Notes on the Front

The very fabric of social insurance is under attack – from Fianna Fail, the Programme for Government, some media commentators and a general public indifference or lack of knowledge as to what it might mean. For the Left it is another one of those interminable ‘into the breach’ times – not only to protect the integrity of the current state of social insurance, but to maintain a system that has the potential to transform the living standards of employees and the self-employed.

Social Insurance (SI) is based on the sound financial principle of spreading the risk throughout society. In Ireland, it deals mainly with contingencies where there is either a permanent loss of income (e.g. old age, invalidity, etc.) or a temporary one (e.g. unemployment, childbirth, illness, etc.). Generally speaking, all employees pay a 4% levy (3% for self-employed) while employers pay 10.7%. All payments go to a ring-fenced Social Insurance Fund, out of which benefit payments are made.

Fianna Fail has sized up the Fund for delivering ‘tax cuts’. The Fianna Fail manifesto proposed slashing PRSI levies: down to 2% for both employees and self-employed. This was literally cut-and-pasted into the Programme for Government, where such cuts are prioritised over income tax cuts. In effect, Fianna Fail is raiding the Fund. They’ve done this before – back in 2001, taking over €400 million into the Exchequer’s coffers.

This time, however, it’s different. The 2001 raid was a once-off. Now Fianna Fail is actually going to cut the contributions – or revenue-source – made into the Fund, which will have year-on-year long-term consequences. There is a logic to this. With doubts being raised over future economic growth, the prospects of income tax cuts is starting to look problematic. But Fianna Fail can get the same effect by slashing PRSI levies. Their proposals would be equivalent to a cut of 1.5% on the standard rate. The advantage is that it wouldn’t immediately incur a burden on the Exchequer as the Fund is in surplus.

But why would Fianna Fail want to do this? It’s not like tax cuts featured in people’s voting intentions. (RTE poll). Sure, tax cuts were in their manifesto – they were in every party’s manifesto, even the Greens (who proposed cuts in PRSI levies) – but with Bertie Ahern’s prediction that we are in for ‘challenging times’, it is arguable that people would rather the Government concentrated on promoting sustainable growth rather than indulging in unnecessary tax cuts.

But with Fianna Fail, IBEC, ISME, the Irish Times leader page (the list could go on) warning of the catastrophe that would occur if workers dare think about using their bargaining power to compensate for failed government policy (i.e. negotiate higher wages), there’s only one way to increase take-home pay – cut taxes. But if that’s not viable due to declining economic and tax-revenue growth, do the next best thing – cut PRSI levies.

In 2005, after all SI payments were made, there was still nearly €500 million left over. In fact, the Fund has been in surplus for some time. But the Fund is already coming under pressure. The biggest demand is coming from old age pensioners and widow/ers over 65 years, who account for over 50% of all SI expenditure. These categories are also the fastest growing. Between 2002 and 2005, SI payments to the elderly increased by nearly a third, while overall SI spending increased by 22%. This trend will continue given the demographics, more elderly becoming eligible for SI (especially since the self-employed were brought into the system) and the Government’s commitment to maintain above-inflation increases. If employment growth and wage increases are not sustained (leaving aside the issue of increased unemployment), then there will be a growing imbalance in the Fund, thus shrinking the surplus.

Fianna Fail’s PRSI cuts would wipe out the surplus overnight. The Programme for Government admits as much. It calculates that the net cost of their PRSI cuts would be of the order of €600 million. In other words, in a period of high employment and relatively low numbers of elderly (relative to other EU countries), the Fund will be in deficit.

The result will be a new, unnecessary Government cost. The Programme for Government made clear that the Exchequer would compensate the Fund for loss of revenue. This loss will have to be recouped by lower expenditure in other areas. In other words, sacrifices will have to be made in areas such as health, education and public services to finance the Fund’s deficit.

Secondly, to minimise the demands on the Exchequer, we shouldn’t expect payments to rise significantly under SI – apart from the commitment on the old age pension. The state of affairs whereby almost all payments, apart from pensions, are below the poverty line will continue.

It would be nice to think the Green Party would prevent the worst Fianna Fail excesses. Except that they have, to put it as constructively as possible, a confused attitude towards SI. They want to:

• Extend maternity benefits and introduce paid parental and paternity benefit
• Lower the contributions for optical and dental benefits Introduce credits for women who lost out due to the civil service marriage bar and recognise spouses of self-employed / farmers
• Reform the 2-year rule by enabling re-entry for women who re-enter the labour market

All extremely desirable. But they have also proposed cuts. Indeed, they want to abolish the SI fund altogether which raises the question of why have any PRSI levies at all if there’s not a Fund to pay into to. S

So it is up to the Left to fight the battle (and explain to the Greens why SI is so important in providing social protection). Politically, Labour could announce that in any future government it participates in, it would reverse any cuts in PRSI levies. The trade union movement could refuse to trade-off wage increases for PRSI cuts. In the past, ICTU was extremely critical of raids on the Fund. In both cases, it is imperative that a strong publicity campaign be mounted to show the long-term debilitation that cutting SI would entail.

And one way of promoting that campaign is to show what a properly funded, comprehensive social insurance system could do people’s living standards and social security – something I will return to in subsequent posts.