the same pension after not working). How should these things should be funded? You seem happy with our contribution system which is very different to any other country's. Do you think other countries' contribution systems are unfair in having contribution caps and pay-related benefits? Should they copy us? Why don't we copy their structures?

I personally would like a system like most of Europe - pay-related contributions with income caps providing minimum benefit standards with caps in line with contribution caps. And the self-employed contributing roughly the same as the combined employer/employee contribution and being entitled to the same benefits.

 

[Sarenco]

the self-employed are part way there in contributing less than an employed person's total employer and employee contributions.

That's far from universally true. Bear in mind that a significant proportion of the self-employed and employees have low annual incomes.

And the self-employed contributing roughly the same as the combined employer/employee contribution and being entitled to the same benefits.

That's certainly not the case in Germany - most self-employed workers fall outside their social security system completely.

It's not the case in the UK either. The self-employed pay 75% of what an employee contributes in NI up to £43k (there's no separate employer contribution) and 2% thereafter - same as an employee.

While I agree with your broader point that our income tax and social security systems have become completely unbalanced and anomalous, it is overly simplistic to suggest that this would be "cured" by simply requiring the self-employed to pay the equivalent of employer and employee contributions unless you subsequent adjust this through the tax system so that the self-employed are ultimately put in the same position as employees (which is the case in the US).

However, the real elephant in the room, IMO, is the level of State pensions. While I think it's a laudable policy that all workers should be entitled to receive a COAP equivalent to 35% of average weekly earnings, I personally don't think this will be remotely realistic in the future. We either adjust now or push this problem further down the road - when it will be immeasurably more difficult to address.

Our choice - no point blaming politicians.

 

[orka]

It's not the case in the UK either. The self-employed pay 75% of what an employee contributes in NI up to £43k (there's no separate employer contribution) and 2% thereafter - same as an employee.

They don't get full benefits with this reduced contribution - I think same contribution/same benefits is fairest.

 

[Purple]

Of course I do orka, you seem unable to understand that we belong to "a system of compulsory contribution to enable the provision of state assistance in sickness, unemployment, etc."

That's what we have alright but it's not pay related and it's not insurance. It's a taxation system, not an insurance system.

 

[ppmeath]

Ireland has a very good social safety net. We also target a flat rate pension for workers after 30-50 years of working (or the social safety net of the same pension after not working). How should these things should be funded? You seem happy with our contribution system which is very different to any other country's. Do you think other countries' contribution systems are unfair in having contribution caps and pay-related benefits? Should they copy us? Why don't we copy their structures?

It really isn't about being happy, I just see the present system in a different way then you do. I am not comfortable with trying to "punish" (not saying that this is where you are coming from) someone who may not have contributed because they didn't work - because this means that they have probably been living on benefits their entire life - then we have to design a system to see why this was the case.

I do think that we all agree that it won't be sustainable in the future and that we will all have to contribute more - and one of my main bug bears is the amount of "lower earners" who are excluded - I believe that everyone should pay something.

I personally would like a system like most of Europe - pay-related contributions with income caps providing minimum benefit standards with caps in line with contribution caps. And the self-employed contributing roughly the same as the combined employer/employee contribution and being entitled to the same benefits.

I fully agree with Sarenco here:

While I agree with your broader point that our income tax and social security systems have become completely unbalanced and anomalous, it is overly simplistic to suggest that this would be "cured" by simply requiring the self-employed to pay the equivalent of employer and employee contributions unless you subsequent adjust this through the tax system so that the self-employed are ultimately put in the same position as employees (which is the case in the US).

That's what we have alright but it's not pay related and it's not insurance. It's a taxation system, not an insurance system.

Yes I believe it is and I agree with the points in relation that Sarenco makes very well here:

"While I agree with your broader point that our income tax and social security systems have become completely unbalanced and anomalous"