This Bill provides for a system of fully pay-related social insurance and occupational injuries insurance contributions to replace the existing mainly flat-rate contribution scheme. Separate Bills will provide for pay-related redundancy contributions and health contributions. When the new system comes into operation in April 1979, all of these contributions in respect of employees will be collected together as a proportion of their pay.
Over the years there has been widespread criticism of the inequitable aspects of the flat-rate social insurance contribution system. The new system is intended to redress this situation. It will benefit not only employees but also employers as well as improving the system of collecting contributions for my Department. Later I shall outline for Senators the effects of the proposals but first they may wish to have some background information on the Bill and the purpose of the changes now envisaged.
The present social insurance system is based on the Social Welfare Act, 1952, which had been added to over the years to form the Social Welfare Acts, 1952 to 1978. Consolidation of this legislation is in hand but cannot be completed at this stage. The present Bill takes the form mainly of providing for amendments of these Acts. Because of this, it is somewhat technical and complex and details of the new scheme may not be readily apparent from its terms. I hope that the explanatory memorandum circulated with the Bill will be of assistance to Senators in this regard. I shall, of course, be happy to clarify any matters on which further explanation is required.
As Senators will be aware, the present social insurance system has two funds, the social insurance fund, out of which all benefits other than those related to occupational injuries are paid, and the occupational injuries fund which I will deal with later. The financing of the social insurance fund is by way of flat-rate contributions, the 3 per cent pay-related contribution introduced in 1974, and an Exchequer subvention. This method is, in the overall, regressive in its impact on contributors. The flat-rate contribution, which accounts for about 70 per cent of the total financing of the social insurance fund, is clearly regressive and the effectiveness of the present pay-related contribution in achieving vertical redistribution is limited by the comparatively low earnings ceiling of £2,500 on which the contribution is levied. The maximum pay-related contribution payable annually in respect of any employee is £75, that is 3 per cent of £2,500, of which the employer would pay £50 and the employee £25. The regressive nature of the flat-rate contribution, in which no account is taken of the ability of the employee to pay, means that, in the case of the lower paid employees, this contribution can be a considerable burden.
In order to ease the burden on lower-paid workers, the flat-rate social insurance contribution payable for workers with earnings of less than £50 a week was reduced by £1 a week last January. This concession was increased from April last, so that at present the worker earning less than £50 a week has his contribution reduced by £1.16 a week and his employer's contribution is reduced by 34p a week. It was recognised when these provisions were made, however, that they were only a "stop-gap" measure pending the introduction of fully pay-related contributions. The new system will subsume these reductions and so consolidate the benefits given by them.
The ordinary weekly rate of flat-rate contribution payable by employees, including the redundancy and health contribution, is £3.42 for men and £3.35 for women, less in each case £1.16 for those earning less than £50 a week. Employees also pay a 1 per cent pay-related contribution on pay up to £2,500 a year. For workers earning £25 a week, therefore, insurance contributions represent about 10 per cent of their pay, for workers earning £50 a week, 7.8 per cent and for workers earning £100 a week, 3.9 per cent.
The flat-rate social insurance contribution is also a heavy burden on the employer in the case of labour-intensive industries. The weekly contribution payable by the employer, including that for redundancy and occupational injuries, is £5.26 for male employees and £5.21 for female employees plus 2 per cent of pay up to £2,500 a year. As was mentioned in the Government's Green Paper on "Development for Full Employment", the introduction of the new pay-related contribution system will, by reducing wage costs in labour-intensive industries, make a positive contribution to the achievement of the Government's employment objectives without involving additional public expenditure.
It can also be said of the flat-rate contribution system that it is a somewhat inflexible method of financing the services. The income from contributions varies only with increases or decreases in the level of employment and there is no buoyancy of income where levels of pay rise. Thus increases of income needed to pay increased rates of benefit can only be assured by increasing the rates of contributions.
I will now outline the main features of the proposals in the Bill. The new system will commence on 6 April next though certain provisions of the Bill, such as those requiring confirmation or variation of rates of contribution before commencement of the scheme, will take effect from other dates. It is intended that the new contribution will, like the present 3 per cent pay-related contribution which it will subsume, be collected for the vast majority of employees by the Revenue Commissioners through the PAYE system of income tax collection. It is necessary, therefore, to start the scheme at the beginning of the income tax year. Section 6 of the Bill will enable me as Minister for Social Welfare to assign all necessary functions relating to the collection and recovery of contributions to the Collector-General of Revenue.
I might explain for Senators the reason for the various functions that I may under the Bill assign to the Collector-General. Though the present 3 per cent pay-related contribution provides a basis for the new fully pay-related contribution system, there is much more involved in the new system than a mere increase in the rate of that contribution. The new system will see the end of the stamped insurance card. This removes the basic source of information at present on individual insurance records. Though there are many problems and difficulties inherent in the stamped card system, it can be said that it provides a fairly efficient system of recording weekly contributions on which the social insurance system is based. With the abolition of the card, the main source of information available to the Department for the purpose of maintaining insured persons' records will be the data which employers will be required to submit to the Revenue Commissioners. The collection of this data by the Revenue Commissioners and its availability to my Department will be vital for the efficient operation of the social insurance code. Without it, insured persons' records would be deficient, and this could lead to delays in payments and hardship to claimants. The collection of the information needed for the determination of claims to benefit will be as important a task for the Revenue Commissioners under the new system as is the collection of contributions. For these reasons, the Collector-General must be equipped with all the necessary powers to enable him to pursue the collection of contributions and to secure the prompt return of information relating to contributions and the duration of insurable employment covered by them.
Employers will, under regulations, be required to keep records of their employees' earnings and duration of employment and these records will be open to inspection. Also, information obtained by the Revenue Commissioners will be made available to my Department where required for the maintenance of insured persons' records, the determination of benefit claims and to assist in any action by officers of my Department to ensure that employers are fulfilling their contribution obligations.
Before moving on to discuss how contributions will be calculated I should perhaps refer to the position of those employees who do not come within the scope of the PAYE system, including employees of companies incorporated outside the State who are paid from outside the State. These employees, relatively few in number, will pay a pay-related contribution under special collection machinery which will be operated by the Department of Social Welfare. Such special arrangements already exist in relation to those employees for whom the existing 3 per cent pay-related contribution is due.
Under the new system, a contribution will be due on every payment of reckonable earnings made to an employee up to the limit of an annual ceiling. A definition of reckonable earnings will be contained in regulations. These will be the same earnings as are used for income tax purposes and on which the present 3 per cent pay-related contribution is collected, that is, gross earnings in cash less approved superannuation contributions.
A ceiling to the amount of reckonable earnings on which contributions are charged is a feature of the present 3 per cent pay-related scheme, and it is being continued in the new system. Benefits payable are for the most part flat-rate and, in the circumstances, it would be unreasonable not to have a limit by way of a ceiling on earnings liable to contribution. Among countries which operate earnings-related schemes, including those where benefit is earnings-related, there is a widespread practice of having a ceiling which is related to average earnings and is set at a level which ensures that the bulk of the earnings of the vast majority of workers is within it. This practice was followed when our present pay-related scheme was introduced, and workers and employers are now familiar with it.
The earnings ceiling of £5,000 specified in the Bill is intended, following the international practice which I have just mentioned, to cover the bulk of the earnings of the great majority of workers. It is, however, a provisional figure. The level of the ceiling was determined having regard to the latest information available, at the time the Bill was published, of the average earnings of workers in the transportable goods industries. Power is taken in the Bill to enable the ceiling to be confirmed or recalculated on the basis of whatever later information becomes available before the scheme commences.
The Bill also provides for variation of the ceiling from time to time as required and that, when a change is made, account would be taken of variations in the average earnings of workers in the transportable goods industries. For obvious administrative reasons the ceiling can only be changed with effect from the beginning of an income tax year and it would, of course, have to be determined in good time before that date to avoid inconvenience to employers who must operate the system.
Before moving to other aspects of the scheme, I should like to explain to Senators how the ceiling will operate in the case of employees who work at the same time for two or more employers. For employees, the maximum liability for contributions will always be limited by the level of the current ceiling on earnings in a contribution year. No contribution will be payable by an employee on any part of his earnings which exceeds that ceiling, even if these earnings are aggregated from different employments. In the case of the employer who takes on a worker already engaged in other employment, however, it is not proposed that earnings from both employments should be aggregated so as to relieve the employer concerned of the social insurance contributions which he would pay if he were the only employer. Accordingly, I am proposing in the Bill that such an employer should pay the employer's element of the contribution on all earnings paid by him up to the ceiling. This proposal will ensure that it will not be more advantageous, in respect of social insurance liability, for an employer to take on a person already in other employment rather than to engage someone on the live register.
There will be a standard rate of contribution in respect of employees who are eligible for all social insurance benefits. The effect of this will be to eliminate the present differential in the flat-rate contributions as between men and women and as between ordinary and agricultural employment. These differentials, which have not been increased for many years and have thus become relatively small by reference to the overall contribution rates, were introduced largely to take account of the lower earnings of the workers concerned. In the case of women, account was also taken of restrictions in benefit entitlements which have now been removed except in the case of certain married women whose benefits in respect of sickness or unemployment are restricted.
A fully pay-related contribution of its nature automatically embodies a differential between individuals or groups to the extent that their levels of pay differ. There is, therefore, no need for continuation of the existing differentials.
The standard rate of social insurance contribution specified in the Bill is 11.2 per cent, of which 7.8 per cent is payable by the employer and 3.4 per cent by the employee. The purpose of the Bill is, as I have indicated, to convert the present contributions to fully pay-related ones, and the rates of social insurance contributions have been calculated by reference to the most recent income distribution data and the £5,000 ceiling to yield approximately the same income as would have been produced by flat-rate contributions and the 3 per cent pay-related contribution. At this stage the rates are provisional, and they will, like the earnings ceiling to which I have already referred, be reviewed and either confirmed or varied by regulations before the scheme commences. This review of the rates will have regard to the most up to date information regarding income distribution and the income yields required for benefit purposes. The rates of 7.8 per cent and 3.4 per cent take account of the special increase of 31 p in the flat-rate contribution which was introduced in 1975 to help to meet the cost of the high level of unemployment claims and has been continued on an annual basis since then. The need for further continuation of this increase will also be considered in the context of the review to which I have just referred.
The new pay-related system of contributions will apply to all persons insured under the Social Welfare Acts. Employees in the public sector and other employees who are insured for a limited number of benefits of the social insurance system pay special reduced flat-rate contributions but do not pay the present 3 per cent pay-related contribution. Their flat-rate contribution will now be converted to pay-related contributions at reduced rates appropriate to the cost of the limited benefits for which they are insured. The new rates in these cases will be provided by regulations under section 12 of the Social Welfare Act, 1952.
The present flat-rate contributions payable by voluntary contributors are similarly being converted into income-related contributions. These will be collected directly by my Department as a percentage of the reckonable income of the contributor up to the ceiling of £5,000. Reckonable income for this purpose is to be defined by regulations and will include earnings as a self-employed person. Rates for each of the three classes of voluntary contributor are specified in the Bill. These rates are made up of the elements of the standard rate for employees which are appropriate to the benefits covered by each category of voluntary contribution. As with the ceiling and the standard rate, the rates of voluntary contributions specified in the Bill—4.4 per cent, 2.7 per cent and 1.7 per cent—are provisional at this stage and they will be either confirmed or varied before the commencement of the scheme.
An outline of the situation in regard to tax relief on the new contributions would, I feel, be helpful as this is not a matter which needs to be provided for in this Bill though it is relevant to the rate of contribution. As Senators may be aware, at present an employee can claim income tax relief in respect of the pensions element of his flat-rate social insurance contribution. As the contribution is flat-rate this is a fixed sum each year. Under a pay-related contribution system, the amount of this relief could change with every payment of earnings made to an employee. To avoid the difficulties that would arise in applying such a variable deduction, direct tax relief on the employee's social insurance contribution will be discontinued. In compensation for the extra income tax thus charged on the employee, the overall increase in the amount of tax collected has been taken into account in calculating the employee's contribution and the appropriate reduction made in the rate of contribution. If tax relief had not been taken into account in this way, the overall contribution would, like the existing pay-related contribution, be shared on a two to one basis between employer and employee with the employee's rate being 3.9 per cent instead of, as I have already mentioned, 3.4 per cent. That is a reduction of 0.5 of 1 per cent.
As I have said, the rates of contribution are designed to replace the income which would have been raised by the existing contribution system, had this continued. In the calculation of the rates, it was accepted that the cost of the concession afforded in the employee's rate to compensate for the loss of the income tax relief will be met by an increase in the Exchequer subvention to the social insurance fund.
Flat-rate contributions of 19p and 16p are at present payable for male and female employees respectively in respect of occupational injuries insurance. These will also be converted under section 16 of the Bill to a pay-related contribution at the standard rate of 0.45 per cent of an employee's reckonable earnings up to the ceiling of £5,000 to which I have referred earlier. As in the case of the new social insurance contribution, the existing difference in contribution for men and women will, therefore, cease to apply. This contribution is payable only by the employer and is paid into a separate occupational injuries fund. In recent years, expenditure on benefits, which is growing each year, and on the administration of the occupational injuries insurance scheme has exceeded income from contributions and the rate of 0.45 per cent is intended to ensure that the fund remains solvent. So far as the occupational injuries insurance scheme is concerned, therefore, the proposals are more than a straight forward conversion of the flat-rate contribution since they are designed also to rectify the deficit situation. The rate of 0.45 per cent will also be subject to confirmation or variation in the light of any new information on income distribution and benefit changes before April next.
Senators will note that the rates I have quoted include decimal fractions and the calculation of contributions by employers who do not have computerised payroll systems could pose difficulties. To facilitate such employers with their calculations, tables of contributions or ready reckoners will be provided.
The changeover from a weekly stamped card system to one under which contributions are payable only on payment of earnings necessitates some additional legislative changes, the most important of which relates to the contribution conditions for benefit under the social insurance system. These conditions require a specified number of contributions to have been paid. At present, a contribution is payable for a person in respect of every contribution week in which he is insurably employed. The number of contributions paid or the stamps on his record thus represents the number of contribution weeks during which he was insurably employed.
Under the new pay-related system. contributions will be payable only when payments of reckonable earnings up to the ceiling are made. When the ceiling is reached no further contributions will be due in that contribution year. Also, in the case of a person who is fully employed throughout the year and is paid monthly, for instance, only twelve contributions at most would be due in the year but these contributions would represent 52 weeks of insurable employment. Thus, the number of contributions will not necessarily be the same as the number of weeks of insurable employment in respect of which they are paid. It is consequently necessary in the various contribution conditions to substitute for the number of contributions paid, the number of weeks of insurable employment for which contributions have been paid or would have been paid but for the operation of the ceiling. This is provided for in section 13 of the Bill.
The new pay-related contribution system in terms of legislative provisions and administrative arrangements represents a major departure from the existing system. To ensure continuity between the two, section 20 enables transitional arrangements to be made by regulations. This provision will be availed of to ensure that the change-over is effected without any disruption in benefit entitlements. It will, for example, be necessary to provide for special contribution and benefit year arrangements for disability benefit and unemployment benefit purposes to cover the period up to the year 1981 when the preceding income tax year will for the first time be the governing contribution year for benefit purposes for both men and women.
These then are the main provisions being made in the Bill. Before finishing I should like to talk about some effects which these proposals will have.
To take firstly a specific case, female domestics in private employment are insured for all benefits of the social insurance system but are excluded from the pay-related benefit scheme at present because it was not possible to arrange for the collection of the 3 per cent pay-related contribution for them. Because of a more comprehensive system of collection now possible, they will be included in the new pay-related contribution system and will then be covered for pay-related benefit for the first time. The standard rate of contribution will apply to them.
For employees generally the new contribution system will eliminate the regressive aspects of the present flat-rate contribution system which bears heavily on the lower paid worker and will relate the level of contribution to ability to pay. It will also remove an anomalous situation arising in relation to the present £1.16 reduction in the contribution of employees earning less than £50 a week. A man earning say, £49.50 a week, is at present liable for a total social insurance contribution of £2.11 leaving his pay £47.39 net of that deduction. If his pay were increased to £50, his contribution would go up to £3.27, leaving him £46.73 after deduction, which is 66 pence less than he had before his pay was increased.
The new system, by scaling up the contribution directly and proportionally as pay increases, will prevent this happening. Employees on the higher pay levels will pay more under the new contribution system than by way of their present flat-rate and 1 per cent pay-related contribution. However, the new pay-related contribution will not be charged on earnings in excess of the ceiling and they will gain in another way. I propose by regulations to raise the ceiling applying to the pay-related benefit scheme from the commencement of the new contribution system from the present level of £2,500 to whatever ceiling is finally determined for contribution purposes and to maintain parity in future that is at present £5,000 per annum. So the £2,500 for the pay-related scheme will be doubled to £5,000 provided that £5,000 is the figure finally settled upon. Higher paid workers would benefit from this proposal which will give them higher overall payments of benefits when they are sick or unemployed.
With the ceiling and rates proposed, employees earning less than about £80 per week will pay less by way of social insurance contributions under the new system than under the flat-rate system. This will mean that, of the employees who will be paying contributions at the standard rate, about 500,000 will pay less by way of contribution under the new scheme while about 200,000 will pay more.
For employers, the new system will provide a simpler way of collecting the various "social" contributions payable and will relieve them of the work connected with the handling and safe custody of insurance cards and stamps. The existence, since 1974, of a dual system of collection of insurance contributions, with flat-rate contributions being collected largely by means of the sale of insurance stamps at post offices and pay-related contributions being collected in conjunction with the PAYE income tax system, has added to the expenses of employers as well as imposing an undue administrative burden on the insurance funds. The new system will thus eliminate duplication of work and reduce costs. It will also remove the complication and responsibility for employers of ensuring that the appropriate reduced rate of stamp is only used for those earning less than £50 a week.
In respect of an employee earning less than about £73 per week the employer's social insurance and occupational injuries insurance contribution will be reduced. How individual employers will be affected will depend on the numbers of employees they have whose earnings are above and below that figure.
For my Department, the new system will, in addition to the reduction in administrative costs to which I have referred, eliminate certain problems and difficulties associated with the existing card stamping system, including the question of security and fraud arising from the theft, counterfeiting or re-use of stamps. It will also facilitate computerised methods being employed in the processing of information, leading to a more efficient records system.
I should refer at this point to the effect which abolishing the present scheme will have for postmasters who are paid on the basis of the work which they do. About 60 per cent of income from flat-rate contributions is collected by way of insurance stamps sold at all post offices. Payment to postmasters at sub-post offices for this work now amounts to about £1.2 million a year and this is met from the insurance funds. The proportion of any individual postmaster's income deriving from work connected with the sale of insurance stamps depends on the extent of such sales.
This work will of course cease and its cessation would affect the remuneration of postmasters at sub-post offices. The Irish Postmasters' Union has raised this matter with the Department of Posts and Telegraphs and I understand that discussions are at present proceeding at the Postmasters' Conciliation Council which is the agreed body for dealing with the remuneration of postmasters.
The Green Paper "Development for Full Employment" points out that the need for a tighter system of control of expenditure implies that social welfare schemes are designed in the most effective way to cover the contingencies for which they are primarily intended. In this regard, as stated in the paper, a review of the existing provisions relating to exclusion from social insurance of subsidiary employments and employments of inconsiderable extent is being undertaken. This issue is of particular relevance in the context of the new pay-related system. The inclusion within the scope of the insurance system of employments of a minor nature on which the employees are not mainly dependent for their livelihood could result in a situation in which employees could work minimal hours and pay minimal contributions which would entitle them to flat-rate benefits on a par with full-time workers. The review will be completed and any necessary amendments to the existing regulations made before the new contribution scheme commences.
The outline which I have given of the proposed new system has of necessity been rather general. This is because many of the detailed arrangements of the scheme will be made by regulations. The working out of the finer points of a scheme such as this involves consultation between my Department, the Office of the Revenue Commissioners and other Departments concerned. Intensive examination of possible procedures and the requirements of my Department in operating the social insurance code is necessary to ensure that there will be no major teething troubles after 6 April next. The consultations have been in progress for some months now and whilst some work still remains to be done, the arrangements will be finalised in good time to enable the preparatory work of instructing employers in the working of the new contributions to be completed and the scheme successfully implemented from 6 April next.
The provisions contained in this Bill represent a major development in the modernisation and improvement of our welfare system and it is with great pleasure that I recommend the Bill to Seanad Éireann for its early and favourable consideration.
