Are contributions to public pension programmes a tax on employment?

Abstract

"Many studies describe the potentially adverse impact on employment of the payroll costs of financing public pension programmes. Conventionally, empirical studies treat contributions to public pension programmes as a pure tax (in, for example, calculations of the tax wedge by OECD). But this approach ignores any future rights to benefits that are perceived by contributors. In fact, public pension programmes contain both an 'actuarial' and a 'redistributive' component - the former closer to saving, the latter a tax. The paper constructs indicators of the tax component of pension programmes, both between and within generations, across a range of OECD countries and time periods. It uses these measures in a cross-country panel analysis of the determinants of age and gender-specific economic activity rates. The results reveal robust evidence that when public pension programme contributions are broken down into a tax component and a savings component, the tax component of the payroll contribution reduces economic activity rates among women while a higher retirement saving component has the opposite effect. There is little evidence that average tax rates, however constructed, have any adverse impact on the economic activity rates of men." Copyright � Blackwell Publishing 2004.

Why are more redistributive social security systems smaller? A median voter approach

“…Both these mechanisms suggest that the political process would result in higher benefits, and 9,4 percent in countries with earnings-related benefits (Disney, 2004;OECD, 2004). …”

“…Disney (2004) reports that the effective contribution rates in the 10 OECD countries dominated by flat-rate systems varied between 14,7 percent in Australia and 23,7 percent in the United Kingdom in 1995. The range in the 12 OECD countries with more earnings-related benefits was between 22,4 percent in Germany and 57,7 percent in Greece.…”

“…2 1 In most countries, social security has both a flat-rate and an earnings-related component, the relative importance of which differs. We choose labels for countries according to which component is more pronounced, taking our classification from Disney (2004) who labels earnings-related systems Bismarckian and flat-rate systems Beveridgean. 2 In 2001, public spending on old-age benefits was in average 6,4 percent of GDP in countries with flat-rate…”

Measurement Issues for Adequacy Comparisons Among Pension Systems

“…With this purpose in mind, two different approaches might be considered: (i) actuarial fairness (no-pension system hypothesis), or, (ii) actuarial equivalence (null solidarity). By the former, it is hypothesized that individuals accumulate their savings in a risk-free asset at the market return (Creedy et al 1993, Disney 2004. By actuarial equivalence, instead, it is hypothesized that individuals get (a) the market return on savings accumulated in funded pension schemes, and (b) the sum of labor force and productivity growth for savings accumulated in PAYG systems (Samuelson 1958, Aaron 1966.…”

“…6 We indicate by 7 Obviously, the size of these vectors is allowed to vary over both time and cohort. From a longitudinal point of view, we indicate by i,h ,ȳ i,h andp i,h respectively lifetime income, average working and average pension income received by the ith income unit of cohort h. From a cross-section point of view, instead, we indicate by µ(y t ) and µ(p t ) respectively the average working and pension income among living individuals at time t. Henceforth, we refer to working and pension income respectively in 6 If each individual is allowed to participate in both funded (λ i ) and unfunded schemes (1− λ i ) at the corresponding rates of return (r,g), then, unless of particular circumstances (λ i = λ ∀ i) the comparison between actual and virtual income distributions as obtained under actuarial fairness would naturally entail some fictitious intra-generational redistribution, whose origins are indeed of the inter-generational kind (Disney 2004). 7 The distribution of virtual pension incomes is constructed assuming no individual behavioral response under the null solidarity hypothesis.…”