Hi °C | Lo °C
THE Government might not increase income tax in the next Budget, but we know it intends to raise another €1.25bn.
The proposed property tax might account for as much as half. But even if income tax is to be left untouched, PRSI is likely to rise. Social welfare benefits are costing the country more than €20bn a year. That is more than half of everything we collect in tax.
Last week the Minister for Social Protection Joan Burton published the 2010 Actuarial Review of the Social Insurance Fund, which was prepared by KPMG.
It really doesn't tell us anything we shouldn't already know. But it contains frightening statistics on the costs we are facing for the future. If income tax doesn't rise to pay for it, PRSI must. Otherwise we will borrow even more and add to a national debt that we cannot pay back. And benefits will be slashed too.
The recession put enormous pressure on our public finances. With nearly 15 per cent unemployed, the rest of the workforce is being asked to shoulder the burden when they have less income themselves. Short-term benefits are creating the current strain, but pensions are the real problem as we look to the future. The report covers the 55-year period from 2011 to 2066. If we believe what it says, we will be beggared in no time at all.
Some 57 per cent of social insurance expenditure in 2011 was on pensions, but it will rise to 85 per cent by 2066. This is after taking into account that by 2028 the pension age will have increased to 68. There are many factors contributing to the future costs. The numbers entering the workforce has risen. They must pay social insurance and therefore they will be entitled to a state pension when they retire, even if it is only a percentage of the full entitlement.
We have an aging population and dependency ratios are deteriorating. The pension support ratio (the number in the workforce supporting each pensioner) is 5.3 workers for every person above pension age. But by the end of the period that is expected to fall to only 2.1 workers supporting each pensioner. We would be facing this problem if the downturn never materialised. We knew it was there, but we did nothing about it. Now we don't have the resources to fix the problem. So we either pay a lot more or we lose the benefit. And as most people know, the State pension won't provide a reasonable standard of living in retirement.
State pensions are paid out of the social insurance fund. The scheme is funded by contributions from employees, employers and the self-employed. But that is not enough, so the State makes up the shortfall. The Government is committed to maintaining benefits. But it is restricted from increasing them by the troika. What is certain is that we are not paying enough to cover what is being provided and it will cost a lot more going forward. We will never be able to put the Universal Social Charge behind us even if we emerge from the recession.
The State needs to cut spending. One way is to make the social insurance scheme self-financing. The KPMG report suggests contributions would need to be 28 per cent higher, on average, over the next five years to match income and expenditure on pensions. For 2011 it was estimated that the shortfall of expenditure over income was €1.5bn. Without corrective action this is expected to double to €3bn by 2019 and it could reach €25.7bn by 2066. If we are to be self-financing, contribution levels would need to double over the next 20 years.
The report estimates that if we added up all the shortfalls in the fund until 2066, their value today would be €324bn. It makes the national debt seem reasonable. It might only be a report and an opinion as the experts see it. But no matter how outrageous its findings appear to be, we ignore it at our peril. The Government will use it to make us pay more. What choice does it have if it cannot cut out the waste? Unfortunately the burden will fall mainly on the private sector.
We are not putting enough aside for our retirement. If we reach retirement, indications are that we will live even longer and the cost of financial independence will be great. It is estimated that those who retire in 50 years will live into their 90s.
The current social insurance system works out better for those on low incomes. Those with short contribution histories fare better than those who contribute over a 40-year career. That is being corrected. The main changes come in 2020, when the system will be based on service contributions, as opposed to the credit system that applies now. But the changes have already started.
Overall, high earners get little back for what they put in. They subsidise the rest. This report signals a move to increase PRSI even more.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning
