Tax, Welfare, and Pension Reforms in Slovenia: Implications for Work Incentives and Labor Participation

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The labor participation rate in Slovenia has been lower than in the EU-15 (the members states prior to May 2004), particularly for the low-income and older individuals. Using simulations of tax and social benefits and public pensions, the paper shows how the current tax, welfare, and pension systems create disincentives to work among these groups. The paper finds that incentives to retire early are strong for men, especially low-wage earners. The marginal effective tax rates also make it costly for low-income individuals to work and negatively affect the probability of participating. The paper proposes reform measures to enhance work incentives and labor participation, which will be crucial for dealing with population aging and for achieving higher potential growth in Slovenia.

Keeping Slovenian Public Finances on a Sustainable Path

“…The pension is reduced if workers retire before they reach the statutory retirement age and is increased if workers retire later, but the additional pension received is less than proportional to the extra time worked. Thus, the pension system provides only weak incentives to continue working and many people still choose to retire early (Egoumé-Bossogo and Tuladhar, 2006;Ahčan and Polanec, 2008). 5 The pension system is redistributive as pension contributions are proportional to wages while pension benefits are capped at four times the minimum pension; furthermore, workers receive a minimum pension (set in 2000 at 62.5% of the average net wage) after a qualifying period of 15 years of service.…”