News Brendan Keenan

Tuesday 23 September 2014

Brendan Keenan: Budget focus on PRSI fund raises question : does it make sense?

Published 13/12/2012 | 05:00

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IT seems a long time ago, but the standard cartoon of the Minister for Finance on Budget Day used to have him dressed as Santa Claus.

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Ridiculous – although in one shop I saw a version on a card which combined Mr Noonan dressed as Santa while holding the Grim Reaper's scythe. A sign read, 'Reduced to €1.50', which perhaps says it all.

Yet there was something Christmassy about the Budget. You know: old faces one hasn't seen for ages come around and make their presence felt – many of whom one wishes had not turned up at all.

Perhaps the strangest of this year's festive visitors is the social insurance fund. It made a brief appearance last year and, it was so long since anyone had heard of it, that I had to look it up.

This year, it is quite the centre of attention with ministers defending the removal of the PRSI exemption for the first few thousand of earnings on the grounds that there was a deficit in the fund, which is supposed to cover welfare payments.

The timing was certainly apt. It is 70 years this month since the 'Beveridge' report proposed a wide social insurance system for Britain – a scheme which, significantly, soon became known as the 'welfare state'.

The extraordinary thing is that, 70 years ago, the war was still in progress and far from over.

One does wonder sometimes about the calibre of present-day politicians and administrators – and not just in this country – when their predecessors could fight a world war and plan something like Beveridge simultaneously.

Not only that, the former civil servant and academic William Beveridge took just 18 months to produce his revolutionary report, which also proves the point.

Admittedly, the concept itself was not new. The invention of social insurance is usually credited to the Prussian Chancellor Bismarck, and seen as a sweetener to Prussia's creation of a united Germany.

Furious

The Beveridge plan is often seen as a sweetener to a furious British public who had been asked to fight two world wars in 30 years, and endure a lot of poverty in between, and were determined to have something better in future.

The point was then – and seemed to be again in the current Budget discussions – that this is supposed to be insurance. Money was paid in and would fund benefits, such as help with unemployment and sickness and the cost of pensions.

It was to be self-financing, with contributions covering the cost of the benefit, and all held in that social insurance fund.

In Germany, they kept it working that way up until the 1990s, when slow growth and the cost of unification pushed the fund into losses. In Britain – and Ireland when the system got going a bit later – the insurance concept disappeared almost at once.

Instead, we got the welfare state, where it is perceived as the duty of government to minimise poverty and reduce disparity of income, rather than individuals buying protection for themselves.

This concept is rarely challenged, at least outside the USA, although the exact scale of this obligation differs widely, of course, from country to country, and is a matter of political choice.

The problem with abandoning the insurance concept, where payments are related to contributions, is that the choices become purely political, with little reference to the cost and, worse, the potential cost.

This is most extreme in the case of pensions. The ink was hardly dry on Beveridge when unfunded state pensions were introduced, to be paid for by future taxpayers.

The Irish, the continental Europeans, and even the Americans, have been even more generous with our descendants' money than the British. No one knows where posterity is going to find the money.

Welfare system

This week's report from the ESRI highlighted the importance of the welfare system in preventing and alleviating poverty. No one can dispute that. But it also raises questions about the consequences of the politically-driven creation of a welfare system divorced from the funds required to sustain it.

The intriguing question thrown up by the Government's tying of one hand behind its back with its veto on tax and welfare rate changes, is whether the idea should be resurrected, that the welfare budget is financed by social insurance.

That argument was implicitly trotted out to justify the end of the PRSI exemption. Like the PRSI ceiling, it was a relic of the insurance idea, where one was not expected to pay for benefits to which one would not be entitled.

It is too late to go back to that, but the curious business of the Universal Social Charge has made the system even more illogical than it was before.

The USC is not a rise in income tax, you understand, (that would break election pledges) because it is collected like PRSI, even though the money is counted as income tax revenues.

One lot of levies on employment goes into the social insurance fund, and another lot does not.

It is a sorry fact though that a properly managed fund might have provided a stability mechanism during the boom and bubble, when it generated large surpluses.

Had these been used to retire debt, or even banked with the NTMA, they would have been available for the rise in welfare expenditures in the downturn.

Instead, they were used to fund new and higher welfare payments – of the kind now being cut so painfully – and built into Charlie McCreevy's general spending rules, for fear it would all be spent by the Minister for Social Welfare.

One has long since abandoned hope of Irish politicians adopting stability policies which modify the ups and downs of the economy, rather than exaggerating them.

Connection

But a clearer connection between who pays for what in the welfare system might provide a useful building block in the new fiscal structures which are set to be part of the new eurozone.

PRSI receipts amount to almost €10bn a year. The USC should amount to over €2bn next year, although it is vaguely intended for the health system.

Since one euro is like another, we could legitimately regard this two thousand million of them as going to top up the social insurance fund, paying for at least the basics of the €18bn social protection budget.

Now that PRSI has been extended to things like rental and dividend income, the last vestiges of an insurance system are gone.

There may still be merit in seeing PRSI/USC as paying for pensions, jobless benefit and sickness pay – as Beveridge had in mind – with other poverty-reducing policies squarely a matter for re-distribution of income through the tax system.

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