Challenges facing the Social Insurance Fund

A new paper from the Parliamentary Budget Office provides an overview of the Social Insurance Fund’s (SIF) operations, income and expenditure trends, and highlights key risks to its long-term sustainability.  The SIF faces several threats, including demographic pressures, economic fluctuations, and policy changes. The SIF's income and expenditure are subject to considerable volatility. During periods of reduced employment, the SIF experiences both a decline in income and an increase in expenditure. 

Overview

The Social Insurance Fund (SIF) was established under the Social Welfare Act 1952 to provide funding for social insurance entitlements primarily through Pay Related Social Insurance (PRSI) contributions. These contributions are made by employers, employees, and self-employed individuals. Contributory schemes such as the State Pension, Jobseeker's Pay-Related Benefit, and Guardian's Payment are funded by the SIF.

Generally, the SIF generates a surplus but this can quickly change where either the number of people in receipt of payments from the fund increases, the cost of the schemes increases, or where income to the fund declines. In some cases, these challenges combine, particularly where events result in large declines in employment. In these cases, the fund’s PRSI income declines just as its expenditure rises. This combined effect has occurred twice in recent times, first in response to the economic and financial crisis in 2008, and much more recently during the COVID-19 pandemic.

Social Insurance Fund income and expenditure

Where the SIF's income is insufficient to meet its liabilities, it will first use any accumulated reserves to ensure continuity of payments; however, once the reserves are exhausted subventions from the Exchequer are required to address the shortfalls. Subventions are effectively an additional Voted allocation to the Social Protection Vote which is then transferred to the SIF.  Subventions were required in response to the economic and financial crisis in 2008, and again as the COVID-19 pandemic resulted in a sudden significant decline in PRSI receipts alongside the extra payment of benefits to those unable to work because of public health measures.

The primary source of income for the SIF is PRSI contributions. For 2025, PRSI contributions are estimated to account for 98.5% of the SIF's forecasted income, amounting to €18.15 billion   

SIF spending is primarily driven by contributory pension payments, which account for approximately 59% of forecasted expenditure for 2025. Other significant areas of spending include illness, disability, and carers' payments, as well as working-age income supports. Even assuming no change in unemployment, spending on Jobseeker's Benefit could ultimately rise with the introduction of the Jobseeker's Pay-Related Benefit from 31st March 2025.

Risks facing the Social Insurance Fund

The report identifies and outlines threats to SIF including demographic pressures, economic fluctuations, and policy changes. The SIF's income and expenditure are subject to considerable volatility. During periods of reduced employment, the SIF experiences both a decline in income and an increase in expenditure. This was evident during the pandemic when expenditure exceeded income to such an extent that the SIF's accumulated reserves (which took years to build up) were exhausted to meet the liabilities in 2020 alone, which meant only €28 million remained in the fund, with almost no buffer heading into 2021.

Since then, the fund has rebuilt its surplus, with €5.5 billion available at the end of 2023. The SIF will potentially achieve a surplus of €13.7 billion by the end of 2025 based on projections in the Revised Estimates for Public Services 2025. The actuarial review of the SIF conducted in 2021 projects that SIF expenditure will surpass receipts come 2035, ultimately running a deficit from there on. This is predicted due to an ageing population and with the fund being based on a PAYG model which requires high employment rates to fund its liabilities.

Risks facing the fund heading into the future, particularly in light of recent developments of tariffs imposed on Ireland which could have a negative impact on the labour force contributing to the receipts of the fund. Importantly, the SIF is projected to enter a deficit by 2035; however, there have been two shocks in recent memory which have pushed the SIF into deficit. As such, the SIF’s reserves are considerably more volatile than might be assumed when reserves often value several billion euro.

The recent tariffs imposed on Irish exports to the US, particularly those affecting the tech and pharmaceutical sectors, pose a significant threat to high-paid jobs in these industries. As these sectors are major contributors to Ireland's economy, any reduction in exports due to tariffs could lead to job losses among highly skilled workers. In a worst-case scenario the implications of tariffs could be serious, with secondary impacts on industries that support or are supported by these industries.

This, in turn, would increase the demand for social welfare supports, including the newly introduced Jobseeker's Pay-Related Benefit, which offers a maximum weekly payment of €450 based on individual earnings and PRSI contributions. The increased reliance on this benefit could drive increases to the Social Insurance Fund's expenditure alongside reductions to the income of the SIF.

For the SIF to be pushed into deficit in the shorter-term would require tariffs to have a dramatic effect on employment. However, even more modest negative impacts could draw the SIF into deficit ahead of the 2035 projection. The Social Insurance Fund (SIF) plays a crucial role in providing financial support through various social insurance schemes funded primarily by PRSI contributions.

Despite the fund's resilience and recent surpluses, it faces significant challenges. The introduction of new benefits, such as the Jobseeker's Pay-Related Benefit, and external economic pressures, including tariffs on Irish exports, pose risks to its sustainability.

Demographic pressures

The ageing population presents a long-term challenge for the SIF. The ageing population will result in a lower proportion of workers contributing via the PAYG model even as demand for pension and illness and disability benefits rise, eventually outpacing the growth in PRSI contributions, as noted in the actuarial review. This demographic shift requires strategic adjustments to ensure the fund's viability.

Looking ahead, the SIF must navigate demographic changes and economic fluctuations to maintain its viability. Strategic adjustments and proactive measures will be essential to ensure the fund can continue to meet its obligations and support Ireland's social welfare system effectively.

The SIF plays a vital role in supporting significant cohorts of the population. Careful management of the SIF in terms of its income and expenditure are essential and may necessitate significant political will to address both projected challenges (demographic) as well as unanticipated challenges (likely economic).   

According to the PBO report“while increasing income to the SIF or cutting expenditure (either through reductions in rates of payment or amended eligibility such as age-related criteria), or a combination of measures may be unpalatable; some measures are required to alleviate the pressure funding the SIF will place on Government Expenditure in the future”.

Increasing PRSI to Strengthen the Social Insurance System

Social Justice Ireland has been highlighting the need to strengthen the SIF reserves for a number of years and have made policy proposals with regard to PRSI rates in our most recent pre-budget briefings.  The pandemic and the cost-of-living crisis have highlighted the important role of the social safety net provided by state. During both periods the state stepped in to assist individuals, families and business cope with the unexpected challenges that came their way. Although the responses were not perfect, the ability of the Irish state to successfully respond and support so many when help was needed was a key public policy achievement.

Central to the ability of the state to respond to occasional and recurring challenges is the social insurance system. In European terms Ireland collects very low levels of social insurance (PRSI) from employers, employees and the self-employed. For most employers the contribution rate is 11.15 per cent of weekly earnings (increasing to 11.25 per cent in October 2025) compared to an EU average of around 21 per cent. Employees pay PRSI at a rate of 4.1 per cent (increasing to 4.2 per cent in October 2025) compared to an EU average of around 14.5 per cent (Department of Social Protection, 2023: 5-6). The self-employed only pay the same rate as employees but do not pay any of the employer component.

While we welcomed the increase of 0.1 per cent in the PRSI rate introduced in each of the last two budgets, these increases do not adequately address the anticipated future shortfalls in the social insurance fund, particularly in light of Ireland’s ageing population (Department of Social Protection, 2023). Therefore, Ireland needs to adopt routes to increase PRSI contributions so that existing social insurance benefits can be maintained, future needs can be met, and there is a fund available to support future emergency policy provisions such as those adopted during COVID-19 and the cost-of-living crisis.

Social Justice Ireland believes that the best way to do this is to commence a process of increasing all PRSI rates by 0.5 per cent a year for the next five years (reaching 6.7 per cent and 13.75 per cent by late 2030). Government should design these changes so that the transition to higher, and more sustainable rates of PRSI, is gradual across each year, lessening the immediate impact for employers and employees. The inequity between contribution from employees and employers and the self-employed should also be addressed. These measures should generate an additional €1 billion a year for every 0.5 per cent increase in social insurance once implemented and notably contribute to a more sustainable social insurance system.