Thursday, December 9, 2010

Social Welfare Expenditure

Following a recent theme here’s another misperception from RTE News last Friday in a report on the release of the White Paper. 

RTE News Social Welfare

The issue is the true nature of the cost of our social welfare system.  In the report David Murphy stated that social welfare expenditure would rise from €13.2 billion in 2010 to €14.2 billion in 2011 (if no changes were introduced in the Budget).  This is partially true.

The White Paper details expenditure by department and the above figure is the estimate of expenditure by the Department of Social Protection in 2010.  It is broken down as follows.

Department of Social Protection

Relative to our banking crisis this would suggest that, although growing, our expenditure on social welfare should be manageable. It seems a relatively light burden for an economy with an expected GDP this year of around €157 billion.  Here is how the €11.2 billion of welfare payments are distributed.

Social Welfare Payments

It is fairy clear that this is not the full list of social welfare payments.  The remainder come from the Social Insurance Fund (SIF).  This fund received a €1.55 billion payment from the Department this year.  However most of the funds receipts come from PRSI contributions.  These were estimated to contribution just over €7 billion to the fund in 2010. 

These do not form part of the Exchequer Accounts as they are paid directly to the SIF so we do not get monthly information on them.  Overall details of the SIF are also difficult to source.  Anyway with €7 billion from PRSI and €1.55 billion from the Department of Social Protection this represents a substantial sum of money.  Here are the payments made from the SIF this year.

SIF Payments

It is only by adding the expenditure on social welfare payments by the Department of Social Protection (€11.2 billion) and the Social Insurance Fund (€9.3 billion) that we get a true measure of total social welfare expenditure.  This is €20.5 billion in 2010.

This is not the full extent as cash transfer provided by the government.  Schemes run by other Departments brought total expenditure on direct transfer programmes to over €26 billion.  This is now a sizable burden for an economy with a GDP of €157 billion (17%) and particularly one with a GNP of €130 billion (20%).

A recent study by TASC shows that our expenditure on Social Protection as a percentage of GDP is now above the EU15 average.  One consequence of the economic crisis has been the complete erosion of the surplus in the Social Insurance Fund.  At the end of 2008 the SIF has a surplus of €3.4 billion.  This surplus was managed by the NTMA and the investment income generated was available to meet social welfare payments.  The NTMA’s annual report for 2009 contained the following section on page 38.

Social Insurance Fund
The income of the Social Insurance Fund derives mainly from Pay-Related Social Insurance (PRSI) contributions by employees, employers and self-employed persons. Payments from the Fund are made in respect of items such as State Pensions, Illness Benefit and Jobseekers Benefit. Since July 2001 the NTMA has managed the accumulated surplus of the Fund, with performance measured against a benchmark agreed with the Minister for Finance.

During 2009 the NTMA transferred €2.9 billion from the Fund back to the Department of Social and Family Affairs, bringing the total under management at the end of the year to € 157 million. The balance of the Fund was transferred back to the Department by the end of April 2010.

The Social Insurance Fund is now empty! It is not just the National Pension Reserve Fund that has been wiped out.

The SIF needed over €1.5 billion from the Department of Social Protection in 2010 just to meet its requirements.  Some changes to PRSI in Tuesday’s Budget will generate some additional revenue (c. €220 million) but it is likely the fund will need to subsidised for the foreseeable future.

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