2004
Benefits and Wages OECD INDICATORS The 2004 edition of Benefits and Wages provides results for 2001 and 2002. Unemployment and related welfare benefits help prevent those without work from falling into poverty but can at the same time reduce the incentive to work; this is one of the main dilemmas of social policy. Launched in 1998, this series (formerly entitled Benefit Systems and Work Incentives) addresses the complicated interactions of tax and benefit systems for different family types and labour market situations and their impact on household incomes and financial work incentives.
«
Benefits and Wages OECD INDICATORS
This new edition provides detailed descriptions of all cash benefits available to those in and out of work as well as the taxes they were liable to pay across OECD countries during both 2001 and 2002. Total household incomes and their components are calculated for a range of family types and employment situations. The results are used to examine financial incentives to work, either part-time or full-time, as well as the extent to which social benefits prevent income poverty for those without a job. The analyses draw on detailed country-by-country information which is available on the Internet at www.oecd.org/els/social/workincentives.
OECD's books, periodicals and statistical databases are now available via www.SourceOECD.org, our online library. This book is available to subscribers to the following SourceOECD themes:
Benefits and Wages
Employment Social Issues/Migration/Health Taxation Ask your librarian for more details of how to access OECD books online, or write to us at
[email protected]
OECD INDICATORS
www.oecd.org
ISBN 92-64-01515-9 81 2004 07 1 P
2004
-:HSTCQE=UVZVZ^:
2004
Benefits and Wages OECD INDICATORS
2004 Edition
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
THE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)
was set up under a Convention signed in Paris on 14th December 1960, which provides that the OECD shall promote policies designed: – to achieve the highest sustainable economic growth and employment and a rising standard of living in member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; – to contribute to sound economic expansion in member as well as non-member countries in the process of economic development; and – to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), Korea (12th December 1996) and Slovak Republic (14th December 2000). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention).
Publié en français sous le titre : Prestations et salaires : Les indicateurs de l’OCDE Édition 2004
© OECD 2004 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, tel. (33-1) 44 07 47 70, fax (33-1) 46 34 67 19, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222 Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: www.copyright.com. All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2, rue André-Pascal, 75775 Paris Cedex 16, France.
FOREWORD
Foreword
T
his is the fourth edition of a series of publications (previously entitled Benefit Systems and Work Incentives for the editions of 1998 and 1999), which allows comparisons of the welfare benefits made available to those in and out of work, net of the taxes they are liable to pay. The series addresses in a systematic way, country by country, the complicated interactions of tax and benefit instruments. It includes analyses of net (i.e. after-tax) incomes in and out of work for different family types and labour market situations presented in a format which facilitates cross-country comparisons. This volume provides results for 2001 and 2002 and the main indicators shown for 1995, 1997 and 1999 in previous editions are updated accordingly. The main indicators computed from the comparisons of net income in unemployment, part-time and full-time work are a) the Net Replacement Rate (NRR) and b) the Average Effective Tax Rate (AETR) and Marginal Effective Tax Rate (METR) faced by individuals entering work or increasing their working hours. This volume also provides detailed comparisons of the impact of different tax-benefit instruments on available household incomes, with a particular focus on the degree to which social benefits provide protection from income poverty for those without a job. The analyses draw on detailed country-by-country information on benefit systems which is available on the OECD Internet site, www.oecd.org/els/social/workincentives. This information has been supplied by the delegates to the Working Party on Social Policy of the Directorate for Employment, Labour and Social Affairs. The information on income taxes and social security contributions has been supplied by the Centre for Tax Policy and Administration. This report is partly the result of a joint project between the OECD and the European Commission. It has been produced with the financial assistance of the European Community. The views expressed herein are those of the OECD Secretariat and can therefore in no way be taken to reflect the official opinion of the European Community. The report has been prepared by Herwig Immervoll, with contributions from David Barber, Desney Erb and Dominique Paturot. The authors are grateful to Mark Pearson who provided advice during different stages of the project. This volume is published on the responsibility of the Secretary-General of the OECD.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
3
TABLE OF CONTENTS
Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
A detailed look at social benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How do taxes and benefits affect individuals in different circumstances?. . . . . . . . . .
8 11
Chapter 1.
Elements of Tax-benefit Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview of key benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Main features of social transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Tax treatment of benefits and interactions between tax-benefit instruments . . .
18 18 20 54
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
Chapter 2.
Tax Burdens, Benefit Entitlements and Net Income Levels . . . . . . . . . .
59
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. An illustration of the mechanics built into tax-benefit systems. . . . . . . . . . . . . 2. Net incomes in employment: tax-benefit position of employees and their families. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Net incomes during unemployment: tax-benefit position of unemployed persons and their families . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Net transfer payments available to the poor . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60 61
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90
Chapter 3.
Financial Consequences of Employment Transitions . . . . . . . . . . . . . . .
91
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Transitions between work and unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Transitions between jobs: changing working-hours or work effort . . . . . . . . . .
92 93 110
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113
Chapter 4.
Policy Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
115
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Out-of-work benefits and benefits of “last resort”. . . . . . . . . . . . . . . . . . . . . . . . . 2. Family benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Childcare and home-care benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Employment-conditional benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
116 116 120 121 122
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
Annex A.
Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125
Annex B.
Using the OECD tax-benefit models. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139
List of Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
141
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
67 74 81
5
TABLE OF CONTENTS
Tables 1.
Public social expenditure: cash transfers by main category. . . . . . . . . . . . . . . . .
9
1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. 1.9. 1.10. 1.11. 1.12.
Types of social transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unemployment insurance benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unemployment assistance benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social assistance benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits available to the young unemployed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash housing benefits for rented accommodation . . . . . . . . . . . . . . . . . . . . . . . . Family benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Childcare benefit schemes: description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Childcare benefit schemes: examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lone-parent tax and benefit schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employment-conditional benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax treatment of benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 21 27 29 33 35 37 40 44 46 49 55
2.1.
Poverty thresholds and APW values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82
3.1. 3.2. 3.3. 3.4. 3.5.
94 97 102 104
3.6.
Net Replacement Rates for six family types: initial phase of unemployment . Net Replacement Rates for six family types: long-term unemployment . . . . . . Average of Net Replacement Rates over 60 months of unemployment . . . . . . . Gross Replacement Rates for three family types over a five-year period. . . . . . Average Effective Tax Rates for short-term unemployed persons re-entering employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marginal Effective Tax Rates for part-time employees . . . . . . . . . . . . . . . . . . . . .
108 112
A.1.
APW earnings and statutory minimum wage . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134
Figures 1. 2.
6
3.
In several countries, above-average wages are required to escape poverty . . . . . . Minimum wages and family incomes: employment of both parents is essential to avoid poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Well-designed “make work pay” policies can facilitate a quick return to work . . .
13 14 15
2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7.
Budget constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-benefit position of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-benefit position of unemployed individuals . . . . . . . . . . . . . . . . . . . . . . . . . . Net incomes of social assistance recipients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net benefit elasticity with respect to the number of children . . . . . . . . . . . . . . . In-work earnings required to reach the poverty line . . . . . . . . . . . . . . . . . . . . . . Net incomes of full-time minimum-wage earners . . . . . . . . . . . . . . . . . . . . . . . .
62 68 75 83 85 87 88
3.1. 3.2.
Net Replacement Rates over a five-year period . . . . . . . . . . . . . . . . . . . . . . . . . . . The OECD summary measure of benefit entitlements . . . . . . . . . . . . . . . . . . . . .
100 105
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ISBN 92-64-01515-9 Benefits and Wages: OECD Indicators 2004 Edition © OECD 2004
Executive Summary
A detailed look at social benefits How do taxes and benefits affect individuals in different circumstances? Social safety-nets and income poverty Overcoming benefit dependency – and poverty Keeping unemployment-spells short
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
7
EXECUTIVE SUMMARY
T
he incomes of employees, unemployed persons and their families are influenced by a multitude of different social and fiscal policy measures. Understanding the impact of these policies is important for social, public finance and labour market reasons. Policy-makers attempt to accomplish three broad goals in the design of benefit systems: support the living standards of low-income families, especially when children are present; encourage work and economic self-sufficiency; and keep government costs low. These goals sometimes conflict so trade-offs complicate the picture. The outcome of policy measures is influenced by the amount of resources devoted to them as well as their specific design.
A detailed look at social benefits Social spending levels are determined by a large number of factors including policy aims and institutional traditions as well as the balance between private and public provision of relevant goods and services. The variation of spending patterns across countries is illustrated in Table 1. While spending levels provide useful information about the potential importance of policy measures across countries, they are not sufficient for understanding how policies affect particular individuals or families of interest. Social policies are intended to address particular contingencies and will therefore often be targeted towards specific groups. For a particular individual or family, the consequences of these measures will then depend on their situation such as being in or out of work, raising children or lacking the financial resources to make ends meet. In addition, different policy measures often interact with each other, which may facilitate or hinder the achievement of particular policy objectives. This publication analyses the direct effects of taxes and social benefits on incomes of working-age individuals and their families in 28 OECD countries. Based on detailed descriptions of benefit systems and relevant policy rules, it presents calculated tax burdens and benefit entitlements for a range of different labour market, family and income situations. The calculations focus on the income situation of unemployed individuals and low-wage earners and how taxes and benefits affect their financial gains from work. The results allow detailed cross-country comparisons of the characteristics of individual policy instruments as well as their combined overall impact on net incomes. The different income levels considered in the calculations are based on the OECD average production worker (APW) salary, as discussed in the OECD publication Taxing Wages: 20012002. The tax calculations in the present publication are based on tax and social security contribution parameters and regulations similar to those used in the aforementioned Taxing Wages series. In addition, the calculations include seven groups of benefits that may be available to families if their circumstances match the corresponding country regulations:
8
●
Unemployment benefits.
●
Social assistance benefits. BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
EXECUTIVE SUMMARY
Table 1. Public social expenditure: cash transfers by main category 2001, gross transfers in per cent of GDP
All
Old age
Survivors
Incapacityrelated benefits
Family
Active labour market policies
Unemployment
Housing
Other
Australia
10.1
4.1
0.2
2.2
2.4
0.1
1.0
0.1
0.0
Austria
19.1
10.3
2.7
2.3
2.4
0.1
0.8
0.1
0.4
Belgium
18.5
8.6
2.6
2.2
1.9
0.7
2.2
0.0
0.3
Canada
8.4
4.8
0.4
0.8
0.9
0.4
0.8
0.0
0.3
Czech Republic
12.5
6.7
0.9
3.0
1.5
0.1
0.2
0.1
0.0
Denmark
15.4
6.5
0.0
2.7
1.5
0.2
3.0
0.7
0.8
Finland
15.6
7.1
0.9
3.1
1.7
0.3
2.0
0.3
0.3
France
17.4
10.4
1.5
1.7
1.5
0.4
1.6
0.0
0.4
Germany
15.9
10.8
0.4
1.6
1.1
0.3
1.2
0.0
0.5
Greece
16.5
12.6
0.8
1.6
1.1
0.0
0.4
0.0
0.0
Hungary
13.3
7.4
0.3
2.5
1.9
0.3
0.4
0.5
0.1
Iceland
8.4
4.1
0.6
1.8
1.2
0.0
0.2
0.1
0.4
Ireland
7.9
2.4
0.8
1.3
1.4
0.4
0.7
0.5
0.5
18.7
12.6
2.6
2.0
0.6
0.2
0.6
0.0
0.0
Japan
9.1
6.4
1.2
0.6
0.3
0.1
0.5
0.0
0.2
Korea
2.4
1.1
0.2
0.3
0.0
0.1
0.2
0.0
0.5
Italy
Luxembourg
14.5
7.5
0.6
2.7
2.9
0.0
0.5
0.1
0.2
Netherlands
13.7
5.7
0.7
4.0
0.7
0.4
1.3
0.4
0.6
New Zealand
11.6
4.7
0.1
2.8
2.1
0.1
1.1
0.6
0.1
Norway
11.6
4.6
0.3
3.9
1.9
0.0
0.4
0.2
0.3
Poland
18.0
8.5
2.1
5.4
0.9
0.0
1.0
0.0
0.0
Portugal
13.3
7.6
1.5
2.4
0.7
0.1
0.9
0.0
0.2
Slovak Republic
12.1
6.5
0.2
2.1
1.4
0.2
0.5
0.1
1.1
Spain
13.2
8.1
0.6
2.3
0.3
0.4
1.3
0.2
0.0
Sweden
14.6
6.8
0.6
3.8
1.8
0.2
1.0
0.0
0.4
Switzerland
18.3
11.6
1.6
3.0
1.1
0.1
0.5
0.0
0.5
United Kingdom
13.7
7.7
0.6
2.2
1.5
0.0
0.3
1.5
0.0
8.0
5.2
0.8
1.1
0.1
0.2
0.3
0.0
0.3
United States
Source: OECD (2004), Social Expenditure Database, OECD, Paris.
●
Cash housing benefits.
●
Family benefits.
●
Childcare benefits (where they do not depend on the use of specific childcare services).
●
Lone-parent benefits.
●
Employment-conditional benefits.
Taxes, benefits and net incomes are calculated for different household circumstances using the relevant legal rules that would apply in each country. Calculations take into account interactions between different tax-benefit instruments (such as the tax treatment of benefits or the influence of tax burdens on benefit entitlements) as well as between different family members (such as the influence of one person’s income on the tax liability or benefit entitlement of another family member). In order to calculate the net income, benefit entitlements, and tax burdens, the OECD has built a tax-benefit model for each country. This publication presents the results of applying such models to many different household types, which are combinations of typical situations regarding labour market
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
9
EXECUTIVE SUMMARY
status, family situations and previous or actual levels of income in work. All results refer to 2002 unless otherwise noted. This publication: ●
Describes and compares the tax and benefit systems and discusses a range of policy design issues.
●
Presents comparative tables of benefit entitlements across OECD countries.
●
Gives example calculations, showing how different elements of tax and benefit systems interact in each country.
●
Compares net incomes of employees and unemployed persons across countries and separately shows the influence of each type of tax and benefit.
●
Analyses the income situation of families relying on benefits of “last resort” and shows their income levels relative to different poverty thresholds.
●
Compares net incomes of persons earning the statutory minimum wage for countries where it exists.
●
Provides updated figures of Gross Replacement Rates (GRR) and Net Replacement Rates (NRR) for a range of family types and income levels, both for short-term and longer-term benefit recipients.
●
Calculates Average Effective Tax Rates (AETR) for an unemployed person re-entering employment. The AETR measures what fraction of earnings is “taxed away” through higher taxes and lower benefits and is a useful indicator of the financial incentives to take up paid employment.
●
Presents results for Marginal Effective Tax Rates (METR) for employees changing the number of hours they work. The METR is a useful indicator of the financial incentives to increase gross earnings by working more.
●
Provides an overview of relevant reforms to countries’ benefit systems.
Chapter 1 introduces the different benefits that are included in this study and presents their key features. Chapter 2 presents calculated tax burdens and benefit entitlements for a range of family situations and earnings levels to compare the resources available to families in different circumstances. Chapter 3 measures the income differentials between different work situations in order to determine the financial consequences of moving between them. Results are presented for three different types of transition: employees becoming unemployed, unemployed persons returning to work, and a change in working hours for those already in employment. Chapter 4 outlines the trends in recent reforms of benefit systems across OECD countries. Annex A includes a detailed explanation of the assumptions applied for calculating net incomes after taxes and benefits. The models used for computing tax and benefit results in this publication are now available to those interested in using them. Annex B explains how the models may be obtained. Detailed country-specific information about tax and benefit systems, and examples of how net incomes are calculated in each country, are available on the Internet at www.oecd.org/els/ social/workincentives.
10
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
EXECUTIVE SUMMARY
How do taxes and benefits affect individuals in different circumstances? The results presented in this publication highlight the income consequences of existing tax and transfer regimes in a wide range of different family circumstances and employment situations. These types of data are essential for monitoring purposes as well as for analysing a large number of different social and fiscal policy issues such as the adequacy of incomes secured by social transfers or the financial context of individuals’ employment or family choices. The structure of the publication reflects the variety of different potential uses. The objective is to provide statistical information that is transparent and reconcilable across countries without restricting its applicability to particular policy issues. While the publication does not have an explicit policy focus, the results have direct implications for a number of current policy topics. Three of them are discussed briefly in turn.
Social safety-nets and income poverty Limiting the extent and duration of poverty is a central aim of many parts of benefit systems across OECD countries. Minimum income schemes provide benefits of last resort to individuals and families not able to support themselves financially. In addition, social assistance and other means-tested benefit payments now assume a more central role as transitory income sources. In recent years, there has been an increase in the number of workers in “atypical”, temporary or precarious employment in OECD countries. For these individuals, employment durations are shorter, transitions into and out of work more frequent and coverage by social insurance benefits can be less universal as a result. Where these patterns are observed, social safety-nets are needed to ensure sufficient family resources during low-income spells when employment is either not available or earnings are insufficient. At the same time, conditions for receiving these benefits need to facilitate the return to self-sufficiency for benefit recipients, and supporting policies are needed to overcome barriers to employment. Increasingly, employment-oriented social policies are being used to improve both the likelihood of finding employment and the financial payoff from it. Well-designed minimum income benefits are therefore essential elements of a balanced approach to raising employment levels while pursuing wider social objectives. While poverty reduction is the primary aim of social assistance schemes, the data in this publication show that, in a number of “typical” family circumstances, these benefits fail to prevent income-poverty measured relative to the population at large. This begs the question as to what is meant by “poverty”. Even leaving aside debates about whether “poverty” is related only to income levels in a particular period, countries will have different traditions regarding the income cut-offs that are commonly referred to as “poverty lines”. By comparing the generosity of benefits using a similar definition of poverty across all countries, this publication provides a comparative perspective on the operation and adequacy of benefit systems. In the majority of OECD countries, benefits of last resort are generally set below the resulting poverty thresholds. Even in those countries where benefit entitlements can potentially lift incomes close to these poverty lines, overall entitlements depend critically on the level of housing costs that qualify for housing-related cash support. Two countries (Greece and Italy) do not provide any general entitlement to minimum income benefits
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
11
EXECUTIVE SUMMARY
while in a number of other countries, the incomes of families who are entirely dependent on social assistance benefits are found to be very low (close to or below 20% of median household incomes). In about half the countries considered, poverty gaps are found to be greater for benefit recipients with children than for otherwise similar childless families.
Overcoming benefit dependency – and poverty Taxes on employment incomes and benefits that are reduced as individuals move into work lessen the financial reward from employment. This is particularly problematic in the case of low-income individuals who can thus be trapped in situations of poverty and benefit dependency – reducing their future employment prospects and increasing poverty as well as the burden on social support systems. The structure of taxes and benefits affecting low-income households is very different across countries and family circumstances. As discussed above, across OECD countries, income from market activities or from benefits other than social assistance is needed to keep families out of poverty but the work efforts required to bring family resources up to a given minimum level vary markedly. Low-wage or part-time employment is a potentially effective route out of poverty in countries allowing benefit recipients to complement benefits with in-work earnings. In addition, low levels of income taxes and, particularly, social security contributions for these types of employment increase the financial attractiveness of lowpaid jobs by increasing the part of any employment income that adds to family resources. Where low levels of earnings make a noticeable difference to family budgets, low-skilled workers and those with limited work experience will find employment to be a more feasible route out of poverty and benefit dependency. In most countries, in-work earnings required to escape income poverty are found to be around 50 to 60% of average earnings in the case of single-person households. Yet, a few countries, through a combination of low tax burdens and low benefit clawback rates for those seeking to supplement their benefit income with income from work, succeed in making even very low-wage employment, below 40% of average earnings, viable as a strategy to exit poverty. Country differences are even larger in the case of multi-person households and this is shown in Figure 1 for married couples with two children. To ensure net income above the poverty line, families in countries as diverse as Hungary, Spain, Sweden or the United States require earnings that are, relative to each country’s average earnings, up to three times as high as in Australia or New Zealand. The wages that low-skilled workers, and other groups with limited wage-earning potential, can attract depend on both market forces and institutional features of the labour market. In several countries, wages are subject to statutory minima. Comparisons based on gross levels of minimum wages, which do not take into account differences in taxes and benefits, can give misleading indications about the true value of the wage floor. They are also not sufficient for examining the income situation of low-wage employees and, thus, the effectiveness of anti-poverty measures that actively seek to promote low-wage employment among groups at risk of poverty. In the majority of countries operating minimum wages, the net incomes of minimum-wage earners are below 60% of median household incomes – one of the poverty lines chosen for the country comparisons. This is shown in Figure 2 below. In about half of those countries, even two full-time workers each earning a minimum wage do not earn enough to keep a family with two children out of poverty. However, an otherwise similar one-earner family is substantially worse off with significant poverty gaps in all but two countries. These results highlight the important role
12
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
EXECUTIVE SUMMARY
Figure 1. In several countries, above-average wages are required to escape poverty Earnings required for income above the poverty line, in % of average production worker wage (APW), married couple with two children, 2001 120
100
80
60
40
20
A
N HU
P ES
US
C SW E
PR T
GR
N
A
E
D NO R
NL
FI
FR
N
CH
T
L
K
CA
DN
AU
L
IR
E CZ
PO
L
IT A GB R
L
U
BE
DE
NZ
AU
S
0
1. It is assumed that there is only one earner per family. Results are shown in relation to the “60% of median income” poverty threshold. The selection of countries is limited by the availability of recent income data required for computing these poverty lines. Source: OECD Tax-Benefit Models, and calculations based on Förster, M.F. and M. Mira d’Ercole (2004), “Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s”, OECD Social, Employment and Migration Working Paper, OECD, Paris, forthcoming.
of measures, such as the provision of affordable childcare, that promote employment for both parents – particularly in the case of families where all adults have limited earnings potential.
Keeping unemployment spells short In countries operating earnings-related unemployment insurance schemes, the initial phase of unemployment is, compared to long-term benefit dependency, considerably less likely to cause severe financial hardship. To prevent short spells of unemployment from developing into situations of continued worklessness and in order to promote the stability of future employment, it is essential that benefit payments are accompanied by active jobsearch assistance that takes into account the situation and needs of job-seekers. In addition, ensuring job-seekers’ genuine participation in job-search activities requires financial incentives for doing so. Different measures to “make work pay” have been adopted across countries or have been announced recently. Their effect on the financial reward from work can be monitored using a number of different work-incentive indicators. One such indicator measures the part of in-work earning that is, upon entering employment, “taxed away” by the combined effect of higher taxes and lower benefits. For an unemployed person re-entering work, this “tax on re-employment” is determined by the amount of unemployment and other social
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
13
EXECUTIVE SUMMARY
Figure 2. Minimum wages and family incomes: employment of both parents is essential to avoid poverty Net incomes of married couples with two children, 2001, in % of median household incomes1 One full-time minimum-wage earner
Two full-time minimum-wage earners
100 90
Three different poverty thresholds
80 70 60 50 40 30 20 10
S AU
R GB
L PO
L BE
E CZ
L NZ
L IR
PR T
N CA
A FR
D NL
A US
N HU
C GR
ES
P
0
1. Horizontal lines show different poverty thresholds, defined as 40, 50 and 60% of median household income. Only countries where statutory minimum wages are in place are considered. Source: OECD Tax-Benefit Models, OECD Minimum Wage database and calculations based on Förster, M.F. and M. Mira d’Ercole (2004), “Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s”, OECD Social, Employment and Migration Working Paper, OECD, Paris, forthcoming (available at www.oecd.org/els/workingpapers).
benefits that are lost as well as the tax burden on in-work earnings. The part of employment income that effectively ends up adding to families’ incomes varies enormously across countries and can be prohibitively small, pointing towards very limited financial gains from employment. In particular, incentives to accept employment are often insufficient if prospective wages are below those earned in a previous job. This is illustrated in Figure 3 which shows the “tax on re-employment” for somebody who has recently become unemployed and had previously earned an average wage. In several cases, effective tax rates are very high and sometimes exceed 100%: for unemployed individuals who have previously earned an average wage, the net incomes gained from part-time employment are, in these cases, smaller than the loss of out-of-work benefits. While job-search activities need to focus on finding stable employment that provides an appropriate match between employee and job vacancy and also offers wages comparable to those earned previously, excessive work disincentives associated with lower-paid jobs are a major concern. Lower-paid work or part-time employment can, depending on the nature of the job, offer valuable experience and continuing contacts with employers. It can also serve as a source of income supplementing transfer payments and can thus reduce risks of unemployment-related poverty as well as the financial burden on social protection systems. Measures to “make work pay” range from a one-sided tightening of benefit entitlements and eligibility rules to more comprehensive approaches addressing the
14
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
EXECUTIVE SUMMARY
Figure 3. Well-designed “make work pay” policies can facilitate a quick return to work Percentage of gross earnings that is “taxed away” when moving back into employment, married couple with two children, 20021 Transition into full-time work; earnings = previous earnings
Transition into part-time work; earnings = 2/3 of previous earnings
Transition into part-time work; earnings = 1/2 of previous earnings 140
120
100
80
60
40
20
T
P CH E SW E LU X DE U
ES
PR
BE L NL D CA N
L
A SV K AU T FI N FR A DN K NO R
IT
IS
N CZ E US A
JP
IR L PO L HU N
NZ L KO R AU S GB R GR C
0
1. The jobless person is assumed to have earned an average wage in the previous job and to receive initial rates of unemployment benefits (following any waiting period). The spouse is full-time employed in a low-paid job earning 2/3 of the average wage. Children are aged 4 and 6. Source: OECD Tax-Benefit Models.
individual situation of job-seekers and taking into account all relevant interactions between policy instruments that may affect the financial context of employment transitions. As unemployment benefit ceilings remain very high in some countries operating earning-related schemes, there is scope for reviewing the balance of resources spent on low and high unemployment benefits. Yet the feasibility of further across-theboard cuts of benefit entitlements is generally limited by the need to prevent widespread poverty among the unemployed. One alternative strategy that does not reduce incomes of the unemployed is to review the mechanisms of phasing out or stopping benefit payments once an unemployed person takes up employment. For instance, a few countries (Japan, Korea) pay re-employment bonuses as a percentage of any “remaining” unemployment benefits that unemployed people would, for a given maximum period, have been entitled to had they remained unemployed. Unemployment insurance benefits in Switzerland are, during a limited period, paid as a proportion of the difference between previous and current earnings and therefore enable benefit recipients to improve their income situation by taking up lowerpaid jobs on a temporary basis. Finally, a more gradual benefit phase-out (e.g. in proportion to the number of hours worked above an allowable limit) is also preferable to a system whereby the entire amount of benefits is lost once working hours or earnings exceed a given threshold.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
15
EXECUTIVE SUMMARY
A number of countries have recently introduced or refined employment-conditional benefits, to supplement in-work incomes. These in-work benefits are often specifically targeted towards low-wage employees and represent a potentially powerful instrument for improving the incomes and work incentives for particularly vulnerable groups without compromising the poverty-reducing capacities of existing out-of-work benefits. A number of studies have demonstrated that the effectiveness of these measures very much depends on specific implementation details as well as the resources devoted to them. The recent adoption of these measures in a number of countries as well as their continued evolution illustrates the importance and usefulness of monitoring tax-benefit systems and providing detailed information that permits comparing relevant reform experiences across countries.
16
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ISBN 92-64-01515-9 Benefits and Wages: OECD Indicators 2004 Edition © OECD 2004
Chapter 1
Elements of Tax-benefit Systems
Introduction 1. Overview of key benefits 2. Main features of social transfers a) Unemployment insurance b) Unemployment assistance c) Social assistance d) Benefits available to the young unemployed e) Housing benefits f) Family benefits g) Childcare benefits h) Lone-parent benefits i) Employment-conditional benefits 3. Tax treatment of benefits and interactions between tax-benefit instruments
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
17
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
Introduction Expenditure levels, such as those shown in the previous chapter, are useful indicators of the overall importance of different types of transfer. At the same time, monetary totals are not sufficient for understanding the net effects of taxes and transfers on individual households’ incomes. This chapter provides an overview of the institutional features of tax-benefit systems including the eligibility and entitlement rules governing different types of social benefits, their tax treatment and the way in which part-time or casual earnings influence benefit amounts. The information presented here sheds light on the structure of benefit systems and provides a background for understanding the quantitative effects of taxes and benefits on household incomes discussed in later chapters. More detailed descriptions on countries’ tax-benefit systems can be found in country chapters available on the Internet at www.oecd.org/els/social/workincentives. Following an overview of the key benefits in Section 1, the second Section compares eligibility and entitlement rules across countries and types of benefit. As in the remainder of this volume, the focus is on cash benefits available to able-bodied individuals of working age and their families.1 Section 3 examines the tax treatment of benefits and discusses how interactions between different types of benefit and taxes can reinforce or weaken the policy effectiveness of individual instruments.
1. Overview of key benefits Table 1.1 provides an overview of benefits that exist in the countries covered in this report. Most countries operate insurance benefit schemes that offer temporary compensation for lost earnings if certain conditions are met by the claimant (unemployment insurance or UI). As this benefit type is based on insurance principles, claimants must have contributed to the insurance fund over certain periods in order to be eligible for the benefit. Claimants must be actively looking for work and, in most cases, unemployment has to be involuntary. As earnings replacement benefits, UI benefits are taxable and/or subject to social security contributions in most countries but are taxexempt in others. Unemployment insurance is limited in duration in most countries. For unemployed persons whose entitlement to UI benefits has expired or whose work record is insufficient to make them eligible in the first place, financial assistance exists in two forms: ●
18
Unemployment assistance (UA). Such payments may also be conditional on employment record and frequently have a limited duration. As UI benefits, they are only available to those actively looking for work. While both UA and UI benefit schemes are often financed by contributions to unemployment insurance funds, the main purpose of UA benefits is the provision of a minimum level of resources during unemployment rather than the insurance against lost earnings. As a result, UA benefits tend to be lower and less directly dependent on previous earnings. They are reduced if other incomes are
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.1. Types of social transfers1 2002 Unemployment
Family benefits (FB)
Social assistance (SA)
Housing benefits
[3]
[4]
Universal [5]
Means-tested [6]
Lone-parent benefits2
Childcare benefits (CCB) Employment conditional benefits Non-parental care Parental care [8] [9] [10]
Australia Austria Belgium Canada3 Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland
– Y Y Y Y Y Y Y Y Y Y Y Y
Y Y – – – – Y Y Y Y – – Y
Y Y Y Y Y Y Y Y Y – Y Y Y
Y SA – SA Y Y Y Y Y Y Y Y SA
– Y Y – – Y Y Y Y Y Y Y Y
Y – – Y Y – – Y – – – Y –
Y – – Y – FB FB Y T – FB Y Y
Y – Y Y – – Y Y Y – – – Y
Y – Y Y – Y – Y Y – – – –
Y Y – – Y – Y Y Y – Y – Y
Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom United States
Y Y Y Y Y – Y Y Y Y Y Y Y Y Y
– – – – Y Y – – Y – Y Y – Y –
4
Y Y Y Y – Y Y Y Y Y Y Y Y Y
Y SA SA SA Y Y Y Y – Y – Y SA Y –
– – – Y Y – Y – – Y – Y Y Y –
Y Y – – – Y – Y Y Y Y – – – Y
– Y Y T T Y Y CCB T – T Y – – T
– Y – – Y Y – – – – – – – Y Y
– – Y Y Y – Y – – – – – – Y Y
– – – Y – – – Y – Y – – – – –
[7]
1. “Y” indicates that the specific benefit or tax credit exists in this country. Where no specific housing or lone-parent benefit is available, “SA” (social assistance), “FB” (family benefit) or “CCB” (childcare benefit) indicate that housing or lone-parent specific provisions exist as part of these schemes. 2. “T” indicates different tax provisions or specific tax allowances for lone parents where no other benefits are available. 3. At a federal level, a refundable child tax credit, Canada Child Tax Benefit (CCTB), serves as family benefits. 4. Social assistance (reddito minimo di inserimento) was at an experimental level and concerned only 305 municipalities (out of more than 8 000) in 2002. It is not taken into account in the taxbenefit calculations shown in Chapters 2 and 3. Source: OECD.
19
ELEMENTS OF TAX-BENEFIT SYSTEMS
Assistance [2]
1.
Insurance [1]
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
available although means-testing tends to be less comprehensive than for minimum income or social assistance benefits. ●
Those who qualify for neither UI nor UA may receive general minimum income or social assistance (SA) benefits with central or local governments acting as providers of last resort to secure a minimum standard of living. The main eligibility criteria relate to available resources and entitlements do not depend specifically on claimants’ work history. Income and asset tests can be very restrictive and take into account the resources of other persons living with the benefit claimant. SA benefits often “top-up” income from other sources so as to ensure that the family as a whole achieves a minimum standard of living. Given that larger families require more resources to secure a given minimum standard, such top-ups are most likely when the benefit claimant has dependent family members.
Households with high housing costs and low income may qualify for housing benefits. These cash-benefits may be administered as part of the SA programme or may be available as separate transfer payments.2 The presence of dependent children gives rise to family benefit (FB) entitlements in most countries (the definition of what constitutes a “dependent child” varies considerably across countries). These are often “universal” (i.e. the amount paid per child does not depend on family income). Childcare benefits (CCB) can help parents who are working or looking for work to cover childcare costs. Countries that do not have centrally administered childcare benefit schemes may have locally based schemes. Alternatively, care for children at home may be encouraged by means of “non-activity” tested benefits to compensate the loss of earnings of the person who stays at home. Most countries provide special benefits for lone parents either in the form of additions to regular family or childcare benefits or as separate programmes. Employment-conditional (or “in-work”, IW) benefits are available to people entering paid employment, and sometimes to people already working but having low household incomes. Just under half of all countries covered in this report provide such benefits to increase financial incentives to work and/or to reduce the risk of falling into poverty for families with at least one person in employment.
2. Main features of social transfers This section presents a more detailed discussion of the policy rules governing the different types of social benefit listed above. All data refer to 2002 unless otherwise mentioned. It should be noted that the distinction between different types of benefit is often not clear-cut. Different benefits may have similar purposes while one particular type of benefit can be designed to address a number of different contingencies. While this section proposes criteria for distinguishing between different programmes, it is clear that no particular categorisation will be ideal for all possible uses of cross-country comparisons.
a) Unemployment insurance Table 1.2 shows information concerning the calculation of UI benefits.3 These benefits exist in all but two of the countries covered here. In Denmark, unemployment insurance membership (and contribution to the insurance fund) is voluntary, but covers most employees. In Finland and Sweden, insurance fund membership is also optional but non-
20
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.2. Unemployment insurance benefits In 2002, for a 40-year-old single worker without children, with a 22-year employment record1 Employment (E) Insurance is and voluntary (V) or contribution (C) compulsory (C) conditions for employees [1] [2]
Minimum benefit3
Waiting period (days)
Maximum duration (months)
Initial payment rate (% of earnings base)
Earnings base2
[3]
[4]
[5]
[6]
Maximum benefit3
National currency
% of APW
National currency
% of APW
Casual employment
Additions for dependent family members
[7]
[8]
[9]
[10]
[11]
[12]
–
–
–
–
–
–
–
–
–
–
–
E + C: 1 year in 2.
C (above an earnings limit)
0
9
55
Net
–
–
13 301
56
No reduction up to EUR 3 618, total loss above. Exception: benefit reduced when < 16 days/ month and net earning less than benefit.
Each dependant: EUR 354.
Belgium
E + C: 468 days in 27 months.
C
0
Unlimited
60 (50 after 1 year).
Gross
8 499
28 (25)
11 831
39
Maximum: supplement of EUR 2 214 for certain types of social employment, limit of EUR 3 370 for artistic employment.
If dependants, minimum benefit is increased to EUR 10 118.
Canada4
E + C: 630 hours in 1 year.
C
14
9
55
Gross
–
–
21 476
55
Up to 25% of benefits or CAD 2 600, whichever is higher.
Family supplements depend on income plus age and number of children.
Czech Republic
E: 12 months in 3 years, C: 6 months in 3 years.
C
7
6
50 (40 after 3 months).
Net
–
–
123 000
60 (64)
Any income from work cancels all unemployment insurance entitlements.
UI maximum benefit level increases depending on number and age of children.
Denmark
E: 52 weeks in 3 years, C: membership fee.
V
0
48
90
Gross less 8% SSC.
157 044
52
Wages reduce benefit by same amount.
–
Finland
E: 43 weeks in 2 years, C: 10 months.
V
7
23
Working hours < 75% of full time. Benefit reduced by 50% of gross income. Benefit plus income < 90% of reference earnings.
Supplements: EUR 1 112, 1 633, 2 105 for 1, 2 and 3 or more children respectively.
France
C: 4 months in 18.
C
8
30
Basic benefit Gross (excluding (21% of APW) additional holiday plus up to 45% pay) less soc. sec. of earnings exceeding contributions. basic benefit. 57-75
Gross
Depends on employment record.
–
–
8 848
40
None
64 802
295
Income < 70% of reference – earnings, hours worked/month < 136 and duration < 18 months. Benefit reduced depending on income ratio to reference earnings.
21
ELEMENTS OF TAX-BENEFIT SYSTEMS
–
1.
Australia Austria
Employment (E) Insurance is and voluntary (V) or contribution (C) compulsory (C) conditions for employees [1] [2]
Minimum benefit3
Waiting period (days)
Maximum duration (months)
Initial payment rate (% of earnings base)
Earnings base2
[3]
[4]
[5]
Maximum benefit3
National currency
% of APW
National currency
% of APW
Casual employment
Additions for dependent family members
[6]
[7]
[8]
[9]
[10]
[11]
[12]
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Germany
E: 12 months, C: 12 months in 3 years.
C
0
12
60
Net
–
–
33 840
103 (99)
Hours worked < 15/week, income Rate increases by < EUR 400/month. Total loss 7 percentage points above limits, no reduction. if children.
Greece
E + C: 125 days in 14 months or 200 days in 2 years.
C
6
12
40-50
Gross
3 195
28
3 357
29
Benefit withdrawn if earnings. Exceptions exist for casual and part time work.
Benefit increased by 10% for each.
Hungary
E + C: 200 days in 4 years.
C
0
9
65
Gross average earnings in previous 4 quarters.
217 080
20
434 160
40
For short term (< 90 days) employment benefit is suspended. For "employment booklet" programme the benefit is reduced by amount earned.
–
Iceland
E + C: 10 weeks.
C
0
60
Fixed amount (34% of average production worker).
–
–
–
–
–
For occasional employment < 2 days, benefit is reduced proportionally.
ISK 35 360 per child.
Ireland5
C: 39 weeks in 1 year (or 26 “reckonable” contributions in 2 years).
C
3
15
Fixed amount (24% of average production worker).
–
–
–
–
–
Benefit is not paid for any day or partial day of employment. Earnings are not assessed.
Supplements of EUR 1 110 per child, EUR 5 203 per adult.
Italy6
C: 52 weeks in 2 years.
C
7
6
40
Average gross earnings in previous 3 months.
–
–
11 194
52
No benefits if receiving earnings from employment except for CIG scheme.
–
Japan
E + C: 6 months in 1 year (at least 14 days each month).
C
7
10
60-80
Gross earnings excluding bonuses paid during last 6 months.
–
–
3 853 440
91
No benefits if employed.
–
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
22
Table 1.2. Unemployment insurance benefits (cont.) In 2002, for a 40-year-old single worker without children, with a 22-year employment record1
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.2. Unemployment insurance benefits (cont.) In 2002, for a 40-year-old single worker without children, with a 22-year employment record1 Employment (E) Insurance is and voluntary (V) or contribution (C) compulsory (C) conditions for employees [1] [2]
Minimum benefit3
Waiting period (days)
Maximum duration (months)
Initial payment rate (% of earnings base)
Earnings base2
[3]
[4]
[5]
C
14
7
Luxembourg E + C: 26 weeks in 1 year.
C
0
Netherlands E: 26 weeks in 39, C: 52 days in 4 of 5 years.
C
0
Korea
E + C: 6 months in 18.
Maximum benefit3
National currency
% of APW
National currency
% of APW
Casual employment
Additions for dependent family members
[6]
[7]
[8]
[9]
[10]
[11]
[12]
50
Gross earnings paid in previous 3 months.
5 978 700
26
12 600 000
55 (62)
12
80
Gross
–
–
35 707
18
70
Gross
11 175
37
41 340
If income divided by number of benefit days entitled is over 60% of unemployment insurance benefit then excess deducted.
–
114
Reduced if earnings > 10% of maximum benefit due.
Rate increases by 5 percentage points if children.
135
If < 5 hours/week, benefit reduced by 70% of gross earnings. If > 5 hours/week, proportional reduction.
Supplementary benefits for low-income households to bring income up to a minimum guaranteed level.
–
–
–
–
–
–
–
–
–
–
–
Norway
E + C: Earnings above a minimum level.7
C
3
36
62
Gross
54 170
19
325 020
111
–
NOK 4 420 per child.
Poland
E + C: 365 days in 18 months.
C
7
18
Fixed amount (26% of average production worker).8
–
–
–
–
–
Gross income disregard of up to PLN 4 560 (half the minimum pay).
–
Portugal
E + C: 540 days in 2 years.
C
0
24
65
Gross plus bonuses.
4 176
50
12 528
149
If income < UI benefit and hours 25 < 75%, unemployment insurance benefit = (UI benefit – income) * 1.25
–
Slovak Republic
E + C: 24 months in 3 years.
C
0
9
50 (45 after 3 months).
Gross
–
–
70 740
52
Any income from work cancels unemployment insurance entitlement.
–
Spain
C: 360 days in 6 years.
C
0
24
70 (60 after 6 months).
Gross
4 643
28
10 524
64
Benefits are reduced in proportion to hours worked.
Increased minima and maxima if children.
Sweden
E: 6 months in last year, C: 12 months.
V
5
14
80
Gross
83 200
35 (30)
181 800
76 (70)
Benefits are reduced in proportion to days worked.
–
1.
New Zealand –
ELEMENTS OF TAX-BENEFIT SYSTEMS
23
Employment (E) Insurance is and voluntary (V) or contribution (C) compulsory (C) conditions for employees [1] [2]
Minimum benefit3
Waiting period (days)
Maximum duration (months)
Initial payment rate (% of earnings base)
Earnings base2
[3]
[4]
[5]
Maximum benefit3
National currency
% of APW
National currency
% of APW
Casual employment
Additions for dependent family members
[6]
[7]
[8]
[9]
[10]
[11]
[12]
Switzerland E + C: 6 months in 2 years.
C
5
24
70
Gross
–
–
74 760
117
“Compensation payment for Rate increases by intermediate earnings”: benefits 10 percentage points are equal to 70% of the difference if children or low income. between insured earnings and current earnings.
United Kingdom
C: 2 years.
C
3
6
Fixed amount (14% of average production worker).
–
–
–
–
–
Income > GBP 260 (520 for – couples) reduces benefit by same amount.
United States
E: 20 weeks (plus minimum earnings requirement).
C
0
6
53
Gross
4 212
13
15 600
48
Earnings smaller than gross benefit are deducted at a 50% rate; 100% reduction with that part of earnings which exceeds gross benefit.
USD 312 for each dependant.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
1. All benefit amounts are shown on an annualised basis. “–” information not available or not applicable. 2. Gross = gross employment income; SSC = (employee) social security contributions; Net = Gross minus income taxes minus SSC. 3. Benefit amounts are shown for a person with previous full time employment. If the per cent of average production worker (APW) value for 2001 differs by more than +/–2 from the 2002 percentage, then the 2001 value is shown in parentheses. 4. The duration of Employment Insurance (EI) payments depends on the unemployment rate in the relevant EI region. The 40 week duration shown here relates to an unemployment rate of 7.1% which is the 2002 average across relevant EI regions in Ontario. 5. Where weekly earnings while in employment were below certain amounts, reduced rates of payment are made. If dependent adult is employed, supplement is reduced or suppressed depending on income level. 6. For employees with a temporary reduction of working hours there is also the CIG (Cassa Integrazione Generale) scheme which pays benefits of 80% of average gross earnings for non-worked hours. 7. At least 23% of APW during the preceding calendar year or 19% of APW averaged over three years. 8. The basic benefit amount is adjusted with the length of the employment record: 80% for under 5 years, 100% for 5-20 years and 120% for over 20 years. Source: OECD.
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
24
Table 1.2. Unemployment insurance benefits (cont.) In 2002, for a 40-year-old single worker without children, with a 22-year employment record1
1.
ELEMENTS OF TAX-BENEFIT SYSTEMS
members are entitled to unemployment assistance. In Finland, they may also be entitled to basic (non-earnings related) unemployment insurance benefits.4 The insurance mechanism is reflected in the contribution requirements (which exist in all countries operating UI benefits) as well as the dependence of benefit amounts on previous earnings. Benefits in Iceland, Ireland, Poland and United Kingdom are, however, provided as flat amounts. As a result, only a small part of high-income employees’ earnings is replaced by UI benefits in the event of unemployment. While flat-amount benefits can in principle also give rise to very high replacement rates for those with very low earnings, the relevant benefit amounts range from only 14% of an average production worker wage (APW)5 in the United Kingdom to a maximum of 34% of APW in Iceland. Gross benefit amounts in these countries are therefore likely to be substantially lower than full-time wages, even for low-paid employees. In countries where benefits are determined in relation to previous in-work earnings, the relevant percentages (column 5 of Table 1.2) only apply within given earnings ranges so that replacement rates for the highest-earning employees are lower. The earnings intervals where benefits are proportional to previous wages vary greatly across countries, however. In Greece, benefit amounts vary only within a narrow range so that the benefit, while nominally earnings-related, largely operates like a flat-rate benefit. Maximum UI benefits in France can be as high as three times average earnings. There is no upper limit for earnings related benefits in Finland. Payment rates and maxima/minima are, however, not sufficient for comparing the relative generosity of UI benefits. In the case of earnings-related benefits, the definition of the earnings base is a crucial factor. In most countries, benefits are computed in relation to average earnings over a longer period. Perhaps more importantly, the payment rate can apply to gross earnings (e.g. Hungary or Japan), net earnings (e.g. Austria or Germany) or some intermediate definition (Denmark, Finland). Compared across countries, lower payment rates will therefore not necessarily result in lower benefit levels. Finally, the tax treatment of UI benefits can have a large influence on the net income available to an unemployed person. While gross benefits are frequently too low to cause substantial income tax (IT) burdens (even if they are taxable in principle), social security contributions (SSC) payable on benefits can be considerable (see Section 3 below for more details). Chapters 2 and 3 will come back to the various determinants of UI benefit levels and show their net effects using detailed model calculations. Required work/contribution periods for benefit claimants are mostly between 6 and 12 months but are markedly shorter in France and Iceland and longer in Belgium, Portugal, Slovak Republic and United Kingdom. For an unemployed person with a long employment history (22 years in the table), the maximum benefit duration is longest in Denmark, Iceland, Norway, Portugal, Spain and Switzerland and shortest (around six months) in the Czech Republic, Italy, Korea, United Kingdom and United States. The maximum duration may depend on: the employment or contribution record (Belgium, Finland, Greece, Netherlands, Slovak Republic, Spain and Switzerland), age (Portugal and Sweden), or a combination of the two (Austria, France, Germany, Japan and Korea) or can be fixed. In Canada, benefit durations are adjusted based on local unemployment rates, while in Norway and the United States durations depend on the level of previous earnings. In Belgium, payment rates can decrease over time from 60% to 50% for those with no
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
25
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
dependants and in the Czech Republic, Slovak Republic and Spain, payment rates decrease for all family situations. In the majority of countries, benefits are not available immediately upon becoming unemployed but only after waiting periods of between 1-2 weeks. These built-in delays reduce the income available during the initial phase of unemployment and, at the same time, the number of benefit claims for very short unemployment spells (e.g. due to transitions between jobs).
b) Unemployment assistance Unemployment assistance (UA) generally succeeds unemployment insurance once the latter has been exhausted (“UI” in column 1 of Table 1.3). In Australia and New Zealand, where UI does not exist, unemployed people are entitled to UA benefits which share characteristics of both UA and SA for an unlimited duration. Claimants do not need to have an employment record to qualify for benefits but are required to look for work. In some countries, people who do not qualify for UI at all (but are actively looking for work) can claim UA benefits without any employment record conditions (Finland, Ireland and United Kingdom) or under the condition of a minimum period of previous employment (Greece, Portugal, Spain, Sweden). Several countries allow UA benefit receipt for unemployed people with small amounts of employment incomes. Once these exceed specific limits (column 8 of Table 1.3), benefits are either stopped completely (e.g. in Austria) or reduced. In the latter case, the withdrawal rates range from 50% (Finland) to 100% (France, United Kingdom). In most cases, incomes from sources other than employment also reduce benefit entitlements. With the exception of the Netherlands and Sweden, UA benefit levels are also affected by the income of other family members, which can severely reduce the incentives for spouses of long-term unemployed persons to maintain or look for employment. In Ireland and the United Kingdom, maximum UA amounts (columns 5 and 6) are equal to UI benefits but are reduced by incomes from other sources. In Finland, Netherlands and Sweden, maximum UA is similar to minimum UI benefit amounts.
c) Social assistance People without resources can, in most OECD countries, fall back on governmentprovided minimum income financial assistance. Depending on their implementation, these last-resort safety nets can have a major impact on both the extent and the intensity of financial poverty and, by providing a minimum level of resources, may support independence from family support networks where they exist. At the same time, the conditionality on resources, including employment income, reduces any short-term gains of attempts to escape poverty by pursuing other income sources. Means-tests can also have adverse effects on other behavioural dimensions, including the decision of entitled persons whether or not to claim the benefit. These issues have received considerable attention (Hernanz et al., 2004; Standing, 2003) and undesired effects of minimum income schemes have partly been addressed by seeking to improve the design and implementation of these transfer programmes. For instance, in order to preserve some financial gain from taking up or maintaining low-paid employment, some income is disregarded when assessing the income on which SA benefit entitlements are based.
26
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.3. Unemployment assistance benefits In 2002, for a 40-year-old single worker without children, with a 22-year employment record1 Employment Waiting period record in months2 (days)
Maximum benefit3 Duration (months)
Payment rate
Tests on Limits and disregards
Additions for dependent family members
[8]
[9]
National currency [5]
% of APW [6]
9 594
20
Yes
Family
Disregard of AUD 1 612, 50% withdrawal up to AUD 3 692, 70% above. Couple: no UA for higher earner once income above AUD 14 560, spouse’s UA reduced by 70% for earnings above this amount.
Parenting payment for dependent children (generally replaces UA). Partner allowance.
92% of basic 12 237 UI benefit4
51
Yes
Family
No UA if earnings above EUR 3 618 (exception if time worked is less than 16 days and earnings less than maximum UI, then UA is reduced). UA reduced if spouse's earnings above EUR 5 220. Limit increased by EUR 2 610 for each child.
Each dependant: EUR 354.
Assets
Income
[1]
[2]
[3]
[4]
Australia
–
7
No limit
Fixed amount
Austria
UI
–
No limit
Finland
–
5
No limit
Fixed amount
5 915
21
–
Family
Limits can be suppressed under certain conditions. Spouse’s income excluded if less EUR 1 112, 1 633 and 2 105 for 1, 2 than EUR 2 832. Disregards of EUR 3 036, 10 176 and 1 272 for single, couple and and 3+ children respectively. dependent child respectively. UA reduced (by 75% for a single, 50% for a couple) for gross earnings exceeding disregard; also reduced for earnings from part-time work.
France
UI and 60 in last 120
–
6 months (renewable)
–
4 810
22
–
Family
Disregard for earnings less than EUR 6 413 then 1/1 reduction up to EUR 11 222; for couple limits are EUR 12 826 and 17 635.
UI
–
No limit
53% of net earnings
28 620
87
–
Family
Spouse’s income disregard is equal to the UA benefit they would receive if unemployed. If children, rate raised by 4 percentage points.
Germany
[7]
Some for older workers depending on age and employment record.
Greece
UI or 2
–
12
Fixed amount 2 400
21
–
Family
Income less than EUR 5 000. UA is zero if there are any earnings.
Ireland
–
3
No limit
Fixed amount 6 178
24
Yes
Family
If working less than 3 days/week UA is reduced by 60% of average net weekly earnings. EUR 4 098 per adult, EUR 874 per child.
Netherlands
UI
–
24
Fixed amount
11 175
37
–
New Zealand
–
7-70
No limit
Fixed amount
9 637
24
–
Family
70% reduction in net benefit If gross income is less than NZD 4 160.
Rates depend on family type.
Portugal
UI or 6 in last 125
–
12 (after UI) or 24
Fixed amount
3 341
40
–
Family
Income less than EUR 3 341/person. UA is zero if there are any earnings.
EUR 835 if dependants.
Spain
UI or 3-6
–
18
Fixed amount
3 980
24
–
Family
Income less than EUR 3 980/person. No disregards.
Older workers with dependants: maximum EUR 2 653 for 6 months.
Sweden
6 or recent graduate
5
14
Fixed amount
83 200
35 (30)
–
United Kingdom
–
–
No limit
Fixed amount
2 805
14
Yes
Individual If working less than 5 hours/week, benefit is reduced by 70% of gross earnings. Proportional reduction if working longer hours.
Individual Benefit not paid for days worked. Proportionally lower after part-time work.
–
–
UI: unemployment insurance; UA: unemployment assistance. 1. All benefit amounts are shown on an annualised basis. “–” information not available or not applicable. 2. UI = Exhaustion of unemployment insurance is required to qualify for unemployment assistance. 3. If the per cent of APW value for 2001 differs by more than +/–2 from the 2002 percentage, then the 2001 value is shown in parentheses. 4. Rate can be increased to 95% for low unemployment insurance levels. 5. There is no employment condition for a first-time job seeker with dependants. Source: OECD.
27
ELEMENTS OF TAX-BENEFIT SYSTEMS
Earnings disregards are GBP 260, 520 and 1 040 for single persons, couples and special GBP 1 596 for spouse, GBP 1 924 for groups (e.g. lone parents) respectively. Other forms of income reduce benefits child under age 16, plus various on a 1/1 basis. premiums.
1.
Family
–
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
However, as long as other resources reduce benefit levels, trade-offs between guaranteeing a minimum income level for those who are unable to support themselves and minimising avoidable benefit dependency will remain. SA is usually paid to the entire household and the resources of the entire household are considered for the assessment. The benefit amount available to the household as a whole is therefore affected by all household members’ income and labour market situation (and, often, assets). There is a trade-off between verifying that a family has sufficient means (“targeting”) and encouraging household members to pursue available opportunities to increase working hours or re-enter paid employment. This sub-section considers the key determinants of benefit amounts for eligible persons. The main eligibility criterion is the insufficiency of household resources. However, additional criteria often apply, including differences in the strictness of any requirements to be available and looking for work or, as in the United States, requirements to participate in employment, training or workfare activities. Perhaps more importantly, countries vary considerably in terms of how formal eligibility rules are implemented in practice. Implementation aspects may themselves be specified formally or may be characterised by benefit agencies’ or social workers’ discretion. These issues are not covered here. Detailed discussions of eligibility criteria and their implementation are provided by Behrendt (2002), OECD (1998a, 1998b, 1999), Standing (2003), Puide and Minas (2001) and Moffitt (2003). Table 1.4 presents a summary of the main features influencing SA amounts. Benefit amounts and other relevant rules often vary by region and the first column clarifies how this variation is accounted for in this study. “National rates” indicates that rates are uniform throughout the country and “national guidelines” that national rates are recommended without being strictly enforced (in which case these guidelines are adopted for the purpose of this study). Where there is regional variation in payment rates, two approaches may be followed: the national average is known and used (“national average”), or the information presented in this report relates to one particular representative region (“regionally determined”). Maximum benefit amounts for a single person (column 2) vary between 5% of APW in the United States and 36% in Luxembourg. The rates at which benefits are reduced range from initially 50% in Portugal and 75% in Canada (and for the Italian reddito minimo di inserimento experimental scheme) to 100% in most other countries. In the latter countries, considerable income or earnings disregards often exist (Denmark, Finland, Germany, Luxembourg, United Kingdom) so that relevant incomes only reduce benefit amounts on a one-for-one basis once they exceed the disregard amount (column 6). In all countries, benefit amounts depend on family size and composition. SA schemes are designed to provide the resources required to satisfy basic needs and these differ between households of different sizes and structures. Comparing the amounts paid for the first person to those granted for additional household members is therefore particularly interesting because they imply certain scales of relative financial needs of different household members. For a second adult (typically a partner or spouse) in the household, additions to the maximum benefit amount range from zero and 11% (Poland and Spain) to 100% (Denmark and Portugal) of the respective single rates while for children, the range is zero and 8% (Hungary, Iceland, Poland, Luxembourg and Netherlands) to more than 70% (Czech Republic, Finland, Germany, Sweden, United Kingdom and United States). It is important to note, however, that maximum benefit amounts alone do not allow us to fully assess the relative generosity of countries’ SA schemes. In addition to the
28
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.4. Social assistance benefits1 2002 Maximum amounts (in % of APW)2 Determination of rates
Head of household [2]
[1]
Spouse/ partner [3]
Means-test
Per child
Other
Disregard
[4]
[5]
[6]
Benefit withdrawal [7]
Benefits excluded [8]
Topping-up of unemployment benefits is possible [9]
Australia3
–
–
–
–
–
–
–
–
Austria
National average.
19
12 (9)
6
–
None
100%
Family.
–
Belgium
National rates.
23
8
Depends on age and number of children.
4-10
–
EUR 310 (250) net income per year with (without) children.
100%
Family.
Rare.
Canada (Ontario)4
Regionally determined.
16
12
Depends on age and number of children.
4-5
–
Depends on family size.
24
17
Depends on age and number of children.
13-17
Dependant.
17
–
31
31
1st child.
Rent.
–
DKK 24 000 if part of employment scheme.
100%
–
No.
16
11
Depends on age and number of children.
9-12
Rent, health care, work related expenses.
–
20% of net earnings (maximum EUR 1 200).
100%
None.
Yes.
20
9
Of a lone parent. 1st child of a couple. 2nd child of a couple. Additional child.
9 0 5 9
–
Upon taking up employment: 100% of earnings for 3 months, then 50% for 9-12 months.
100%
Specific family and housing benefits.
–
11
9
Depends on age of child.
9 4 2-11
Earnings of EUR 1 752.
100%
Child-raising allowance, inwork benefit Mainzer Modell.
–
Czech Republic5 National rates.
Finland
National average.
France
National rates.
Germany
National rates.
Greece
–
Hungary
National guidelines.
Age > 25. Age < 25.
Age > 25.
If unemployed and benefits exhausted. Age > 18.
10
–
None.
–
–
20
5-10
Adult. Lone-parent supplement. Rent and heating.
–
–
–
–
–
16
–
–
–
None.
– 100%
– None.
– No.
29
ELEMENTS OF TAX-BENEFIT SYSTEMS
National rates.
75% – (100% after 2 years)
1.
Denmark
–
2002 Maximum amounts (in % of APW)2 Determination of rates [1] Iceland (Reykjavik)
Regionally determined.
Age > 17.
Head of household [2]
Spouse/ partner [3]
31
25
Ireland
National guidelines.
24
16
Italy6
Regionally determined; experimental scheme.
16
9
Japan5 (Osaka/Tokyo)
Regionally determined.
Depends on age of family members.
24
13
Means-test Benefit withdrawal [7]
Benefits excluded [8]
None.
100%
Child support, family and rent benefits.
Per child
Other
Disregard
[4]
[5]
[6]
–
3
Depends on number of children. 1st child of a lone parent.
7-8
Depends on age and number of children.
6-7
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Depends on number of children.
Topping-up of unemployment benefits is possible [9]
Unemployed age 18-24 living at home. Funeral costs, dental bills, etc.
16
Adult dependant. Rent/mortgage interest payments.
16 –
–
100%
Family.
Rare.
–
25% of labour income.
100%
None.
–
Medical and long-term care aid. Housing costs.
4
Net earnings of at least JPY 100 080 (up to JPY 402 720 for higher earnings).
100%
–
Yes.
Medical and educational aid.
–
15% of income earned under specific programmes.
100%
None.
Yes.
–
–
13
Korea
National rates.
16
10
Luxembourg
National rates.
Netherlands
National rates.
Age > 25.
36
18
3
Supplementary adult.
10
30% of payment rate.
100%
Family.
–
Age > 22.
30
13
–
Supplement for lone parent.
9
None.
100%
Family and housing.
–
New Zealand3
–
–
–
Norway
Social worker discretion, national guidelines adjusted regionally.
30
7
–
–
–
–
–
16 4
–
None.
100%
None.
–
Poland
National rates, social worker discretion for periodic assistance.
Permanent benefit.
21
–
–
Periodic assistance; temporary benefit depending on family situation.
–
None.
100%
–
Portugal
National rates.
Age > 17.
20
20
10
Adult.
14
Upon taking up employment: 50% of earnings for 1 year.
100%
Family and housing.
1st child of a couple. 1st child of lone parent.
9-10
4
–
Rare.
–
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
30
Table 1.4. Social assistance benefits1 (cont.)
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.4. Social assistance benefits1 (cont.) 2002 Maximum amounts (in % of APW)2 Determination of rates [1]
Head of household [2]
Spouse/ partner [3]
Means-test
Per child
Other
Disregard
[4]
[5]
[6]
Benefit withdrawal [7]
Benefits excluded [8]
Topping-up of unemployment benefits is possible [9]
Slovak Republic National rates.
17
12
8
Adult.
12
None.
100%
–
Yes.
Spain (Madrid)
Regionally determined.
27
3
3
4th dependent person in household.
11
None.
100%
Family.
Rare.
Sweden5
National guidelines. Social worker discretion for supplements.
16
11
7-12
Medical costs, transport, child care, etc. Housing costs.
–
None.
100%
None.
Rare.
Switzerland (Zurich)
National guidelines, social worker discretion for supplements.
22
12
6
3
–
100%
–
12
Supplement from 3rd person aged > 16. Housing and basic medical costs, child care, etc.
8
10
Family premium.
4
GBP 260/520/1 040 for a single person/couple/ lone parent.
100%
Housing.
4
4
–
Occasional income up to USD 120.
100%
Earned Income Tax Credit.
United Kingdom
United States7
National rates, personal amount plus family premium. National rates.
Depends on age and number of children.
1st child of lone parent.
Age > 24 or lone parent. Single person aged 18-24.
14 11 5
–
Yes.
–
31
ELEMENTS OF TAX-BENEFIT SYSTEMS
Source: OECD.
1.
1. All amounts are shown on an annualised basis. “–” information not available or not applicable. 2. If the per cent of APW value for 2001 differs by more than +/–2 from the 2002 percentage, then the 2001 value is shown in parentheses. 3. Low-income individuals actively looking for work typically receive the means-tested unemployment assistance benefit described in Table 1.3 (unlimited duration and not subject to employment record conditions). All “Social Assistance” amounts shown for Australia and New Zealand in this publication therefore relate to means-tested unemployment benefits. In Australia, another type of benefit (Special Benefit) can be available to people in severe financial hardship, who have no other means of support and for whom no other benefit is available. Special Benefit is not considered in the results reported here. 4. Basic allowance plus shelter allowance. 5. The benefit is made up of two parts: an individual amount depending on the age of the child (and sometimes the adult) concerned; and a household amount that depends on the size of the household. 6. Social assistance (reddito minimo di inserimento) was at an experimental level and concerned only 305 municipalities (out of more than 8 000) in 2002. It is not taken into account in the taxbenefit calculations shown in Chapters 2 and 3. 7. Amounts shown for food stamps only. See Table 1.7 for information on the Temporary Assistance for Needy Families (TANF) programme.
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
differences in eligibility rules and implementation emphasised above, there is considerable variation in the interaction of SA with other parts of the tax-benefit system. One such difference concerns the assessment of claimants’ income and, in particular, which benefits and taxes are taken into account. While the definition of a household’s “means”, to be taken into account when determining benefit eligibility, tends to be comprehensive, it often excludes items such as family benefits (column 8). Low-income families with children would, for instance, see their SA entitlements reduced by the amount of family benefits in Finland, Germany or United Kingdom. In Finland and the United Kingdom, SA additions for children are, however, much larger than universal family benefit amounts. Family benefits are not deducted from SA in Austria, Belgium, Iceland, Ireland, Luxembourg, Netherlands or Spain. Interactions of benefit schemes – including SA – with other parts of the tax-benefit system are discussed in more detail in Section 3 of this chapter. In most countries, SA benefits can complement (or “top-up”) other incomes, whatever their source (column 9). However, in Denmark, low income is not a sufficient reason for eligibility. Instead, SA is conditional on the occurrence of a “social event” (unemployment, sickness, divorce, etc.). In several countries, recipients of unemployment benefits are often explicitly excluded from receiving SA.
d) Benefits available to the young unemployed All regular UI benefits and some UA benefits are subject to employment conditions preventing young unemployed adults with no or little work experience from being eligible. At the same time, unemployment rates of teenagers and young adults are substantially higher than for prime-age adults aged 25-54 (OECD, 2002a, Chapter 1). Special unemployment benefits for young unemployed people are in place in several countries in order to provide them with some degree of income security or to prevent them from dropping out of the labour force at an early stage. The latter purpose is reflected in requirements to participate in active labour market programmes targeted particularly towards young people (ibid.). Table 1.5 summarises unemployment benefits available to the young unemployed. A 20-year-old single person without employment record and actively looking for work can receive unemployment benefits in 11 countries. In Finland, Ireland and Sweden, all unemployed persons without employment record are entitled to UA and, as result, benefit amounts and rules are the same regardless of age. In Denmark, benefits for “newcomers” who have joined the (voluntary) unemployment insurance immediately after finishing their education can be as high as the minimum UI benefit received by non-newcomers with an employment record. In the remaining countries, benefit levels are generally lower than “regular” UI or UA benefit amounts. For instance, in Belgium, the allocation d’attente amounts to 50% of regular minimum UI benefits while support available to young people without unemployment record reaches about 80% of regular benefit levels in Australia, New Zealand and United Kingdom. Young people not entitled to unemployment benefits may still qualify for incomedependent social assistance (SA) or housing benefit (HB). Depending on household structure and income, these transfers may also top-up unemployment benefits. In Austria and Germany, SA is available in principle although parents of young claimants can be obliged by benefit agencies to provide for their children even if they live in different households. This contrasts with Denmark, Finland and Sweden, where rights to SA are more individualised: young adults count as separate benefit units, even if they live with
32
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
1.
ELEMENTS OF TAX-BENEFIT SYSTEMS
Table 1.5. Benefits available to the young unemployed In 2002 for a 20-year-old unemployed single person, living alone with no family responsibilities and no employment record1 Maximum unemployment benefit2
Other benefits available3
Scheme
National currency
% of APW
Age group subject to special rules
[1]
[2]
[3]
[4]
[5]
Long-term social assistance [6]
UA
7 844
16
16-20
Unlimited
Austria
–
–
–
–
Belgium
UI
4 315
14
< 30
Australia
Duration (months)
Additional information
Housing benefits [7]
[8]
Yes
Yes
Youth allowance. Reduced benefit for those living at home. Age limit extended to 24 for students.
–
Yes
–
For those aged under 25, a 26-week (instead of 1 year) employment record qualifies for unemployment insurance.
–
Yes
–
Allocation d’attente. Benefits vary by age and are accorded after a waiting period of 5-10 months. –
Canada
–
–
–
–
–
Yes
–
Czech Republic
UI
50 760
25
–
6
Yes
Yes
Time spent studying is considered as working time.
Denmark
UI
128 700
42
–
48
Reduced
Yes
Upon joining the insurance immediately after education.
Finland
UA
3 522
13
–
Unlimited
Yes
Yes
Labour Market Support for those entering labour force for the first time and living with parents only get 60% of unemployment assistance benefit.
France
–
–
–
–
–
No
–
–
Germany
–
–
–
–
–
Yes
Yes
–
UI + UA
880
8
20-29
5
–
Yes
–
Hungary
–
–
–
–
–
No
Yes
–
Iceland
–
–
–
–
–
Yes
Yes
–
Ireland
UA
6 178
24
–
Unlimited
No
No
–
Italy
–
–
–
–
–
Yes
–
Japan
–
–
–
–
–
Yes
Yes
Korea
–
–
–
–
–
Yes
–
Family members are obliged to provide support first.
Luxembourg
UI
11 109
35
< 21
12
No
–
After a 6 month waiting period; benefit is 70% of minimum wage (40% if aged under 18).
Netherlands
–
–
–
–
–
Reduced
Reduced
Benefit receipt is exceptional since parents provide financial support up to age 21.
New Zealand
Greece
Experimental social assistance scheme (see Table 1.4). –
UA
8 022
20
–
Unlimited
–
Yes
Independent Youth Benefit for age 16-17.
Norway
–
–
–
–
–
Yes
Yes
–
Poland
–
–
–
–
–
Yes
Yes
A recent school leaver in on-the-job training or adult education (in a high unemployment area) is eligible to receive 60% of basic unemployment insurance benefit.
Portugal
–
–
–
–
–
Yes
–
–
Slovak Republic
–
–
–
–
–
Yes
Yes
– –
Spain Sweden
Switzerland United Kingdom United States
–
–
–
–
–
No
–
UA
83 200
35 (30)
–
14
Yes
Yes
–
–
–
–
–
Yes
–
UA
2 220
11
18-24
Unlimited
Yes
Yes
–
–
–
–
–
Yes
–
Waiting period of 4 months if student entering labour market without previous employment record. – If duration over 6 months, participation in training is compulsory under “New Deal” programme. –
UA: unemployment assistance; UI: unemployment insurance. 1. All benefit amounts are shown on an annualised basis. “–” information not available or not applicable. 2. If the per cent of APW value for 2001 differs by more than +/–2 from the 2002 percentage, then the 2001 value is shown in parentheses. 3. “No” indicates that the benefit exists but is not available for the young unemployed. Source: OECD.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
33
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
their parents (Puide and Minas, 2001). In France, Italy and Spain, the incomes of unemployed 20-year-olds without employment record are likely to be strongly dependent on informal family support as they qualify for none of these social benefits. It should be noted, however, that, in addition to the cash benefits discussed here, several countries operate “safety-net” and active labour market programmes directed specifically towards recent school leavers or young people in general (OECD, 2002a, Chapter 1).
e) Housing benefits Low-income households may be entitled to receive support for housing-related costs and these forms of support can significantly reduce net housing costs or add to out-ofwork or in-work income. There is a broad range of different types of housing-related support, including cash benefits, other financial assistance (e.g. low-interest loans) and benefits in-kind (e.g. subsidised housing) with some of them available irrespective of income levels. Housing-related programmes are often the responsibility of regional, local or municipal authorities and providing a comprehensive presentation of these instruments at the country level is therefore difficult. In this study, we only consider cash benefits paid for rented private accommodation. While amounts of these benefits can be significant, it is important to bear in mind that other housing-related schemes may be in place for households whose housing situation is different (such as owner-occupiers or people living in social/subsidised housing). Table 1.6 shows that most countries include housing-related supplements as part of SA schemes (column 4), operate a separate means-tested housing benefit (columns 1-3), or both. Housing-related income tax reductions are available in Italy. For the purpose of calculating the value of housing benefits, an assumption must be made about housing costs. Unless otherwise noted, the assumption throughout this study is rented accommodation with rent amounting to 20% of APW earnings, regardless of actual income levels or employment situation (see Annex A). Maximum benefit levels in Table 1.6 are shown for a four-person household.
f) Family benefits Most social benefits (and also taxes) depend on family circumstances to some degree. For instance, the sub-sections above show family-related additions to unemployment and SA benefits. A number of benefits, however, are designed to support the family as such, with the existence of a family being the main eligibility criterion. The definition of what counts as a family in this context can vary across countries. In most cases, benefits are directed towards families with children. An exception is Italy where benefits are also available for dependent spouses. Column 5 of Table 1.7 shows the maximum age underlying the definition of a child, which is frequently higher for children in education. While age is the main factor determining a person’s child status, there can be other considerations. For instance, children may not give rise to family benefits if they have income of their own, are married or do not live with their parents. Transfers may take the form of non-wastable (or “refundable”) tax credits. These are tax reductions that are not limited by the tax liability and are therefore akin to cash benefits. Given this equivalence, they are included in Table 1.7. Benefit amounts vary and can be substantial with maximum means-tested benefits for low-income families with one child as high as 13% of APW in Australia. Non-means tested benefits for a one-child family are most generous in Austria and Luxembourg (9 and 8% of APW, respectively). Amounts
34
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2002 2
Regular housing benefits
Other cash support
Description
Maximum benefit amount in % of APW3
Treatment of housing costs in social assistance
[2]
[3]
[4]
Rent assistance for benefit recipients: 75% of rent above a threshold until maximum amount is reached. Also low rent public housing for low income households.
6
–
Actual rental cost
Geographic location
Dwelling size
Income
Entitlement depends on Household type/size
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.6. Cash housing benefits for rented accommodation1
[1] Australia
Yes
Yes
–
–
Yes
Austria
–
–
–
–
–
Treatment varies widely across regions.
–
Housing benefits may be provided through social assistance or other schemes, e.g. in Vienna they are for people receiving social assistance and depend upon household and dwelling size, also heating assistance is provided from October to April.
Belgium
–
–
–
–
–
No general scheme. Public low-rent housing for low-income families.
–
–
Canada
–
–
–
–
–
No general scheme.
–
Rules and payment rates determined provincially. A shelter allowance is included in the Ontario Works programme (SA) and amounts are determined by household size, income and location.
Czech Republic
Yes
Yes
No
–
No
Difference between the estimated rent required and a quotient.
6
–
Denmark
Yes
Yes
Yes
–
Yes
Difference between 60% of (adjusted) rent and own payment (18% of income with limits) subject to a maximum.
6
Rent above a threshold is paid after deducting regular HB.
Finland
Yes
Yes
Yes
Yes
Yes
80% of (limited) rent above a “deductible amount”.
16
“Reasonable” housing costs can be covered (93% limit).
France
Yes
Yes
–
Yes
Yes
Several schemes provide assistance to low-income households.
20
Basic amount included in resources used to calculate entitlement to social assistance.
Yes
Yes
–
Yes
Yes
General scheme with various ceilings (including the quality of the dwelling).
17
Rent and heating expenses in excess of regular housing benefit.
Greece
Yes
Yes
–
–
–
No general scheme. Rental subsidy for unemployed receiving benefits which may be extended for 2 years afterwards.
12
Tax allowance: 100% of rent paid up to EUR 440, 40% above up to limit of EUR 734.
Hungary
Yes
Yes
Yes
–
–
Administered by local authorities. Covers rental costs and maintenance expenses.
1
–
Yes
Yes
–
–
Yes
Maximum amount is 50% of rent up to a limit.
10
–
–
–
–
–
–
No general scheme.
–
Rent in excess of EUR 396 (less all other income) can be added. In practice, the number of recipients is very small.
Italy
–
Yes
–
Yes
–
Rent subsidies for low income households; eligibility conditions and amounts differ at regional and municipal levels.
–
Wastable tax credit.
Japan
–
–
–
–
–
No general scheme.
–
Housing costs are covered up to a limit, e.g. JPY 156 000 in Osaka/Tokyo.
Korea
–
–
–
–
–
No general scheme.
–
Additional amount based on size of household to cover rent and maintentance/repair expenses.
35
ELEMENTS OF TAX-BENEFIT SYSTEMS
Iceland Ireland
1.
Germany
2002 2
Regular housing benefits
Other cash support
Description
Maximum benefit amount in % of APW3
Treatment of housing costs in social assistance
[2]
[3]
[4]
No general scheme.
–
Rent in excess of 10% of minimum income up to a maximum of EUR 1 488, conditional on receipt of social assistance.
10
–
Actual rental cost
Geographic location
Dwelling size
Income
Household type/size
Entitlement depends on
[1]
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Luxembourg
–
–
–
–
–
Netherlands
Yes
Yes
–
–
Yes
Minimum “standard rent” must be paid by household, 100% of rent above this is paid up to a “quality allowance limit”, then 75% of remainder up to a ceiling.
New Zealand
Yes
Yes
–
Yes
Yes
70% of rent exceeding 25% of the unemployment insurance standard rates.
7
–
Norway
Yes
Yes
–
–
Yes
For social assistance recipients, the elderly and families with children aged under 18. Benefit is 70% of difference between actual and a standard “reasonable” housing expense.
10
–
Poland
–
Yes
–
–
Yes
For low income households. Rent exceeding tabulated standard cost.
7
–
Portugal
–
–
–
–
–
No general scheme.
–
Possible complement for people in sudden need (30% loss of gross income or income lower than EUR 1 659).
Yes
Yes
–
–
No
For low income households to cover rent and maintentance expenses.
22
–
–
–
–
–
–
No general scheme (tax credit instead). Some regions provide benefit.
–
–
Yes
Yes
–
–
Yes
–
–
–
–
–
Yes
Yes
–
Yes
Yes
–
–
–
–
–
Slovak Republic Spain Sweden Switzerland United Kingdom
United States
Amount also depends on age of recipient.
11
Rent in excess of housing benefit is added.
No general scheme. Some regions provide benefit for low income households, elderly persons or families with children.
–
Housing costs are added up to a limit.
Housing benefit: paid on “eligible” rent only. Amount is rent minus 65% of difference between net resources and social assistance rates (determined by family type).
20
100% of “eligible” rent is covered for social assistance claimants when family assets are less than a limit, benefit is reduced above limit up to a ceiling. Also local benefits to help pay Council Tax (Great Britain only). In the tax-benefit calculations shown in this publication, Council Tax and Council Tax Benefit are not taken into account.
No federal scheme. Housing assistance exists in some states for very low income households.
–
Rent (if it exceeds 50% of net income and with a maximum of USD 4 248) is included in the food stamps means test.
1. All benefit amounts are shown on an annualised basis. “–” information not available or not applicable. 2. There are sometimes other schemes aimed at specific groups, e.g. Denmark: elderly or disabled; Finland: pensioners and students; Greece: elderly; Sweden: pensioners. 3. For an unemployed couple with two children aged under 6 under the assumption that housing costs are 20% of the gross earnings of an average production worker. Source: OECD.
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
36
Table 1.6. Cash housing benefits for rented accommodation1 (cont.)
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.7. Family benefits1 2002 Maximum benefit for one child Benefit amount per additional aged 3-12 child varies with:2
Upper age limit for children (student)
Means test on
Observations
[5]
[6]
[7]
[2]
Age of child [3]
Number of children [4]
3 303
7
+/–
+ from 3rd
20 (24)
Family earned income.
Family Tax Benefit (FTB) part A to help families with cost of raising children. Can be paid as a benefit or as a tax allowance.
2 836
6
–
0
15 (18)
Earned income of secondary earner in a couple.
FTB part B to provide extra help for families with one main income. Family based payment which can be paid as a benefit or as a tax allowance.
Austria
1 483
6
+/–
+
19 (27)
No
For low income families there is an extra supplement for each additional child from the 3rd.
611
3
0
0
Belgium
1 102
4
+/–
+/–
17 (24)
No
For unemployed, family benefits are increased as from 7th month of unemployment.
Canada
1 151
3
0
+ from 3rd
17
Family taxable income.
Canada child tax benefit (non-wastable tax credit). Additional supplement per child aged under 7 if no childcare expenses are claimed.
Family net income.
National Child Benefit (NCB) supplement for low income families.
Australia
4
National currency [1]
% of APW3
Non-wastable tax credit.
3
0
–
8 563
4
+/–
0
14 (25)
Denmark
11 300
4
+/–
0
17
Finland
6 420
4
0
+
16
No
Fixed rate of increase for each additional child.
France
0
0
+
+
20
No
Family allowance: zero benefit for first child. For 2 children (under age 11) the amount per child would be EUR 653 (3% of average production worker).
1 876
9
–
–
3
Yes
Allocation pour jeune enfant: for families with young children.
1 848
6
0
+ from 4th
18 (27)
No
Kindergeld is a non-wastable tax credit in the form of a monthly tax refund (deducted from social assistance if no tax liability).
106
1
0
+/–
17 (21)
No
Employment condition: 50 days of work prior to the claim. In addition, the employer usually grants 5% of gross earnings to each worker for each child. The employer benefit and extra family benefit supplements for large families are taxable.
No
–
Germany Greece
45 600
4
0
+
15 (20)
Iceland
155 670
6
–
+
15
Ireland
1 028
4
0
+ from 3rd
15 (18)
Italy5
1 010
5
0
+
17
Three income levels used to define level of benefit: increased, basic or reduced.
No
–
Basic allowance is reduced by a percentage of income Basic allowance has an income limit of ISK 1 408 916 for a couple. Reduction is 3, above limit. Supplement is not means tested. 7 and 9% for 1, 2 and 3 children respectively. There is a supplement for children aged under 7. No
–
Household taxable income.
Benefit is paid by employers and is only granted if at least 70% of household taxable income is employment income (or earnings replacement benefits including unemployment benefits and employment pension). A spouse is considered a dependant so a couple with no children can receive family allowance. Benefits are reduced in proportion to days not worked.
37
ELEMENTS OF TAX-BENEFIT SYSTEMS
Hungary
Family income relative to minimum living standard.
1.
1 293 Czech Republic
2002 Maximum benefit for one child Benefit amount per additional aged 3-12 child varies with:2
Japan Korea
[2]
Age of child [3]
Number of children [4]
60 000
1
0
+ from 3rd
National currency [1]
% of APW3
Upper age limit for children (student)
Means test on
Observations
[5]
[6]
[7]
6
Gross income less employment income tax deduction.
Amount per child doubles as from 3rd child.
–
–
–
–
–
–
–
Luxembourg
2 609
8
+
+
18 (27)
No
Maximum amount by age is reached at age 12.
Netherlands
838
3
+
0
17
No
Under the previous system (which still applies for children born before 1 January 1995) the amount per child decreased with the number of children.
New Zealand
2 444
6
+
–
18
Family earned income.
Family Support Tax Credit (includes Child Tax Credit available for families not receiving benefits).
Norway
11 664
4
0
0
18
No
Supplement for child aged between 1 and 3.
Poland
510
2
0
+ from 3rd
15 (19)
Gross income per household member relative to average wage.
Benefit also paid for a dependent wife/husband aged over 60/65.
Portugal
315
4
0
–
16 (24)
Income relative to minimum wage.
Higher benefits for children aged under 1. Benefits also vary relative to family income (four levels).
9 960
7
+
0
15 (25)
Not for basic allowance since July 2002 but supplement is means tested.
The means test is based on family income relative to state social benefit amounts.
Slovak Republic BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
291
2
0
0
17
Gross family income.
–
Sweden
Spain
11 400
5
0
+ from 3rd
16 (20)
No
Basic allowance remains fixed but there is a supplement from the 3rd child onwards.
Switzerland (Zurich)
2 040
3
+
0
15 (24)
No
Amounts are fixed at the level of the cantons and paid by the employer. Benefits are taxable but not subject to social contributions.
819
4
0
–
15 (18)
No
Fixed rate from 2nd child.
1 056
3
0
+
–
Yes
Temporary Assistance for Needy Families (TANF): benefit is not based on number of children but on family size at the time of application; it does not increase thereafter. The benefit amounts and durations vary by State.
United Kingdom United States5 (Michigan)
1. Family benefits including non-wastable tax credits. All benefit amounts are shown on an annualised basis. “–” information not available or not applicable. In general family benefits are not taxable unless otherwise indicated. 2. “+”: increases, “–”: decreases, “0”: remains the same, “+/–”: increases or decreases (some countries give higher rates to the youngest and oldest age groups). 3. If the per cent of APW value for 2001 differs by more than +/–2 from the 2002 percentage, then the 2001 value is shown in parentheses. 4. See also the Parenting Payment in Table 1.8. 5. Benefit amount for the first child is calculated as the difference in benefit between a 3-member and a 2-member household. Source: OECD.
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
38
Table 1.7. Family benefits1 (cont.)
1.
ELEMENTS OF TAX-BENEFIT SYSTEMS
per child can be uniform but more often vary by age and/or number of children. It is interesting to note the different age profiles of child benefit amounts (column 3, where “+” and “–” indicate that benefit amounts for older children are higher and lower respectively). Differences reflect not only diverging assumptions about how age influences the “cost of children” but also differences in the rationale for providing family benefits (FB). While compensating parents for child-related expenses is one purpose of benefit payments, transfers to families with children may also form part of family policies aiming to compensate parents for a service they are providing to society. In a slight majority of countries, family benefits are not dependent on family income and are paid as universal amounts per child. Amounts per child may, however, vary depending on a child’s age or parity (i.e. the number of children). Given that family income is often negatively correlated with family size, universal family benefits that increase with the number of children can be an effective way of targeting resources towards the poor while avoiding problems (such as non take-up of benefits and negative effects on work incentives) that means-tests can give rise to. They can therefore play an important role in addressing child poverty (see Vleminckx and Smeeding, 2001). Benefit amounts are reduced for higher-income families in 13 countries (column 6). In Italy, benefits first increase with earnings (and therefore improve work incentives for lowincome groups) before being reduced once income exceeds an upper limit.
g) Childcare benefits The provision of childcare is an essential component of policies aiming to address the balance between work and family life. The implications of childcare arrangements are numerous and include fertility decisions, labour market behaviour and, not least, child development (see OECD, 2002b, 2003a, 2004). Financial support for families with small children requiring care is available in a multitude of different forms. Support may be available to all children of a certain age (see the discussion of family benefits in the previous section), or may be conditional on having children in certain types of childcare such as that provided by approved institutions or specially qualified individuals. Generous support is sometimes also available to parents taking on caring responsibilities themselves. The provision of these types of support also varies widely and ranges from direct cash benefits or tax breaks to subsidies paid to the providing institutions. Frequently, countries operate a combination of different types of support and a comparison across countries requires an understanding of their combined effect on childcare costs. In six countries, direct cash benefits are available to parents of young children and provide a partial or total compensation for certain types of childcare expenditure (Australia, Canada, Denmark, France, Korea and the United Kingdom). This is shown in column 1 of Table 1.8 which also specifies which types of care are covered (i.e. institutional childcare in approved day-care or nursery centres or services of professional carers at their own or the parents’ home). In contrast to previous editions of this Series, tax-reductions available to families with children in paid childcare are now shown alongside benefits. Such tax breaks are widespread and should be considered when comparing across countries. Being targeted towards taxpayers, tax reductions can have distributional consequences that are very different from benefits which are either available irrespective of income or targeted towards low-income families who are often BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
39
2002 Benefits to care for children at home (“child-raising allowances”, “non-activity” tested) [2]
Benefits to cover costs [1]
Childcare facilities subsidised?
Income test?
[3]
[4]
Australia
Benefits paid for approved care (institutions) and registered care (child carer is officially registered). If both parents (or a lone parent) are working they are eligible for both types of Childcare Benefit. If neither parent is working they are eligible for up to 20 hours of approved care only.
Parenting payment provides income support to low- For approved care the benefit may be paid directly income persons who have primary care of children to the institution to reduce the fees charged. under 16 years of age. Families must receive no other income support payments. However, recipients can work while receiving the benefit (subject to a meanstest).
Austria
–
Childcare Benefit is combined with the post-natal parental leave scheme and entitlement is linked to previous employment record. The benefit is payable for 18 months for one parent plus (optionally) another 6 for the other parent and is independent of the other parent’s income or work status. May be combined with part-time work.2
Belgium
Not for registered care fees, but both fees of approved care and parenting payments are family income tested.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Yes, varies by state (Land).
Yes, for child-raising allowances.
Costs are tax deductible (up to a limit) if the care is in – approved centres and only for children up to age 3 (free school starts at age 4). The alternative is a nonwastable tax credit.
Yes, varies by province (Communauté).
Yes for fees paid in centres.
Canada
Federal tax allowance for expenses up to limit. The Canada Child Tax Benefit includes a supplement for families with children aged under 7: full amount for those not claiming the childcare expenses as a tax allowance, reduction of 25% of childcare costs for those claiming it. Provincial governments may cover all or part of the cost if SA beneficiaries are involved in training or similar programmes. Some benefits available at provincial level, e.g. Ontario Child Care Supplement for Working Families (OCCS).3
–
Varies by province.
For Federal tax allowance: least of childcare expenses, 2/3 of earned income (of spouse with lowest earnings) or limits based on age of child. For OCCS (greater of 50% of childcare expenses or percentage of earnings over a limit which varies with number of children).
Czech Republic
–
Parental allowance for full-time care for at least one No child up to age 4. Rate is individual social assistance rate plus 10%. A parent with low work income may be eligible under certain conditions (e.g. maximum 5 days of childcare per month).
Denmark
For low-income families, the benefit covers up to 100% of the (subsidised) fees charged by day care institutions.
–
Heavily subsidised day care is available to all households with young children. Parents only pay 30-32% of costs.
Yes for working parent (maximum 1.5 times individual social assistance amount).
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
40
Table 1.8. Childcare benefit schemes: description1
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.8. Childcare benefit schemes: description1 (cont.) 2002 Benefits to care for children at home (“child-raising allowances”, “non-activity” tested) [2]
Benefits to cover costs [1]
Childcare facilities subsidised?
Income test?
[3]
[4]
Finland
–
Home care allowance and supplement (payable for one child only) available to parents caring for own children aged under 3. Increases with number of children cared for (aged under 6).
Heavily subsidised public day care is available to all children aged under 7 (school age). For those using private day care (and not receiving home care allowance for other children) there is a private day care allowance and supplement which is paid directly to provider.
France4
The benefits cover (some or all of) the social security contribution costs due for the employment of a person to care for children aged under 6. Either at the parents’ home (AGED) or by a qualified carer in their home (AFEAMA). There is also a tax deduction for collective care costs (crèches) or for employing a home worker (in addition to AGED).
Parental education benefit (APE) is payable for families Public sector crèches are subsidised. The majority with at least 2 children (one aged under 3) on of children aged 3 and above are in school full time. condition that the parent leaves (partially or totally) employment that has lasted at least 2 years in last 5.
Germany
Tax allowance for childcare costs.
Federal child raising allowance for parents taking Yes. Children aged 3-6 are entitled to a place Child raising allowance is income tested for level of personal care of at least one child aged under 2 (some in a kindergarten. Children of other ages are admitted benefit but parent concerned can work up to 30 hours/ states provide allowances for additional periods if possible. week. afterwards).
Greece
Childcare costs can be included in family expenses which are tax deductible up to 30%.
–
Hungary
–
Childcare allowance: for parent or grandparent raising a – child up to age 3. Child raising support: for parent raising 3 children of which youngest is aged 3-8. Both are equal to minimum old age pension amount. Also childcare benefit (following pregnancy/confinement) for up to 2 years which is 70% of previous earnings up to a limit.
Work disregard of 4 hours/day for childcare allowance and child raising support (but benefit becomes taxable as soon as income is earned). Childcare benefit is lost as soon as there is earned or other income.
Iceland
–
–
–
Ireland
–
New carers allowance is a tax credit for families where Collective childcare is not well developed, very few one parent stays at home to care for children. state subsidies for private provision.
Italy
–
–
In Rome, 80% of nurseries for children aged under 3 Depends on municipality. are public and subsidised; 90% of children aged 3-5 attend school.
Japan
–
–
Municipal childcare is subsidised for children aged under 5. The government subsidy to municipal childcare increases with the amount of income tax payable by the family.
Yes in public nurseries.
Yes, ceilings based on number and age of children.
Yes for public nurseries.
1.
Day care centres and “day mothers” are heavily subsidised by municipalities.
Public day care fees are a per cent of income exceeding a limit based on family size. Same income limits apply to the supplements for home care and private day care but not to the allowances.
Yes based on the amount of income tax payable.
41
ELEMENTS OF TAX-BENEFIT SYSTEMS
Yes based on working spouse's income up to limit, benefit reduced above limit.
2002 Benefits to cover costs [1] Korea
Benefits to care for children at home (“child-raising allowances”, “non-activity” tested) [2]
Social assistance recipients are fully subsidised for – child “educare” centre fees for children aged under 6. Tax allowance to cover childcare expenses of working mothers or lone-parent fathers up to limit.
Childcare facilities subsidised?
Income test?
[3]
[4]
Public sector childcare is subsidised.
Luxembourg Either an abatement on taxable income (amount Parent must not be in the labour force and must look – depending on income level and number of children) after a child aged under 2 at home. or an abatement for childcare expenses which covers real costs up to a limit.
Entitlement for the subsidy is linked to SA receipt. For the tax allowance, no other benefits/deductions for childcare costs may be received. For the childcare benefit there are no salary conditions (but if one parent has half time job then payment is 50% of benefit) and no employment conditions if family income is below a limit (which depends on number of children).
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Netherlands Formal childcare costs are tax deductible (up to a – limit), amount depends on whether care is full or part time and on number of children. There is also a tax credit for working parents.3
Local government and employers subsidise childcare Yes but subsidy also depends on employment terms centres. Children are in school from age 4. of the parent.
New Zealand –
–
All official centres are subsidised, in particular for low Yes, subsidy rate is related to income and number of income or working families. Child care subsidy for children. Maximum 37 hours of subsidised care/week. preschool children (age 0-5) is paid directly to providers. Similar program for part-time care for children aged 5-13 (OSCAR).
Norway5
Documented childcare expenses for children aged under 12 are tax deductible up to a limit.
–
Yes
No, fixed amount for one or more children.
Poland
–
For a parent caring for at least one child. Not normally available for children aged over 2.
–
Yes, fixed limit.
Subsidies for non-profit private or state facilities.
Portugal
–
–
Slovak Republic
–
For parent caring for at least one child up to age 3. –
–
Spain
–
–
Most children aged 3-5 are in subsidised public childcare – or in school. All communities provide free childcare for families with serious socio-economic difficulties.
Sweden
–
–
Subsidised by state and local governments. All 6-year Yes, parents only pay (per child) 1-3% of their gross olds get 525 hours a year of free pre-school. income in childcare fees. Percentage varies with number of children.
Switzerland
–
–
Some facilities are subsidised. Considerable variation – across regions and municipalities.
United Kingdom
Working Families Tax Credit (WFTC) allows parents to claim up to 70% of cost of childcare up to a limit dependant on number of children.
–
No. Free part time care is provided for 4-5 year olds in nursery school education or reception class.
Income from any source stops benefit.
Income and asset test for WFTC recipients.3 Person must be working over 16 hours per week.
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
42
Table 1.8. Childcare benefit schemes: description1 (cont.)
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.8. Childcare benefit schemes: description1 (cont.) 2002 Benefits to care for children at home (“child-raising allowances”, “non-activity” tested) [2]
Benefits to cover costs [1] United States
Child and Dependent Care Credit provides tax assistance to working families paying for childcare.3
–
Childcare facilities subsidised?
Income test?
[3]
[4]
The Child Care and Development Fund is the main programme which provides federal funding to subsidise childcare facilities through certificates or contracted programmes.
Yes, eligibility conditions vary widely across States. In general only families with extremely low income relative to State median or to the poverty level are eligible.
1. “–” information not available or not applicable. 2. Following a reform introduced during 2002, parents are entitled to post-natal leave/home-care benefit for 30 months (one parent on maternity leave) or 36 months (leave shared between parents). Previous employment is no longer an eligibility condition. After 8-12 weeks following childbirth, the new benefit may be combined with income from work (subject to an upper limit). 3. See Table 1.11 on employment-conditional benefits. 4. AFEAMA: aide à la famille pour l'emploi d'une assistante maternelle agréée; AGED: allocation de garde d'enfant à domicile; APE: allocation parentale d'éducation. 5. See also Table 1.10 for lone-parent benefits. Source: OECD.
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
43
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
Table 1.9. Childcare benefit schemes: examples1 Full-time care provided by a person other than the parents, in 2002 Maximum benefit for 1 child2 Type of scheme [1] Australia
Belgium
Canada
Age of child [2]
Approved care.
<6
Registered care. Childcare costs tax credit. Non-wastable tax credit.
National currency [3]
% of APW [4]
Benefit amount depends on Additional information
[5]
Number of children in the family [6]
Yes
Yes
Sometimes paid directly to provider of childcare. Not taxable.
Yes
Income
[7]
6 916
14
<6
1 162
2
No
<3
2 523
8
Yes
No
–
<3
330
1
Yes
No
If childcare costs are not already claimed as a tax credit.
Federal tax allowance.
<7
[7 000]
–
Yes
No
–
Canada Child Tax Benefit supplement.
<7
228
1
No
No
If childcare costs are not claimed as a tax allowance.
OCCS two-parent family.
<7
1 100
3
Yes
No
Ontario Child Care Supplement (OCCS) for working families.3
OCCS lone parent.
<7
1 310
3
Denmark
Subsidy of day-care costs
<7
CCC
–
Yes
Yes
Paid directly to provider.
France4
AGED – Employment of childcarer at child's home.
0-3
6 192
28
Yes
Yes
Contribution to payment of social security contributions for person being employed to care for children. Not taxable.
3-6
2 064
9
0-3
2 400
11
3-6
1 200
5
–
[2 160]
–
Yes
No
< 6 [1 000 000]
–
Yes
–
Female wage earner or loneparent father. –
AFEAMA – Employment of childcarer at their home. Germany
Tax allowance.
Korea
Tax allowance.
Luxembourg
Standard tax abatement.
Netherlands
Tax deduction.
Jointly assessed married couple.
–
3 600
11
–
–
0-3
[467]
–
Yes
Yes
Combination tax credit.
< 12
[190]
–
Yes
–
Norway5
Tax deduction.
< 12
[25 000]
–
Yes
Yes
–
United Kingdom
Supplement to Working Families Tax Credit (WFTC).
–
7 020
36 (27)
Yes
Yes
Only for families already receiving the WFTC.3
United States
Child and dependent care tax credit.
–
1 440
4
Yes
Yes
For working families.3
Employer pays for childcare. Working parent paying for childcare.
1. “–” information not available or not applicable. 2. All benefit amounts shown are on an annualised basis. Where the benefit is in the form of a tax allowance or deduction, its income value depends on the marginal tax rate. The amount of the tax allowance/deduction is shown in square brackets in these cases. Where the benefit covers the actual cost, this is indicated by CCC (childcare costs). If the per cent of APW value for 2001 differs by more than +/–2 from the 2002 percentage, then the 2001 value is shown in parentheses. 3. For more information see Table 1.11 on employment-conditional benefits. 4. AFEAMA: aide à la famille pour l'emploi d'une assistante maternelle agréée; AGED: allocation de garde d'enfant à domicile. 5. See also Table 1.10 for lone-parent benefits. Source: OECD.
exempt from paying income tax. To provide an illustration of the generosity of different schemes, Table 1.9 shows maximum benefit amounts (or tax concessions) for families with one child in eligible care. Childcare costs can have a substantial impact on the financial attractiveness and viability of work, particularly for secondary earners and lone parents. While cash benefits and tax concessions help reduce the net costs of childcare for somebody in work, cash benefits available to parents engaged in care activities themselves will increase their
44
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
1.
ELEMENTS OF TAX-BENEFIT SYSTEMS
incomes while out of work. This latter type of benefit is often referred to as child-raising allowance. It is “non-activity” tested, meaning that it is only paid if one parent is out of work or working part-time (in which case the benefit may be reduced). A summary of these benefits is provided in column 2 of Table 1.8. In some cases (Austria, France) benefits are conditional upon past employment (Austrian child-raising allowances no longer depend on employment records for new parents from mid-2002 onwards). The benefit is typically a flat monthly payment to replace a certain part of lost earnings of the parent staying at home. In some countries, rates are reduced with individual or family income once it exceeds certain limits. Although benefits paid for parental and institutional childcare may co-exist (e.g. in Australia), many countries opt for one of the two alternative patterns. A small third group of countries does not provide any benefits directly to the families but instead subsidises childcare fees by either operating public childcare facilities or meeting part of the fees charged by private childcare providers. The reduction of fees charged by childcare providers can, however, be equivalent to a direct cash transfer to the family and a distinction can be difficult in these cases (like cash benefits, subsidies may also depend on the particular situation of the family using childcare services). Column 3 provides an overview of childcare subsidies and shows that these are also widespread in countries that provide direct cash benefits to parents.6 For comparisons of parents’ net childcare expenses across countries, it is necessary to adopt a broad perspective. This is particularly important when analysing financial work incentives for parents of young children. A comparison of in-work and out-of-work incomes should consider the out-of-pocket childcare expenses borne by parents (i.e. after any subsidies) along with any childcare related cash benefits or tax reductions. The overall impact of all childcare-related tax-benefit instruments on these out-of-pocket expenses is the subject of a current project (Immervoll, 2004). In this study, available information on childcare cost is combined with computed cash benefits and tax burdens in order to illustrate the impact of childcare schemes on the financial tradeoffs faced by lone parents and second earners.
h) Lone-parent benefits Reduced opportunities to share bread-winning, care and other domestic responsibilities and a lower overall earnings potential combine to create above-average poverty risks for lone-parent households. Social protection systems seek to ease the resulting financial pressures by providing programmes particularly targeted towards lone parents and their children. Benefits may be provided as additions to other transfers or may be available independently and administered as separate programmes. Any family-related additions to unemployment and SA benefits, including special entitlements or eligibility conditions for lone parents, are shown in Tables 1.2 to 1.4 above. The present sub-section summarises benefits and tax reductions that lone parents can receive independently of other out-of-work benefits while working or caring for their children (Table 1.10). Column 1 of Table 1.10 shows that tax reductions for lone parents exist in ten OECD countries. With the exception of Austria and Canada, only lone parents with taxable income will benefit from these tax reductions as they are either wastable (and thus limited in value to any income tax paid) or reduce taxable incomes rather than tax liabilities. Separate benefit programmes for lone parents exist in France, Iceland, Ireland, Japan,
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
45
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
Table 1.10. Lone-parent tax and benefit schemes1 2002
Type of benefit
[1]
Maximum supplementary benefit for one child aged 32 National currency [2]
% of APW3 [3]
Test on income or capital
Earnings/income disregard and benefit withdrawal
Additional information
[4]
[5]
[6]
Australia
Parenting payment for low income families with primary care of children: higher rate. In addition, Family Tax Benefit part B is not means-tested for lone parents (see Table 1.7)
2 314
5
Income
Disregard: AUD 3 016 plus AUD 640 per child (values are for the entire amount of Parenting Payment, not just the loneparent supplement).
Lone parents tend to claim parenting payment rather than unemployment assistance since the benefit received is higher. No other benefit may be received at the same time except for the pharmaceutical allowance and the maximum rate family tax benefit.4
Austria
Lone-parent tax credit (nonwastable): same rate as “soleearner” tax credit for oneearner couple.
–
–
–
–
–
Canada (Ontario)
Childcare supplement: higher rate. Federal and provincial wastable income tax credits plus a nonwastable federal goods and services tax credit.
210
1
Net family income.
–
–
–
Disregard: CAD 20 000. –
To help cover childcare cost for working families. Lone parents receive the same amount of tax credits as a couple (with dependent spouse).
3 980 13 900
1 5
No No
–
–
–
Denmark
Family benefit supplement. Family benefit supplement per child aged 0-17.
Finland
Family benefit supplement.
1 821
7
No
–
France5
Lone-parent benefit (API).
8 205
37
Net taxable income.
–
–
–
Net taxable income.
Family benefit for young children (APJE): higher income disregard.
The benefit tops up net taxable income to this maximum level. EUR 2 051 per additional child. Disregard: additional – EUR 5 568.
Germany
Tax allowance.
[2 340]
–
–
–
–
Hungary
Family benefit: higher rate.
8 400
1
No
–
Same increase for 2 children, HUF 4 800 for 3+ children.
Iceland
Family benefit: higher rate.
80 033
3
Income
Mother/fatherhood Allowance.
52 692
2
No
Disregard: ISK 704 459, 3% withdrawal rate. –
ISK 62 313 for each additional child. Benefit withdrawal rates increase to 7% for 2 children and 9% for 3+ children. For a parent with 2 children aged under 18. ISK 137 004 for 3 children.
7 155
28
EUR 1 004 for each additional child. Entitlement to only 50% of basic rate of UI with no increase for child dependants.
–
–
Disregard: EUR 7 618 plus 50% of gross earned income above this level. –
Ireland
Lone-parent benefit.
Single Parent Family Relief: wastable tax credit. Different income tax schedule.
Income (excluding benefits).
–
Supplement to basic tax credit so total equals married tax credit. 20% taxable income band at EUR 32 000.
–
–
Japan
Lone-parent benefit.
508 440
12
Korea
Child Raising Support.
204 000
1
Property and income. Varies with number of Property threshold KRW 50-60 million family members. and income threshold KRW 9.618 million for 2-6 family members.
[1 920] –
– –
– –
Luxembourg Tax allowance. Different income tax schedule.
46
–
–
Income
Disregard of JPY 568 440 for parent with 2 children JPY 2 048 million. plus JPY 36 000 for each additional Reduction of child. JPY 14 020 for income up to JPY 3 million.
– –
– –
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
1.
ELEMENTS OF TAX-BENEFIT SYSTEMS
Table 1.10. Lone-parent tax and benefit schemes1 (cont.) 2002
Type of benefit
Maximum supplementary benefit for one child aged 32 National currency [2]
% of APW3 [3]
Netherlands Single parent and additional tax credit, both wastable.
[2 602]
–
New Zealand Domestic Purposes Benefit.
14 115
[1]
Test on income or capital
Earnings/income disregard and benefit withdrawal
Additional information
[4]
[5]
[6]
–
–
35
Earnings.
Disregard NZD 4 160; NZD 15 465 if 2 or more children. Same withdrawal rate of benefit rate as UA but with less strict 43% up to income and activity tests. NZD 9 360, 70% above.
100 215
34
11 664
4
Income (earnings plus unemployment insurance). No.
Disregard NOK 27 085, 40% withdrawal rate. –
Family benefit supplement.
7 884
3
Earnings.
Childcare benefit.
5 852
2
–
Earnings above NOK 27 085 stop entitlement. –
Different income tax schedule.
–
–
–
–
Childcare benefit: higher rate. Family benefit: increased income disregard. Additional wastable tax credit.
2 252 –
9 –
–
–
Income. Gross income per person. –
Disregard: PLN 548. – Disregard: additional No relation to average wage. PLN 64. – As for a married couple (with dependent spouse).
Portugal
Wastable tax credit for dependent child: higher rate.
[139]
–
–
–
–
Spain
Tax allowance: higher personal rate.
Less than for a two- – parent family.
–
Basic tax relief for head of household.
Norway
Transitional Benefit.
Family benefit.
Poland
Sweden
Lone-parent benefit.
14 076
United States
Tax allowance: higher personal rate. Different income tax schedule.
Less than for a two- – parent family. – – –
6
No.
Basic allowance of EUR 1 301 plus supplement of 4.3% of earned income up to same amount.
Entitlement limited to 3 years after the birth of the youngest child. Lone parents are paid one child more than the actual number. Lone parents are paid one child more than the actual number for a child aged 0-3 (instead of 1-3). 70% of expenses up to maximum: NOK 10 248 for 2 children and NOK 15 612 for 3+ children. “Tax liability limitation schedule”.
–
For children up to age 16 (20 if student).
–
Basic tax relief for a single head of household. “Head of household” tax bands.
–
1. It is assumed that neither lone parents nor their children receive alimony payments from the other parent. All benefit amounts are shown on an annualised basis. “–” information not available or not applicable. Specific provisions for lone parents receiving unemployment benefits or social assistance can be found in the corresponding tables. 2. Where the benefit is a complement to another benefit or tax reduction, the amount shown is the difference between a oneparent/one child situation and a two-parent/one-child situation (Australia, Canada, Hungary, Iceland, Poland). Where the benefit is in the form of a tax allowance or deduction, its income value depends on the marginal tax rate. The amount of the tax allowance/deduction is shown in square brackets in these cases (Germany, Luxembourg, Netherlands, Portugal, Spain, United States). 3. If the per cent of APW value for 2001 differs by more than +/–2 from the 2002 percentage, then the 2001 value is shown in parentheses. 4. See also Table 1.11. 5. API: allocation de parent isolé; APJE: allocation pour jeune enfant. Source: OECD.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
47
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
Korea, New Zealand, Norway and Sweden. Additions to family benefits exist in seven countries while four countries provide lone-parent additions to childcare benefits. Several countries operate combinations of more than one type of lone-parent benefit. Benefit amounts for a lone parent with one child are shown in columns 2 and 3. For tax allowances or deductions, the income value will depend on the lone parent’s tax situation (the amount shown is therefore the tax allowance and not the amount by which taxes are reduced). Where benefit amounts are supplements to family or childcare benefits, amounts indicate the differential in relation to the two-parent situation. In Italy, family benefits for lone-parent households can be lower than for two-parent families since family benefits are available for children and dependent spouses. Tax allowances for Spain and the United States are also lower for lone parents than for equivalent two-parent families. In addition to the entitlements shown in Table 1.10, several countries operate employment-conditional benefits that are either particularly targeted towards lone parents or incorporate special provisions to make benefits more generous for lone parents. These are discussed in the following sub-section.
i) Employment-conditional benefits Many of the social transfers described above depend upon employment status and/or income level. In addition, income tax (IT) and social security contributions (SSC) increase with income and are often zero (or even negative in the case of IT) for individuals with very low incomes. Together, these mechanisms have a redistributive impact that reduces income inequalities and provides a degree of income security for individuals at risk of unemployment or other contingencies such as lone-parenthood. At the same time, benefits that are withdrawn as people take up employment or increase working hours can, depending on wage levels and the size of the benefit being withdrawn, severely reduce any financial gain of these work efforts. In an attempt to ensure that at least some incentive to work is maintained, many OECD countries allow benefit recipients to work a certain number of working hours without stopping eligibility. For other out-of-work benefits, employment reduces benefits by less than the full amount of any part-time or occasional employment incomes (see Tables 1.2, 1.3 and 1.4 above). Maintaining benefit entitlements for jobless persons re-entering part-time paid employment is frequently an explicit part of a strategy to facilitate the transition from unemployment back to work. To “make work pay”, particularly for individuals with low current or prospective wages, several countries have recently introduced additional, or more explicit or comprehensive measures, intended to enhance the financial reward to work. In order for the income maintenance function of existing out-of-work benefits not to be compromised, such measures need to increase the net incomes of wage earners targeted by the “make work pay” policy. Net incomes in work can be raised through higher wages, increased benefits, or reduced tax burdens or other work-related expenditures (such as childcare costs). Approaches differ across countries and are frequently a combination of several measures. They are designed to accentuate the difference between in-work and out-of-work incomes and thereby increase the returns to leaving a situation of benefit dependency. Table 1.11 summarises their main features (the net effects of employment-conditional benefits on household incomes are quantified in Chapter 2). It includes both benefits and tax reductions in order to permit comparisons across countries with different institutional
48
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.11. Employment-conditional benefits1 2002
Name of programme
Type of benefit
[1]
[2]
Australia
Employment entry payment.
Belgium
Benefit.
Beneficiaries
Maximum benefit
Minimum earnings
Working hour criterion
[3]
[4]
[5]
[6]
Transition criterion
Phase-in rate
Phase-out rate
Earnings when phasing out begins
[7]
[8]
[9]
[10]
Approximate maximum earnings when benefit is phased out completely [11]
Income assessment unit [12]
No.
No
–
–
–
Crédit d’impôt.2 Nonwastable tax credit. Complément de Benefit. garde d’enfant.
Working individuals with low income.
–
–
6%
2%
EUR 12 840 (42% of APW).
EUR 16 680 (54% of APW).
Individual.
Long-term unemployed Lump sum of EUR 744. No. lone parents.
At least Starting half-time. employment.
No.
No
–
–
–
Canada3
Ontario start up benefit.
Benefit.
Social assistance Lump sum of CAD 253. No. recipients (eligible once every 12 months).
No.
Starting or changing No. employment, or joining a training programme.
No
–
–
–
Finland
Earned income allowance.
Income tax Working individuals allowance. with low income.
Maximum value of tax EUR 2 500 allowance is EUR 2 140 (9% of APW). (8% of APW). Maximum value in terms of tax reduction is approximately EUR 440 (1.5% of APW) per employee.
No.
No.
For value of tax reduction: 1.5-6%, depending on earnings level.
For value of EUR 12 600 tax (46% of APW). reduction: 1%.
EUR 74 000 (270% of APW).
Individual.
France
Prime pour l’emploi.
Nonwastable tax credit.
Approximately: Approximately No. EUR 475, 570 and 620 EUR 4 000 (19% of (2-3% of APW) for an APW). individual, lone parent with two children and couple with two children.
No.
4-5%
9%
Approximately Family. EUR 18 700, 18 700 and 28 100 (85%, 85% and 128% of APW) for an individual, lone parent with two children and one-earner couple with two children.
Working individuals with low income.
EUR 90.
EUR 3 850 (13% of APW).
Approximately EUR 13 000 (60% of APW).
49
ELEMENTS OF TAX-BENEFIT SYSTEMS
Full time. Starting employment.
1.
Unemployed lone Lump sum of AUD 104. No. parents or long term income support recipients. Eligible once every 12 months.
2002
Name of programme
Type of benefit
Beneficiaries
Maximum benefit
Minimum earnings
Working hour criterion
[1]
[2]
[3]
[4]
[5]
[6]
Germany Mainzer Modell.
Reduction of social security contributions (SSC) and addition to child benefit.
Working individuals/ couples with low income; additional amounts for dependent children.
Ireland
Back-to-work allowance (BTWA).
Benefit.
Family income supplement (FIS).
Benefit.
Long-term unemployed EUR 4 633 (75% of social assistance (over 15 months) amount). 50% of aged over 22. socials assistance amount for 2nd year, 25% for 3rd year. Working families with 60% of difference between net family children and low earnings and income earnings. limit (see maximum earnings column). Long-term unemployed EUR 874 per child (for 13 weeks only). (over 12 months) receiving unemployment insurance and unemployment assistance. Long-term unemployed Flat rate of EUR 3 910 for a single person, previously receiving EUR 6 604 for a couple unemployment (15 and 26% of APW). assistance.
4
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Continued child Benefit. dependent payment (CCDP).
Benefit. Part-time job incentive (PTJI).
Japan
Re-employment Benefit. allowance.
Refund of full amount of employees’ SSCs, plus additional benefit of EUR 924 per child.
Approximate Income maximum earnings when assessbenefit ment is phased out unit completely [11] [12]
Transition criterion
Phase-in rate
Phase-out rate
Earnings when phasing out begins
[7]
[8]
[9]
[10]
No
Approximat ely 14.7% for individuals without children.
EUR 5 364 (16% of APW) for individuals, EUR 8 844 (27% of APW) for couples.
SSC refund: individuals Family EUR 10 764 (33% of APW) and couples EUR 20 484 (62% of APW).
No.
–
–
–
EUR 3 900 (12% of APW).
15 hours No per week.
No.
–
–
19 hours No. per week.
No.
60%
–
Family. Approximately EUR 20 100 if 2 children (79% of APW).
No.
Full-time Starting for at least employment. 4 weeks.
No.
No.
–
–
Family.
No.
Part-time. No.
No.
No.
–
–
–
20 hours Starting per week. employment while over 1/3 of benefit duration remains (minimum 45 days).
No.
No.
–
–
–
Unemployment benefit Lump sum = remaining No. recipient. days of term of benefits × 1/3 × daily unemployment benefit (basic allowance).
Starting employment.
Individual.
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
50
Table 1.11. Employment-conditional benefits1 (cont.)
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 1.11. Employment-conditional benefits1 (cont.) 2002
Korea
Name of programme
Type of benefit
[1]
[2]
Early reemployment allowance.
[3]
[4]
[5]
[6]
Unemployment benefit recipient.
Lump sum of 50% of remaining benefits.
No.
Tax credit.
Benefit recipients.
Lump sum of EUR 2 269 No. (7% of APW). EUR 1 361 after one year of work and EUR 454 after 2 and 3 year’s work.
Combination tax credit.
Tax credit.
Working families with EUR 190 for a single children aged under 12. person.
Family tax credit.
Transition criterion [7]
Phase-in Phase-out rate rate [8]
Approximate maximum earnings when benefit is phased out completely [11]
Earnings when phasing out begins
[9]
[10]
Income assessment unit [12]
Starting No. employment while over 50% of benefit duration remains.
No.
–
–
–
Full-time.
Starting employment.
No.
–
–
–
–
No.
No.
No.
No.
–
–
Individual.
Non-wastable Working non-beneficiary Ensures a minimum net – tax credit. families (employees) income of NZD 15 080 with low income. (40% of APW) before other tax credits.
30 hours per week No. for two-parent family, 20 for lone parent.
No.
100%.
–
See maximum benefit column.
Family.
Low Income Earner Rebate (LIER). Work Start Grant (WSG).
Non-wastable Working non-beneficiary NZD 728. – tax credit. families (employees) with low income. Benefit. Benefit recipients. Lump sum of NZD 500. –
20 hours per week.
No.
20%.
NZD 6 240 (16% of APW).
NZD 9 880 (25% of APW).
Family.
Minimum 15 hours Starting per week. employment.
No.
No.
–
–
–
Working families tax credit.
Non-wastable Working families with Maximum GBP 3 856 tax credit. children and low income. (20% of APW) per adult (working over 30 hours/ week), plus GBP 1 375 per child, reduced by difference between net income and limit.
16 hours per No. week, supplement for working 30 hours per week or more.
No.
55%.
Net income of GBP 4 914 (25% of APW).
Approximately GBP 21 550 (110% of APW) for a family with two children.
Family.
EUR 4 060 (13% of APW).
No.
No.
51
ELEMENTS OF TAX-BENEFIT SYSTEMS
20 hours per week.
1.
United Kingdom5
Minimum earnings
Benefit.
Netherlands Work credit premium.
New Zealand
Beneficiaries
Maximum benefit
Working hour criterion
2002
United States
Name of programme
Type of benefit
[1]
[2]
Beneficiaries
Maximum benefit
Minimum earnings
WAPWorking hour criterion
[3]
[4]
[5]
[6]
Earned income Non-wastable Working families with USD 376 without tax credit. tax credit. children and individuals children, USD 2 506 with low income. with one child, USD 4 140 with 2 children.
No.
No.
Transition criterion
Phase-in rate
Phase-out rate
Earnings when phasing out begins
[7]
[8]
[9]
[10]
7.65% without children, 34% with one child, 40% with 2 children.
In per cent of gross income: 0.765% without children, 16% with one child, 21% with 2 children.
USD 6 150 without children, USD 13 520 with children (19 and 42% of APW). All values increased by USD 1 000 if married.
No.
Approximate maximum earnings when benefit is phased out completely [11]
Income assessment unit [12]
USD 11 060 without Family. children, USD 29 201 with one child, USD 33 178 with 2 children (34, 90 and 103% of APW). All values increased by USD 1 000 if married.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
1. All amounts are shown on an annualised basis. “–” information not available or not applicable. Non-general schemes that are specifically targeted towards younger or older age-groups are not shown. 2. Introduced in 2002; will be fully phased-in by 2004 (maximum benefit amounts are set to increase to EUR 500 during the phase-in period). 3. Most Canadian provinces have a scheme similar to this; there are no federal programmes. 4. The Mainzer Modell scheme only existed between March 2002 and March 2003. 5. Rates depend on age and number of children. Source: OECD.
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
52
Table 1.11. Employment-conditional benefits1 (cont.)
1.
ELEMENTS OF TAX-BENEFIT SYSTEMS
setups. Tax concessions are included if they are targeted towards certain groups of workers (e.g. those working more than a minimum number of hours and having income below a relevant limit) rather than being available to all working individuals. It should be noted that it is not always possible to clearly distinguish between employment-conditional benefits or tax reductions and other categories of tax-benefit instruments. For instance, childcare benefits frequently complement (or share several features with) in-work benefits as they can also be designed to make work more financially attractive. Examples are the Ontario Child Care Supplement for Working Families in Canada and the Italian family benefit, which is reduced in proportion of days not worked. Where such overlaps exist, they are noted in the relevant tables. Further details are provided in the individual country chapters. In 2002, IT or SSC reductions for low-income wage earners are in place in four countries [Finland, Germany, Netherlands (Combination Credit) and New Zealand (LIER)]. Belgium, France, New Zealand (FTC), United Kingdom and United States provide employment-conditional tax credits but these are non-wastable and therefore akin to cash benefit payments. Employment-conditional benefits are also available in Australia, Canada (the scheme applying in Ontario is given as an example but similar programmes are operated in other provinces), Germany, Ireland, Japan, Korea, Netherlands (Work Benefit) and New Zealand (WSG). Substantial country differences exist in terms of the following characteristics [for convenience, the remainder of this sub-section refers to both benefits and tax reductions as employment-conditional or in-work (IW) benefits]: ●
Work conditions: in order to target IW benefits towards relevant groups, eligibility may depend on a number of factors. These include having in-work earnings of at least a certain amount (column 5), working a minimum number of hours (column 6) and entering/ changing employment (column 7). All employment-conditional measures employ at least one of these conditions or they feature gradually increasing IW benefits (column 8) as a means of targeting individuals with specific earnings levels or hours of work.
●
Income conditions: where benefits are not time-limited, benefit amounts are reduced for higher income levels in order to limit overall costs (columns 9 and 10). No benefit is received once earnings exceed an upper limit (column 11).
●
Income assessment unit: for the purpose of targeting the benefit to low-income individuals, incomes can be assessed individually for the benefit recipient or jointly for the couple or family as a whole (column 12). While irrelevant for those living alone, the assessment unit can affect benefit entitlements in multi-person households.
In eight countries (Australia, Belgium, Canada, Ireland, Japan, Korea, Netherlands and New Zealand), benefits are available for certain groups of individuals entering or changing employment. These can be one-off payments or be paid out over a longer (but limited) period. Since these benefits are only available to individuals finding new employment, they will not affect the financial incentives to remain in work or to seek increased earnings in an existing job. In the remaining countries, benefits add to low-income employees’ net income regardless of their previous work status. They are thus not only creating additional financial rewards for seeking work but also increase the payoff of remaining in work for those benefit recipients who already have a job. At the same time, targeting low earnings can reduce employees’ incentives to increase work effort or working hours since decreasing in-work benefits will partly offset any increase in gross earnings. Withdrawing benefits over larger earnings intervals will reduce any associated work disincentives and
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
53
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
broaden the group of potentially entitled employees.7 The distribution of in-work earnings in the population and particularly the number of low-wage earners who are potential beneficiaries are critical determinants of the overall cost of in-work benefits and, by implication, the phase-out rates needed to contain it. IW benefits in five countries (Belgium, Finland, Japan, Korea and Netherlands) depend on the income situation of the benefit claimant only, while the incomes and/or work status of other household members can influence benefit entitlements in France, Germany, United Kingdom and United States. Ireland and New Zealand operate several IW benefit schemes employing different assessment units. Eligibility and entitlement rules that relate to the family – and thus take into account the income situation of all family members – permit a more direct targeting of benefits towards poor families but can discourage work efforts of the benefit claimant’s spouse or partner. As a result of family-based income tests, secondary earners may find that reducing working hours increases the amount of IW benefits that can be claimed by another family member and therefore does not reduce overall family resources by very much. For a “make work pay” policy measure, this is an undesirable outcome which needs to be weighed against the positive effect on work incentives in households where, in the absence of the benefit, financial incentives would be such that no household member would seek employment at all. Maximum benefit levels are shown in Table 1.11 for a one-earner family with two children. Detailed illustrations of the functioning of IW benefits based on model calculations are presented in Section 2.1 of Chapter 2.
3. Tax treatment of benefits and interactions between tax-benefit instruments Net effects of benefits on household incomes will often differ from individual benefit entitlements as a result of interactions with other elements of the tax-benefit system. These may take the following forms: ●
Benefits are subject to tax or SSC.
●
Benefits of a given type reduce entitlements to other benefits.
●
Benefits of a given type give rise to other benefit entitlements or tax reductions (“passporting”).
Developing a comprehensive and systematic perspective on individual policy measures and their role in the overall tax-benefit system can be difficult if responsibilities for different social and fiscal policies are spread across several authorities and/or institutions. An awareness of interdependencies is, however, essential for correctly understanding the functioning of existing policies and for identifying reform options and priorities. This is, for instance, obvious in the case of a benefit reform that seeks to enhance the financial incentives to work. A prerequisite for such a reform is a detailed assessment of how existing benefits and taxes combine to influence net income in a range of different income and labour market situations. Model calculations that capture and illustrate interactions between the various policy elements are presented in the next chapter. In this section, the aim is to summarise some of the main links. The tax treatment of benefits is summarised in Table 1.12. Benefit incomes, and particularly earnings replacement benefits (UI, UA), are treated as taxable income in many OECD countries, but often entitle the recipient to special allowances. Benefits may be subject to regular income tax (indicated by “T” in the table) and/or social security contribution (“S”) or they may be included in the relevant tax bases but give rise to tax
54
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
1.
ELEMENTS OF TAX-BENEFIT SYSTEMS
Table 1.12. Tax treatment of benefits 2002 Unemployment insurance [1]
Unemployment assistance [2]
Australia
–
Austria
*
Belgium Canada Czech Republic
Family benefits [3]
Lone-parent benefits [4]
Housing benefits [5]
Social assistance [6]
T(n) S(n)
N
T(n) S(n)
N
–
*
N
–
N
N
T(n)
–
N
–
–
N
T
–
–
–
–
N
N
–
N
–
N
N
Denmark
TS (reduced)
–
N
N
N
TS (reduced)
Finland
TS (reduced)
TS (reduced)
N
N
N
N
France2
TS (reduced)
T(n) S(n)
N
N
N
N N
Germany
*
*
tc
–
N
Greece
N
N
N3
–
N
–
TS (reduced)
N
N
N
N
N
Hungary Iceland
TS
–
N
TS
N
TS
Ireland
T(n)
N
N
T(n)
N
N
TS (reduced)
–
N
–
–
N
N
–
N
N
N
N
Italy Japan
N
–
–
–
–
N
Luxembourg
Korea
TS (reduced)
–
N
–
T(n)
TS4
Netherlands
TS
TS
N
–
N
*
New Zealand
–
TS
N
–
N
–
Norway
TS
–
N
T5
N
N N
Poland
T
–
N
–
N
Portugal
N
N
N
–
–
–
Slovak Republic
N
–
N
–
–
N
TS (reduced)
T(n)
N
–
–
T(n)
TS
TS
N
N
N
N
TS (reduced)
–
T
–
–
N
T(n) S(n)
TS
N
–
N
N
T
–
N
–
N
N
Spain Sweden Switzerland United Kingdom United States
Legend: T: Taxes are payable. S: Social security contributions (SSC) are payable. N: Neither taxes nor SSC are levied. –: No specific scheme or no information available. * Benefit is a proportion of after tax income (and thus not taxable). T(n) or S(n): Longterm recipients will not pay the taxes or SSC as the credits, allowances or zero rate bands exceed the benefit level. (reduced): A reduced rate is payable for beneficiaries. tc: Non-wastable tax credit. 1. Only countries that provide family benefit supplement or specific non-means-tested benefits. 2. Family and housing benefits are not taxable as such but are subject to an obligatory contribution of 0.5% to a social fund (CRDS: contribution au remboursement de la dette sociale). 3. The general scheme is not taxable but the employers’ benefit is added to gross income before tax. Also the benefits for the 3rd and 4th child are taxed at 10% separately from other income. 4. Full payment of social security contributions for the benefit (indemnité d'insertion) but only the sickness contribution for the supplement (complément). 5. The transitional allowance is taxable as pension income but the childcare benefits are not. Source: OECD.
concessions resulting in lower effective rates (“reduced”). In some cases, benefits are taxable but the structure of the tax system is such that a year-long recipient would pay no tax [“T(n)”]. “N” indicates that the specific benefit is not taxable. Benefit income in some countries (e.g. UI and UA in Austria and Germany) is calculated in relation to previous net in-work earnings and is therefore not taxable (indicated by an asterisk in Table 1.12). Finally, benefits may be paid in the form of non-wastable tax credits and will, therefore, not be taxable (“tc”). Interdependencies between benefit entitlements are mainly a consequence of one type of benefit employing a means-test that comprises other benefits for the purpose of
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
55
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
assessing beneficiaries’ incomes. For instance, financial safety nets of “last resort”, such as social assistance (SA), typically involve an assessment of benefit claimants’ resources based on comprehensive income definitions including most other benefits. Any changes in benefits that are included in the means test (such as family benefits in Finland and the United Kingdom, see Table 1.4) will therefore be partly or wholly offset by changes in SA benefit amounts. As a result, the effects of policy reforms making family benefits more or less generous can be very limited for families receiving SA unless relevant SA rules are changed in parallel. Measures, such as in-work benefits, specifically aimed at low-income households have to be tailored around other relevant benefit schemes in order to maximise their effectiveness (e.g. by targeting entitlements to incomes above maximum SA levels or including them in the SA means test and, at the same time, making them sufficiently generous to lift recipients above the income level guaranteed by SA). However, not linking different tax or benefit instruments can be problematic as well. Means tests that ignore the effects of other taxes or benefits on net incomes may result in overly abrupt, and perhaps unintended, benefit withdrawals. Multiple means-tested benefits can lead to situations of extremely distorted work incentives and the same is true for means tests that assess incomes without deducting taxes. For instance, Danish SA amounts are reduced by 100% of pre-tax income. As a result, higher in-work earnings can reduce disposable income for families receiving SA since the tax payable on any earnings adds to the 100% benefit withdrawal rate and causes marginal effective tax rates in excess of 100%. Similar situations can arise in Luxembourg and Spain: since taxes or contributions paid on any additional earnings are not fully taken into account in the means test, SA recipients can lose income as a result of increased work efforts. In other countries, different benefits are withdrawn independently. As a result, benefit phase-out rates for recipients of more than one income-related benefit are cumulated resulting in marginal effective tax rates that can exceed 100%. For instance, the German Mainzer Modell in-work benefit was not counted as “means” when assessing the family income of SA recipients. For people receiving both these benefits simultaneously, the rate at which in-work benefits are withdrawn therefore adds to the 100% phase-out rate of SA. This type of interaction highlights the virtue of integrated analyses of tax-benefit systems (as well as international comparisons in order to benefit from experiences with similar problems in other countries).8 Examples of “passporting”, the third type of interdependence listed above, can be found in several countries, where eligibility to housing benefits (HB) is conditional upon receiving SA or is in fact integrated into the SA programme (e.g. Luxembourg). In Canada and Korea, certain childcare benefits are targeted exclusively towards SA recipients. A result of these mechanisms is that an expiration of SA eligibility can cause income reductions in excess of the SA amount. The relevance of interactions between different types of taxes and benefits is most obvious when considering the situation of benefit recipients starting a new job or changing their working hours. UI, UA and SA benefits are intended to replace the absence of other sources of income and so are conditional upon the recipient not working. Other benefits discussed above are means-tested and will generally also be reduced when the beneficiary starts to work. Recipients of these benefits may find that the immediate financial consequences of starting to work are complex, with entitlement to some benefits lost and the amount of other benefits reduced.
56
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
1.
ELEMENTS OF TAX-BENEFIT SYSTEMS
Notes 1. The income consequences of old-age pensions and disability benefits are the subject of separate OECD studies; see OECD (2001) and OECD (2003b). 2. While this report only considers cash benefits, it should be emphasised that benefits in-kind, such as the provision of social housing, can substantially reduce families’ housing-related expenditures. 3. Unemployment benefit generosity and coverage also differs across countries as a result of differences in the implementation of these formal rules in practice. See OECD (2000), Chapter 4. 4. 76% (Denmark, fourth quarter of 2003), 76% (Finland, fourth quarter of 2002) and 78% (Sweden, 2002) of the labour force are members of the respective unemployment insurance funds. 5. Average production worker (APW) values are the average full-time gross earnings of production workers in the manufacturing sector for the country as a whole. The methodology underlying these data is explained in OECD (2003c). APW values and, where applicable, statutory minimum wages are shown in Annex A. 6. Private childcare providers may also be subject to fee-related regulations which will affect both the price structure and the number of childcare places provided through the private sector. A description of the regulatory framework governing the childcare sector is beyond the scope of this publication. 7. Similar to other means-tested benefits, targeting towards low-income groups may give rise to stigmatisation and, hence, incomplete benefit take-up. 8. For instance, Blundell (2002) documents how past reforms of the UK in-work benefit have deliberately included in-work benefit amounts in the means-test of other benefits in order to avoid a “staggering” of withdrawal rates.
Bibliography BEHRENDT, C. (2002), At the Margins of the Welfare State: Social Assistance and the Alleviation of Poverty in Germany, Sweden and the United Kingdom, Ashgate. BLUNDELL, R. (2002), “Welfare-to-Work: Which Policies Work and Why?” Keynes Lecture in Economics: 2001, Proceedings of the British Academy, Vol. 117, pp. 477–524. HEIKKILÄ, M. and E. KESKITALO (eds.) (2001), Social Assistance in Europe: A Comparative Study on Minimum Income in Seven European Countries, STAKES, Helsinki, www.stakes.fi/verkkojulk/pdf/ socasst.pdf. HERNANZ, V., F. MALHERBET and M. PELLIZZARI (2004), “Take-up of Welfare Benefits in OECD Countries: A Review of the Evidence”, OECD Social, Employment and Migration Working Papers, No. 17, OECD, Paris. IMMERVOLL, H. et al. (2001), “The Impact of Tax-Benefit Systems on Poverty Rates in the Benelux Countries. A Simulation Approach Using Synthetic Datasets”, Schmollers Jahrbuch – Journal of Applied Social Science Studies, Vol. 121(3), pp. 313-352. IMMERVOLL, H. (2004), “Can Parents Afford to Work? Childcare Costs, Benefits and Work Incentives”, OECD Social, Employment and Migration Working Papers, OECD, Paris, forthcoming. MOFFITT, R.A. (ed.) (2003), Means-Tested Transfer Programs in the United States, The University of Chicago Press, Chicago. OECD (1998a), The Battle against Exclusion: Social Assistance in Australia, Finland, Sweden and the United Kingdom, OECD, Paris. OECD (1998b), The Battle against Exclusion: Social Assistance in Belgium, the Czech Republic, the Netherlands and Norway, OECD, Paris. OECD (1999), The Battle against Exclusion: Social Assistance in Canada and Switzerland, OECD, Paris. OECD (2000), OECD Employment Outlook, OECD, Paris. OECD (2001), Ageing and Income: Financial Resources and Retirement in 9 OECD Countries, OECD, Paris. OECD (2002a), OECD Employment Outlook, OECD, Paris. OECD (2002b), Babies and Bosses – Reconciling Work and Family Life (Vol. 1): Australia, Denmark and the Netherlands, OECD, Paris.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
57
1. ELEMENTS OF TAX-BENEFIT SYSTEMS
OECD (2003a), Babies and Bosses – Reconciling Work and Family Life (Vol. 2): Austria, Ireland and Japan, OECD, Paris. OECD (2003b), Transforming Disability into Ability: Policies to Promote Work and Income Security for Disabled People, OECD, Paris. OECD (2003c), Taxing Wages: 2001-2002, OECD, Paris. OECD (2004), Babies and Bosses – Reconciling Work and Family Life (Vol. 3): New Zealand, Portugal and Switzerland, OECD, Paris, forthcoming. PUIDE, A. and MINAS, R. (2001), “Recipients of Social Assistance”, in Heikkilä and Keskitalo (eds.), pp. 37-61. STANDING, G. (ed.) (2003), Minimum Income Schemes in Europe, International Labour Office, Geneva. VLEMINCKX, K. and T.M. SMEEDING (eds.) (2001), Child Well-Being, Child Poverty and Child Policy in Modern Nations: What Do We Know?, The Policy Press, Bristol.
58
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ISBN 92-64-01515-9 Benefits and Wages: OECD Indicators 2004 Edition © OECD 2004
Chapter 2
Tax Burdens, Benefit Entitlements and Net Income Levels
Introduction 1. An illustration of the mechanics built into tax-benefit systems 2. Net incomes in employment: tax-benefit position of employees and their families 3. Net incomes during unemployment: tax-benefit position of unemployed persons and their families 4. Net transfer payments available to the poor
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
59
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Introduction What levels of household income do the tax-benefit rules discussed in the previous chapter translate to? And how important are individual tax-benefit instruments in determining household resources? This chapter compares calculated tax burdens and benefit entitlements for a range of family situations and earnings levels to compare the resources available to families in different circumstances. How the relative income situations in different employment circumstances affect financial work incentives is discussed in Chapter 3. The calculations are performed using the OECD’s tax-benefit models. These models are built using detailed country-by-country information on legal tax and benefit rules. They can be used to quantify the combined effects of taxes and social benefits on household income. A detailed methodological explanation including a discussion of relevant assumptions is provided in Annex A. Annex B explains how versions of the models may be obtained by those interested in using them for their own purposes. Tax and benefit amounts depend on gross incomes, employment situation, as well as a large number of family characteristics. Their impact on household incomes will therefore vary depending on household circumstances. In order to capture these relationships, we compute net incomes for a set of different family types (described in more detail in Annex A): 1. Single adult without children. 2. Lone parent with two children aged 4 and 6. 3. One-earner adult couple. 4. One-earner adult couple with two children aged 4 and 6. 5. Two-earner adult couple. 6. Two-earner adult couple with two children aged 4 and 6. For each of these family types, the tax-benefit models are used to evaluate tax burdens, benefit entitlements and net incomes at different levels of gross income. Childcare costs and benefits conditional on the use of childcare services are disregarded. These indicators provide a useful complement to population-based approaches such as incidence studies based on micro-data alone or microsimulation models capable of simulating the effects of fiscal and social policy instruments on a sample of actual households. By computing tax and benefit amounts using existing policy rules, calculations based on hypothetical households help us understand the features of these instruments. And by repeating these calculations for a number of different household situations, they allow us to assess under which circumstances (e.g. family situation or income level) each of these features becomes relevant. For comparisons across countries, it is important to bear in mind that population structures will differ. The relevance of a particular household situation will therefore vary between countries.
60
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
1. An illustration of the mechanics built into tax-benefit systems A useful approach for illustrating the mechanics of tax-benefit systems is by means of so-called “budget-constraint” graphs. These graphs show the feasible combinations of gross and net incomes given the tax-and benefit rules that apply to a specific type of household. By plotting net incomes on pre-tax-benefit incomes, we can compare net transfers (benefits minus taxes) across household types and, as in Immervoll et al. (2001), across countries. These graphs can also be used to analyse what determines net household incomes. This is done by disaggregating household net income in order to separately indicate the impact of each individual tax and benefit instrument. Figure 2.1 shows examples of these graphs for several countries. Results relate to a lone-parent household with two children aged 4 and 6 (household type 2 above). For illustrative purposes, and in order to provide further information on some of the more recently-introduced “make work pay” policies, results are shown here for countries operating employment-conditional benefits (see also Chapter 1, sub-section i). The full set of budget-constraint graphs for six family types and 28 countries is available on the Internet at www.oecd.org/els/social/ workincentives. All results are shown for a transition from non-employment to employment under the assumption that the lone parent has not received unemployment benefits while out of work. For low income levels, social assistance benefits are received instead. Given the particular circumstances of lone parents, a situation of non-employment without entitlement to unemployment benefits is of considerable relevance for these types of household. Employment records may not be sufficient to qualify for unemployment benefits in the first place or entitlements may have expired as a result of periods spent caring for children at home. The budget constraints are displayed as bold dark lines in Figure 2.1. Net incomes (NET) as well as a range of income components (discussed in more detail below) are shown for levels of gross earnings (GROSS) ranging from 0 to 133% of average production worker wages (APW).1 The rate at which any additional gross earnings are “taxed away” by the combined effects of taxes and benefit withdrawals can be seen by comparing the slope of the budget constraint to that of the gross income line. The budget constraint graphs therefore present useful summaries of marginal effective tax rates (METR).2 If a small increase in gross earnings results in no change in net income, NET is horizontal (METR = 100%) while a budget constraint that is parallel to the GROSS line indicates that the full amount of additional earnings amount adds to net income (METR = 0). Similarly, the distance between NET and GROSS indicates the size of effective tax burdens. Where they cross, total benefits equal total taxes (the effective tax burden is zero). Net incomes in Figure 2.1 are shown as the sum of gross earnings and total benefits minus total taxes. Social assistance (SA), housing benefits (HB), family benefits (FB) and inwork benefits (IW) are shown as positive income components above the horizontal axis while income tax (IT) and own social security contributions (SSC) reduce net income and are therefore shown as negative components below the horizontal axis. For all countries, the net income line is flat at low levels of gross income: a change in gross incomes results in no or only very small changes in net income as a result of the phase-out of means-tested benefits. Earnings disregards, as in Australia or the United Kingdom, can reduce benefit withdrawal rates and hence increase net incomes for those
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
61
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.1. Budget constraints 2002, lone parent with two children aged 4 and 6, selected countries Social security contributions
Social assistance
Income tax
Net incomes (NET)
In-work benefits
Housing benefits
Family benefits
Gross earnings
Thousand AUD per year 80 Australia 70 60 50 40 30 20 10 0 -10 -20 -30 0
10
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
Thousand EUR per year 50 Belgium 40 30 20 10 0 -10 -20 0
10
Thousand CAD per year 60 Canada 50 40 30 20 10 0 -10 -20 0
10
Source: OECD Tax-Benefit Models (budget constraint graphs for a wider range of family types can be found at www.oecd.org/els/ social/workincentives).
62
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.1. Budget constraints (cont.) 2002, lone parent with two children aged 4 and 6, selected countries Social security contributions
Social assistance
Income tax
Net incomes (NET)
In-work benefits
Housing benefits
Family benefits
Gross earnings
Thousand EUR per year 50 Finland 40 30 20 10 0 -10 -20 0
10
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
Thousand EUR per year 35 France
30 25 20 15 10 5 0 -5 -10 0
10
Thousand EUR per year 50 Germany 40 30 20 10 0 -10 -20 0
10
Source: OECD Tax-Benefit Models (budget constraint graphs for a wider range of family types can be found at www.oecd.org/els/ social/workincentives).
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
63
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.1. Budget constraints (cont.) 2002, lone parent with two children aged 4 and 6, selected countries Social security contributions
Social assistance
Income tax
Net incomes (NET)
In-work benefits
Housing benefits
Family benefits
Gross earnings
Thousand EUR per year 50 Ireland 40 30 20 10 0 -10 0
10
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
Thousand JPY per year 6 000 Japan 5 000 4 000 3 000 2 000 1 000 0 -1 000 -2 000 0
10
Thousand EUR per year 50 Netherlands 40 30 20 10 0 -10 -20 0
10
Source: OECD Tax-Benefit Models (budget constraint graphs for a wider range of family types can be found at www.oecd.org/els/ social/workincentives).
64
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.1. Budget constraints (cont.) 2002, lone parent with two children aged 4 and 6, selected countries Social security contributions
Social assistance
Income tax
Net incomes (NET)
In-work benefits
Housing benefits
Family benefits
Gross earnings
Thousand NZD per year 60 New Zealand 50 40 30 20 10 0 -10 -20 0
10
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
20
30
40
50
60
70
80
90
100
110
120
130 % of APW
Thousand GBP per year 30 United Kingdom 25 20 15 10 5 0 -5 -10 0
10
Thousand USD per year 50 United States 40 30 20 10 0 -10 0
10
Source: OECD Tax-Benefit Models (budget constraint graphs for a wider range of family types can be found at www.oecd.org/els/ social/workincentives).
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
65
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
combining benefit income with small amounts of in-work earnings. Once social assistance and housing benefits are withdrawn completely, net incomes increase at higher rates as indicated by a steeper slope of the NET line. Family benefit amounts shown here include lone-parent benefits but exclude childcare benefits unless they are also available to parents not using childcare services (i.e. any child-raising allowances shown in Table 1.8 are included). Any childcare costs are also not taken into account in computing net incomes. In about half of the countries shown, family benefits are not income-related and therefore provide a constant level of resources independently of parents’ earnings and working hours. For lone parents, these benefits often provide a substantial part of total net income. For instance, in Australia and Ireland, they are the main source of income for lone parents with earnings below, respectively, 33 and 38% of APW. Several countries (Australia, Canada, Ireland, Japan, New Zealand) phase out benefits such that they are already severely reduced at average levels of earnings. Family benefits in the United States are akin to social assistance schemes in other countries and are only available to the lowest-income groups. In Canada (Ontario), where the Ontario Child Care Supplement for Working Families is available at an increasing rate once annual earnings exceed CAD 5 000, benefits are withdrawn at a lower rate. German taxpayers can opt between receiving a non-wastable tax-credit or a deduction from taxable income – the latter being more advantageous for taxpayers facing higher marginal IT rates (at earnings levels above 110% of APW in the lone-parent case). In-work benefits typically exhibit the opposite profile of minimum income benefits, with benefit levels going up once earnings or working hours exceed a certain minimum threshold. They thus boost net incomes for those willing and able to find employment. However, in several cases, these benefits are targeted towards lower incomes so that benefit amounts are phased out at varying rates for higher-earning individuals. As discussed in Chapter 1, this leads to a flattening of the budget constraint over the phaseout range. While individuals entering new employment can thus benefit from considerable additions to their net incomes, the reduction of benefit levels at higher earnings levels lessens the financial reward for additional work efforts for those with earnings in the phase-out range (indicated by flatter NET lines). This is evident in the United Kingdom and, more strikingly, in Germany, where the withdrawal of in-work benefits combines with taxes and phase-outs of other benefits to cause METRs in excess of 100% (downward sloping NET line). In Belgium (complément de garde d’enfant), the Netherlands (Work Credit Supplement), Ireland (Back to Work Allowance) and New Zealand (Work Start Grant), benefits are not income-related and are therefore available as long as relevant working-hours and into-work transition criteria are met. 3 A one-off transition benefit is available in Japan but only to unemployment insurance recipients and not to those receiving SA as in Figure 2.1. New Zealand operates two additional income-dependent IW benefits but these are not available for someone working at APW hourly wages due to a combination of working-hours and income conditions. For similar reasons, Figure 2.1 shows only a very limited impact of the Irish Family Income Supplement (indicated by the small hump in net incomes at around 50% APW): recipients need to work at least 19 hours per week. At the same time, there is a maximum earnings limit which is reached at just over 21 working hours for somebody earning APW hourly wages. IW benefits in Australia, Belgium4 and Canada are small and therefore not easily visible in the graphs. Note, however, that the Ontario Child Care Supplement for
66
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Working Families in Canada, classified as a family benefit in Figure 2.1, works in a similar way as IW benefits in other countries.
2. Net incomes in employment: tax-benefit position of employees and their families Budget constraints provide an in-depth view on the features of tax-benefit systems. However, when comparing across a larger number of countries, it is convenient to focus on selected earnings levels. This is done in Figure 2.2, which shows the tax-benefit position and net incomes for selected in-work situations. Given our focus on benefits, results are shown for low to moderate earnings levels between 33 and 100% of APW. Similar to the budget constraints shown above, wage rates are again equal to APW hourly wages so that persons earning less than 100% APW are employed part-time. Contrary to the results shown in Figure 2.1 above, we now assume that the worker has been in employment for some time (as a result, those in-work benefits that are paid following a transition into employment will not be available). All incomes are shown as percentages of APW and countries are displayed in ascending order of net income relative to gross earnings. Results are consistent with those presented in the OECD series Taxing Wages (OECD, 2003) but differ due to differences in scope. Firstly, the focus of the present report is specifically on current household incomes. As a result, certain compulsory payments, such as private old-age pension contributions in Denmark and Iceland, are taken into account. In contrast to OECD (2003) they are here taken to reduce calculated net income measures even though they do not correspond to the formal definition of a “tax”. Secondly, and most importantly, calculations presented here take into account a wide range of benefits that are particularly relevant for lowincome households. For a single average production worker, the highest relative net incomes amount to around 93% of earnings (Korea) while, at roughly 40% of gross earnings, net taxes (i.e. income taxes plus employees’ social security contributions minus any cash benefits) are highest in Denmark, Belgium and Germany. They tend to be lower for one-earner couples with the same amount of gross earnings and this is mainly a result of tax concessions available to couples (at this earnings level, benefits are generally not available for couples so they play less of a role). One-earner couples with children often have substantially higher net incomes due to a combination of family benefits and income tax concessions. In four countries (Iceland, Ireland, Luxembourg and Portugal), this causes net incomes to exceed gross earnings. Specific benefits or tax concessions are also available to lone parents. As a result, household net incomes of working lone parents with average earnings can, in absolute terms, be higher than for otherwise similar one-earner married couples (Canada, Hungary, Netherlands, Norway and especially Finland and Sweden). For married couples with spouses earning 100 and 67% of APW, net tax burdens are, relative to household gross earnings, generally similar to those of single-earner couples. In a purely individual-based progressive tax system, the tax burden for a two-earner couple would, relative to gross earnings, be the same as for a one-earner couple if both spouses’ earnings are the same and would be lower if, as is the case here, the second spouse’s earnings are lower. However, in countries with joint tax systems or sizable “joint elements”, such as tax allowances that are transferable between spouses, income taxes depend on gross income of the family or couple as a whole. In a progressive tax system that is not purely individual, relative tax burdens therefore tend to increase for two-earner BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
67
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.2. Tax-benefit position of employees 2002, in per cent of average production worker (APW) Earnings
Family benefits
Income tax
In-work benefits
Social assistance
Housing benefits
Own SSC
Total net income
Single person, earnings = 100% of APW Full-time employment
200 160 120 80 56 59 59
40
93
83 84 76 76 76 76 77 78 78 79 80 81 81 81 82 67 68 69 70 71 71 71 73 73
0 -40
T IR L KO R
PR
N SV K GR C
JP
NZ L CH E ES P
CZ E GB R IS L LU X
DN
K BE L DE U NL D FI N PO L SW E HU N NO R AU T IT A FR A CA N US A AU S
-80
Lone parent, 2 children, earnings = 100% of APW Full-time employment
200 160 120 80
88 89 89 80 81 84 85 85 86 86 86 86 86 69 72 73 74
97 98 102 90 91 91 92 92 94 95 96
40 0 -40
X LU
L IR
PR T IS L SV K
JP N NO R AU S GR C CZ E ES P CA N AU T FI N CH E GB R HU N SW E KO R
NZ L NL D IT A US A FR A
L
U DN K
DE
BE
PO
L
-80
One-earner couple, earnings = 100% of APW Full-time employment
200 160 120 80
90 90 93 82 82 83 83 85 85 86 75 77 78 79 79 79 79 80 74 73 72 71 71 70 70 69 67 68
40 0 -40
KO R
L IS
L IR
PR T ES P
K
N CH E LU X
JP
SV
CZ E NZ L FR A AU S CA N US A GR C
IT A GB R
N DN K SW E DE U HU N PO L NL D AU T NO R
FI
BE L
-80
Source: OECD Tax-Benefit Models.
68
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.2. Tax-benefit position of employees (cont.) 2002, in per cent of average production worker (APW) Earnings
Family benefits
Income tax
In-work benefits
Social assistance
Housing benefits
Own SSC
Total net income
One-earner couple, 2 children, earnings = 100% of APW Full-time employment
200 160 120
101 102 104 109 94 98 86 86 86 88 88 88 89 89 89 90 90 91 92 82 82 80 79 78 77 77 71 77
80 40 0 -40
CH E KO R SV K IR L LU X IS L PR T
JP N CA N US A IT A AU T ES P HU N CZ E GB R
PO L DN K FI N NL D BE L SW E NZ L DE U NO R FR A AU S GR C
-80
Two-earner couple, earnings = 167% of APW First spouse's earnings = 100% of APW, second spouse's earnings = 67% of APW, both full-time employment
200 160
157 144 137 137 138 138 141 130 131 132 135 135 123 124 126 129 129 129 130 122 121 119 118 116 116
120 96 100 103
80 40 0 -40
IR L KO R
C
P PR T
ES
X
GR
K
LU
SV
L CH E JP N
NZ
CZ E AU S IS L CA N US A GB R
DN
K BE L DE U NL D PO L SW E FI N NO R HU N IT A AU T FR A
-80
Two-earner couple, 2 children, earnings = 167% of APW First spouse's earnings = 100% of APW, second spouse's earnings = 67% of APW, both full-time employment
200 160 120 104
157 159 148 149 150 152 140 142 143 144 144 140 139 139 138 137 129 129 132 132 134 122 127 127 112 115 116
80 40 0 -40
CH E US A SV K PR T IR L KO R LU X
ES P GR C GB R
AU T
E
N
HU
L IS
CZ
JP N
FR A
NZ L AU S
IT A CA N
FI N SW E NO R
DN
K BE L DE U PO L NL D
-80
Source: OECD Tax-Benefit Models.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
69
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.2. Tax-benefit position of employees (cont.) 2002, in per cent of average production worker (APW) Earnings
Family benefits
Income tax
In-work benefits
Social assistance
Housing benefits
Own SSC
Total net income
Single person, earnings = 67% of APW Part-time employment (67%)
160 140 120 100 80 60
63 55 55 56 56 58 58 58 61 50 50 51 52 52 53 53 53 53 54 54 54 55 49 48 47 40 44 44
40 20 0 -20 -40
K
X CH E GR C IS L ES P PR T IR L KO R
LU
SV
IT A FR A NZ L CA N GB R JP N
AU T US A CZ E AU S
DE
DN
K
U BE L PO L SW E NL D NO R FI N HU N
-60
Lone parent, 2 children, earnings = 67% of APW Part-time employment (67%)
160 140 120 100 80
77 77 78 79 77 71 72 74 77 66 66 67 67 68 69 69 69 71 71 64 63 57 57 59 59
60 51
40
87 87
20 0 -20 -40 L IR
AU T HU N SV K LU X AU S PR T CA N SW E FI N IS L GB R
IT A NZ L JP N NO R
A CZ E US A
FR
L
U GR C DN K ES P KO R CH E NL D
DE
BE
PO
L
-60
One-earner couple, earnings = 67% of APW Part-time employment (67%)
160 140 120 100 80
69 69 62 64 65 66 55 55 55 56 56 56 56 57 58 58 58 58 58 60 54 53 52 52 51 50 48 49
60 40 20 0 -20 -40
IR L LU X IS L PR T
L ES P KO R
NZ
SV K
JP N DN K IT A CH E CA N
E AU S
CZ
FR A NL D US A GR C
N NO R AU T GB R
U
FI
DE
L BE L HU N
PO
SW
E
-60
Source: OECD Tax-Benefit Models.
70
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.2. Tax-benefit position of employees (cont.) 2002, in per cent of average production worker (APW) Earnings
Family benefits
Income tax
In-work benefits
Social assistance
Housing benefits
Own SSC
Total net income
One-earner couple, 2 children, earnings = 67% of APW Part-time employment (67%)
160 140 120 100 80
73 73 66 67 67 68 69 70 70 71 72 72 72 59 60 61 62 62 63 64 64
60
76
82 85 86
89 90 96
40 20 0 -20 -40 IR L GB R IS L SV K LU X PR T
A
N IT A US A CA N
JP
FR
NZ L HU N FI N AU T CZ E AU S
E
U DN K
DE
CH
GR
C PO L NO R SW E BE L ES P NL D KO R
-60
Two-earner couple, earnings = 133% of APW First spouse's earnings = 67% of APW, part-time employment (67%); second spouse's earnings = 67% of APW, full-time employment
160 140 120 100 80
80
85 88
121 111 111 113 113 115 116 105 107 107 107 107 109 109 109 105 105 103 102 100 100 94 96 98
127
60 40 20 0 -20 -40 P PR T IR L KO R
X
ES
LU
N IS L SV K CH E GR C
R
JP
GB
L
N CA
NZ
IT A AU T CZ E FR A US A AU S
DN
K BE L DE U PO L SW E NL D NO R FI N HU N
-60
Two-earner couple, 2 children, earnings = 133% of APW First spouse's earnings = 67% of APW, part-time employment (67%); second spouse's earnings = 67% of APW, full-time employment
160 140 120 100 80
87
132 126 127 129 120 120 121 121 122 125 125 114 115 115 118 119 113 111 111 104 106 107 108 109 94 97 99
60 40 20 0 -20 -40 FR A GR C CZ E ES P HU N CH E AU T GB R IS L US A PR T SV K KO R IR L LU X
IT A CA N JP N
N AU S
FI
BE L DE U NL D SW E NZ L NO R
DN K PO L
-60
Source: OECD Tax-Benefit Models.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
71
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.2. Tax-benefit position of employees (cont.) 2002, in per cent of average production worker (APW) Earnings
Family benefits
Income tax
In-work benefits
Social assistance
Housing benefits
Own SSC
Total net income
Single person, earning = 33% of APW Part-time employment (33%)
120 100 80 60 40
33 34 34 35 36 36 36 37 39 39 29 29 29 30 30 30 31 32 25 27 28 28
20
40
40
41 41 43
46
0 -20
IS L FR A FI N NZ L NL D GB R CH E IR L LU X
PR T SV K NO R SW E DE U
IT A CZ E ES P KO R AU T JP N
PO
L BE L GR C HU N US A AU S DN K CA N
-40
Lone parent, 2 children, earnings = 33% of APW Part-time employment (33%)
120 100 80
64 64 64 65 65 66 61 62 63 54 54 57 58 59 59 53 52 51
60 40 34 37 38 30 33
20
70 71 73
40 42
0 -20
X IR L
LU
K FR A JP N
SV
N
L
R AU S
GB
FI
NZ
CZ E US A DE U DN K NL D SW E AU T NO R CH E IS L PR T CA N
L BE L HU N
PO
IT A ES P KO R
GR
C
-40
One-earner couple, earnings = 33% of APW Part-time employment (33%)
120 100 80
69
60 40 20
40 37 39 32 32 33 35 28 28 31 31 31
54 50 51 52 53 53 44 45 47 47 47
58 59 60 61
0 -20
L IS L DN K LU X
IR
PR T SV K
FI N NL D CH E NZ L FR A
CZ E DE U AU T GB R SW E JP N
PO L AU S US A CA N NO R
GR C HU N IT A ES P BE L KO R
-40
Source: OECD Tax-Benefit Models.
72
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.2. Tax-benefit position of employees (cont.) 2002, in per cent of average production worker (APW) Earnings
Family benefits
Income tax
In-work benefits
Social assistance
Housing benefits
OwnSSC
Total net income
One-earner couple, 2 children, earning = 33% of APW Part-time employment (33%)
120 100
89
80 60 40 30
20
34 35
40 40
46
56 57 57 52 52
77 72 74 67 70 70 70 70 71 65 65 65 64 62
94
81
0 -20
L PR T SV K LU X
L
IS
IR
JP N AU T FI N GB R DN K FR A
E
S AU
CH
D US A SW E NZ L CZ E CA N
U
NL
DE
GR
C IT A ES P BE L HU N KO R PO L NO R
-40
Two-earner couple, earnings = 100% of APW First spouse's earnings = 33% of APW, part-time employment (33%); second spouse's earnings = 67% of APW, full-time employment
120 100
95 95
86 86 86 89 89 89 81 81 81 83 83 83 84 84 77 77 78 80 80 81 76 73 69 71 72
80 60
61
40 20 0 -20
120
P IS L PR T KO R IR L
ES
SV K GB R CH E LU X
IT A JP N CA N AU S GR C
NZ L US A FR A
T AU
E
Tow-earner couple, 2 children, earnings = 100% of APW First spouse's earnings = 33% of APW, part-time employment (33%); second spouse's earnings = 67% of APW, full-time employment
100
101 103 104 104 96 96 97 97 100 92 93 93 94 95 90 88 87 85 86 87 87 80 82 83 83 83
80 60
CZ
DN
K BE L DE U PO L SW E NL D NO R FI N HU N
-40
68 72
40 20 0 -20
L IS L
IR
AU T US A SV K PR T LU X
ES P CA N CZ E IT A CH E KO R HU N GB R
JP N FR A
FI N GR C AU S
BE L NZ L DE U NL D SW E NO R
DN K PO L
-40
Source: OECD Tax-Benefit Models.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
73
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
couples. For instance, married couples with one spouse earning an average wage face net tax burdens of 33% in Belgium, 30% in Germany and 10% in Iceland while net taxes as a fraction of total household earnings increase to 40, 38 and 23% for two-earner married couples with total earnings at 167% of APW. At lower income levels, the impact of taxes, and especially benefits, on household incomes is very different both in absolute terms and when compared across countries. In the case of a single person with employment income of 33% of APW, net taxes are positive in less than half the countries considered here. While taxes and contributions are often of a similar magnitude in the remaining countries, a combination of social assistance, housing and in-work benefits causes net incomes to exceed gross earnings. An interesting case is Denmark, where high levels of taxes are largely compensated by means-tested social assistance and housing benefits. For low-earning families with children, social benefits can be the main source of income, especially in the case of lone parents. In-work benefits are sometimes targeted towards families with children and amounts may vary considerably depending on family income and working hours. For instance, the Working Families Tax Credit in the United Kingdom is not available to those working part-time at around 14 hours per week (the 33% APW case) but is the main benefit payment to lone parents earning two thirds of APW (with around 28 hours of work). For a number of reasons, the amounts shown for means-tested benefits can be considered upper-bound estimates. First, the calculations are based on the assumption that households do not have assets that would disqualify them from receiving meanstested benefits such as social assistance. Also, people entitled to means-tested benefits may not in fact receive them (see note 8). Finally, while housing benefits frequently provide the largest part of benefit income, they are computed for rental expenses equal to 20% of APW, which may well exceed actual housing costs, particularly for low-income households.
3. Net incomes during unemployment: tax-benefit position of unemployed persons and their families Resources of households without any employment incomes are largely determined by replacement benefits or, similar to the low-earnings situations shown in Figure 2.2 above, by means-tested transfers. The tax-benefit position of unemployed individuals is summarised in Figure 2.3 for three different situations. For those entitled to unemployment benefits, benefit amounts may depend on the duration of unemployment and the level of previous in-work earnings. Figure 2.3 shows results at two levels of previous earnings (67 and 100% of APW) for a 40-year-old unemployed individual during the initial period of unemployment.5 To be able to compare maximum benefit entitlements across countries, we consider long and un-interrupted work histories (details are provided in Annex A). The third scenario is relevant for those not receiving unemployment benefits. If they meet other relevant eligibility criteria, these individuals may be entitled to social assistance benefits (but, as mentioned above, may not always claim or receive them). As all results in this report, incomes are computed for a particular month – here the initial period of unemployment following any waiting period – and then annualised. Net incomes of unemployment benefit recipients vary considerably more across countries than those of employees. For a single production worker with average previous earnings, net incomes during the initial phase of unemployment range from 25% of APW
74
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.3. Tax-benefit position of unemployed individuals 2002, in per cent of average production worker (APW), initial phase of unemployment, previously full-time employed Earnings
Family benefits
Housing benefits In-work benefits
Income tax
Unemployment benefits Own SSC
Social assistance
Total net income
Single person, unemployment benefits Previous earnings = 100% of APW
175 150 125 100 75
56 57 57 50 50 51 52 43 43 44 47 48 48 39 39 38 38 38 38 30 31 33 34 36 25 29
50 25
65 66
0 -25
K
N FR A SW E ES P CH E PR T LU X
JP
SV
D CA N KO R
NL
L AU T IR L US A FI N NO R
E
BE
L IS
CZ
AU
S NZ L PO L HU N DN K GB R DE U IT A GR C
-50
Lone parent, unemployment benefits Previous earnings = 100% of APW
175 150 125 100 75 50
72 75 75 67 67 67 70 61 63 63 63 64 65 58 58 56 53 46 47 47 50 50 50 51 38 44
83
92
25 0 -25
FI N SW E LU X
ES P SV K CA N NO R PR T CH E
CZ E DN K IR L GB R DE U IS L JP N NL D AU T FR A
PO L GR C AU S US A BE L NZ L IT A HU N KO R
-50
One-earner couple, unemployment benefits Previous earnings = 100% of APW
175 150 125 100 75 50 25
23
65 71 56 58 59 59 60 60 53 53 52 51 50 44 44 45 45 46 48 50 38 39 42 42 43 31 32
0 -25
IR L CH E IS L ES P PR T LU X
CZ E DE U AU T US A DN K FI N NO R KO R JP N CA N FR A NL D SW E SV K
L IT A NZ L GB R
BE
AU S HU N PO L GR C
-50
Source: OECD Tax-Benefit Models.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
75
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.3. Tax-benefit position of unemployed individuals (cont.) 2002, in per cent of average production worker (APW), initial phase of unemployment, previously full-time employed
Earnings
Family benefits
Housing benefits In-work benefits
Income tax
Unemployment benefits Own SSC
Social assistance
Total net income
One-earner couple, 2 children, unemployment benefits Previous earnings = 100% of APW
175 150 125
89 92
100 72 74 75 77 66 66 67 67 70 60 61 63 64 65 65 65 58 56 51 52 52 53 54 44 47 49
75 50 25 0 -25
FI N SW E GB R CA N ES P AU T PR T IR L CH E IS L SV K LU X
U CZ E FR A
N
DE
D
JP
NL
L IT A AU S DN K NO R
NZ
A PO L KO R
US
GR
C BE L HU N
-50
Two-earner couple First spouse unemployment benefits (previous earnings = 100% of APW), second spouse's earnings = 67% of APW, full-time employed
175 150 125 100 75
56 60
114 114 108 111 101 104 105 106 97 96 96 94 92 86 86 88 88 90 91 78 81 69 70 73
122 125
50 25 0 -25
175
X PR T
P
LU
Two-earner couple, 2 children First spouse unemployment benefits (previous earnings = 100% of APW), second spouse's earnings = 67% of APW, full-time employed 148
150 125 100 75
ES
N CH E KO R
JP
N FR A SW E SV K
CA
IT A DE U IS L FI N CZ E AU T NL D US A NO R
PO L DN K BE L HU N GR C IR L
AU
S NZ L GB R
-50
74 68 72
81
88 88 90
112 113 113 114 114 114 106 107 111 111 99 99 101 102 103 104
130 122 124 127
50 25 0 -25
ES P CH E PR T LU X
NZ L AU S PO L DN K GB R GR C BE L IT A HU N NL D IR L FI N CZ E IS L NO R DE U JP N CA N FR A US A AU T KO R SW E SV K
-50
Source: OECD Tax-Benefit Models.
76
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.3. Tax-benefit position of unemployed individuals (cont.) 2002, in per cent of average production worker (APW), initial phase of unemployment, previously full-time employed
Earnings
Family benefits
Housing benefits In-work benefits
Income tax
Unemployment benefits Own SSC
Social assistance
Total net income
Single person, unemployment benefits Previous earnings = 67% of APW
150 125 100 75
50 44 45 47 38 38 39 39 39 40 40 43 43 33 33 33 33 33 34 34 36 36 31 30 30 29 25 27
50 25 0 -25
ES P CH E LU X PR T
L
A
IR
FR
FI N SW E JP N
IS L SV K BE L NL D
CA N GB R DE U GR C
AU T DN K KO R
AU
S IT A NZ L CZ E PO L HU N US A NO R
-50
Lone parent, unemployment benefits Previous earnings = 67% of APW
150 125 100 75 50
70 71 62 63 63 65 67 56 56 57 58 58 58 58 59 60 53 51 50 50 44 46 47 48 37 38 38 41
25 0 -25
FI N SW E
IS L JP N SV K LU X
A
E
R NO
FR
CH
L
N GB R
CA
IR
CZ E DE U DN K NL D PR T AU T
BE L ES P NZ L HU N
IT A KO R PO L US A GR C AU S
-50
One-earner couple, unemployment benefits Previous earnings = 67% of APW
150 125 100
68
75 50 25
23
42 43 43 44 45 45 46 46 36 38 38 39 40 40 41 47 29 31 32 33
49 50 52
58 59 60
0 -25
IS L LU X
FI N DN K SW E NL D PR T CH E SV K IR L
FR A DE U ES P AU T
CZ E NO R NZ L GB R
A GR C CA N BE L JP N
US
PO L KO R
IT A HU N
AU S
-50
Source: OECD Tax-Benefit Models.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
77
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.3. Tax-benefit position of unemployed individuals (cont.) 2002, in per cent of average production worker (APW), initial phase of unemployment, previously full-time employed Earnings
Family benefits
Housing benefits In-work benefits
Income tax
Unemployment benefits Own SSC
Social assistance
Total net income
One-earner couple, 2 children, unemployment benefits Previous earnings = 67% of APW
150 125
89 93
100 77 70 74 62 63 65 65 65 66 67 60 60 58 52 52 53 56 56 56 46 47 48 49 41 44 45
75 50 25 0 -25
L IS L SV K LU X
IR
CH E GB R PR T AU T
E
N FI
CZ
NZ L DE U NL D AU S DN K FR A CA N SW E JP N
IT A GR C US A KO R BE L ES P HU N PO L NO R
-50
Two-earner couple First spouse unemployment benefits (previous earnings = 67% of APW), second spouse's earnings = 67% of APW, full-time employed
150 125 100 75
56 60
90 90 84 84 86 86 86 88 78 78 79 80 81 82 83 83 69 70 73
101 102 96 97 97 99
109
50 25 0 -25
150
IS L FR A JP N KO R CH E ES P LU X PR T
IR L US A CA N SW E SV K
D AU T GR C
NL
N
R NO
FI
Two-earner couple, 2 children First spouse unemployment benefits (previous earnings = 67% of APW), second spouse's earnings = 67% of APW, full-time employed
125 100 75
IT A CZ E HU N
PO L DN K BE L DE U
AU
S NZ L GB R
-50
74 68 72
81
104 105 106 106 108 99 99 99 100 102 103 103 93 95 97 97 88 88 89 90 90 93
115
125
50 25 0 -25
P IS L CH E PR T LU X
K
ES
SV
US A FR A
T AU
L IR
JP N
CA N DE U HU N
IT A NO R CZ E FI N SW E KO R
BE L
NZ L AU S PO L DN K GB R GR C NL D
-50
Source: OECD Tax-Benefit Models.
78
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.3. Tax-benefit position of unemployed individuals (cont.) 2002, in per cent of average production worker (APW), initial phase of unemployment, previously full-time employed
Earnings
Family benefits
Housing benefits In-work benefits
Income tax
Unemployment benefits Own SSC
Social assistance
Total net income
Single person No unemployment benefits
125 100 75 50
41 43 36 36 39 39 28 29 30 31 33 33 34 34 35 27 21 22 23 24 16 17 17 20 20
25 0
0
0
5
E IR L
CH
FI N SW E IS L NL D LU X
U FR A AU T SV K GB R
DE
BE L CZ E JP N DN K NZ L NO R
L
P ES
PO
CA N HU N PR T AU S
GR
C IT A US A KO R
-25
Lone parent No unemployment benefits
125 100 75 50
38 42 34 37 29 30
62 63 65 58 58 58 59 59 53 54 54 56 52 51 51 50 49 47 47 48
25 0
0
2
K SV
R PO L BE L PR T DE U AU S CA N NZ L SW E CZ E NL D DN K FI N FR A NO R AU T IR L GB R IS L CH E LU X JP N
P
KO
A
ES
US
IT A GR C HU N
-25
One-earner couple No unemployment benefits
125 100 75
52 52 47 50 42 43 44 45 46 37 39 39 40 40
50 30 32 26 27 29 25
61 57 58 59
17 18 9 0
0
0
L
L
IS
IR
FI N SW E NL D DN K CH E LU X SV K
AU T
CZ E NZ L GB R FR A
R DE U PR T JP N
NO
L PO
L BE
AU S KO R ES P CA N
IT A US A HU N
GR
C
-25
Source: OECD Tax-Benefit Models.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
79
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.3. Tax-benefit position of unemployed individuals (cont.) 2002, in per cent of average production worker (APW), initial phase of unemployment, previously full-time employed
Earnings
Family benefits
Housing benefits In-work benefits
Income tax
Unemployment benefits Own SSC
Social assistance
Total net income
One-earner couple, 2 children No unemployment benefits
125 100
89
75 55 51 51 52 52 53
42 46 36 37 39
50
74
70 65 65 65 66 67 60 60 62 63
78 80
27
25 0
0
2
K SV
L
X LU
L
IS
IR
CH E GB R PR T AU T
E
N FI
CZ
NZ L NL D FR A DN K SW E JP N
N PO L NO R
U
CA
DE
P AU S BE L KO R
A
ES
US
IT A GR C HU N
-25
Two-earner couple First spouse unemployed without unemployment benefits, second spouse's earnings = 67% of APW, full-time employed
125 100
69 62 64 65 56 56 56 57 58 58 58 58 58 60 56 69 55 55 55 54 54 53 52 48 49 50 51 52
75 50 25 0
CH E SV K NZ L ES P KO R IR L IS L PR T
X IT A CA N
LU
CZ E AU S JP N
R AU T DN K GB R FR A NL D US A GR C
NO
N FI
U DE
SW
E PO L BE L HU N
-25
Two-earner couple, 2 children First spouse unemployed without unemployment benefits, second spouse's earnings = 67% of APW, full-time employed
125 100
76 72 72 72 73 73 74 68 69 69 70 71 71 63 64 64 66 67 59 60 61 62 62
75
82
86 86
89
96
50 25 0
IT A US A LU X CA N IR L IS L GB R SV K PR T
A FR
DN K HU N FI N CZ E AU T AU S JP N
L NZ
U DE
E CH
GR
C PO L NO R SW E BE L ES P NL D KO R
-25
Source: OECD Tax-Benefit Models.
80
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
in Australia to 66% in Luxembourg. The values of unemployment benefits (ranging from 14% of previous APW earnings in the United Kingdom to 80% in Luxembourg and Sweden) vary even more but these differences are compensated to some extent by other transfer payments and the tax treatment of unemployment benefits. In nine countries, unemployment benefits are the same regardless whether previous earnings were 100 or 67% of APW. Of those countries, Australia, Iceland, Ireland, New Zealand, Poland and United Kingdom provide fixed-amount unemployment payments (sometimes means-tested) while benefits in Belgium, Denmark and Hungary are earningsrelated but subject to benefit ceilings which are reached at both the 100 and 67% earnings levels. In Germany, unemployment insurance benefits do differ between the two scenarios but net incomes are virtually the same as other benefits make up the difference. Those not entitled to unemployment benefits are often substantially worse off. Compared to a single unemployment benefit recipient with previous earnings of 67% of APW, net incomes of social assistance recipients are less than one sixth in the United States and less than half in Canada, Korea, Portugal and Spain. In Greece and Italy, where no general SA scheme exists on a national level, those not entitled to unemployment benefits may not have any benefit income at all.
4. Net transfer payments available to the poor While analysing the operation of taxes and benefits in relation to average wages is informative when comparing across countries, the typical average wage earner is rarely an explicit target of social policy. The opposite is true for households with very low incomes. Income protection schemes providing direct financial support are to a large extent directed towards the poor. At the same time, this is the group that can potentially gain most from financially rewarding employment opportunities. Given their significance for policymaking, the numbers and circumstances of people living in poor households are natural starting points for discussing the design of relevant policy measures and evaluating their success. It is therefore useful to examine the mechanics of tax-benefit systems relative to income cut-off points that are commonly used in comparative research to identify lowincome or “poor” households. Clearly, countries will have different traditions regarding the income cut-offs that are commonly referred to as “poverty lines”. By comparing the generosity of benefits using common poverty concepts across countries, this section provides a comparative perspective of the operation and adequacy of benefit systems. For the purpose of this section, we use three simple poverty criteria defined as income below 40, 50 and 60% of median household income.6 The resulting poverty lines for different household types are shown in Table 2.1. In addition, poverty lines for a single person are compared to the net income of a single full-time employee earning wages at APW level. Using tax-benefit calculations similar to the previous sub-sections, Figure 2.4 evaluates net incomes of households who do not have any employment or other market incomes and who are also not entitled to unemployment benefits. The results show the levels of resources guaranteed by benefits “of last resort” in relation to the three chosen poverty thresholds in countries where these data are available.7, 8 Net income figures take into account social assistance (where available) as well as other benefits and taxes that have an influence on the income situation of social assistance recipients. As before, the calculations relate to adults of working age and their children.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
81
2001
Data source
Reference year
50% of median equivalised net household income
Poverty thresholds Single
Lone parent, 2 children
Couple
Couple, 2 children
Poverty threshold as % of net income of average production worker
Australia
Household Expenditure Survey (HES)
1999
11 417
11 417
19 776
16 147
22 835
Austria
Mikrozensus
1999
8 013
8 013
13 879
11 332
16 026
34 48
Belgium
Administrative tax statistics
1995
7 073
7 073
12 251
10 003
14 146
40
Canada
Survey of Labour and Income Dynamics (SLID)
2000
13 349
13 349
23 121
18 878
26 698
46
Czech Republic
Sociální situace domácností v 2001
2000
63 106
63 106
109 303
89 245
126 212
43
Denmark
The Danish Law Model System
2000
85 351
85 351
147 832
120 705
170 702
52 47
Finland
Finnish income distribution survey
2000
8 580
8 580
14 861
12 134
17 160
France
Enquête budget de familles
2000
7 481
7 481
12 957
10 580
14 962
48
Germany
Socio-Economic Panel
2001
7 554
7 554
13 083
10 683
15 107
39
Greece
Household Budget Survey
1999
4 254
4 254
7 368
6 016
8 507
47
Hungary
Household Monitor Survey
2000
395 052
395 052
684 250
558 688
790 104
60
Ireland
Living In Ireland Survey
2000
8 878
8 878
15 377
12 555
17 755
45
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Italy
Bank of Italy Survey on Household Income and Wealth
2000
6 158
6 158
10 666
8 709
12 316
40
Netherlands
Income Panel Survey
2000
9 606
9 606
16 639
13 586
19 213
49
New Zealand
Household Economic Survey
2001
10 208
10 208
17 681
14 436
20 416
33
Norway
The Income Distribution Survey
2000
102 709
102 709
177 898
145 253
205 419
52 36
Poland
CHER panel database for Poland
2000
6 055
6 055
10 487
8 562
12 109
Portugal
Inquérito aos Orçamentos Familiares
2000
3 720
3 720
6 444
5 262
7 441
56
Spain
Encuesta Continua de Presupuestos Familiares
1995
6 566
6 566
11 373
9 286
13 133
52
Sweden
Inkomstfördelningsundersökningen (HEK)
2000
80 884
80 884
140 096
114 388
161 769
51
Switzerland
Enquête sur les revenus et la consommation
2001
22 384
22 384
38 770
31 656
44 768
45
United Kingdom
Family Expenditure Survey
2000
6 090
6 090
10 548
8 613
12 180
42
United States
March Current Population Survey
2000
12 956
12 956
22 441
18 323
25 913
55
1. All amounts are annual and shown in 2001 national currency (euro for euro area countries) using the consumer price index to uprate poverty thresholds for countries where original data are from earlier years. Median incomes are computed using the “square root of household size” equivalence scale. Source: Förster, M.F. and M. Mira d’Ercole (2004), “Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s”, OECD Social, Employment and Migration Working Paper, OECD, Paris, forthcoming (available at www.oecd.org/els/workingpapers).
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
82
Table 2.1. Poverty thresholds and APW values1
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.4. Net incomes of social assistance recipients 2001, in per cent equivalent of median household income No housing related benefits
With housing-related benefits (rent = 20% APW)
Three different poverty thresholds
70 Single person 60 50 40 30 20 10
L BE
L NL D
PO
NZ L AU S NO R
T
CZ E
AU
E
IR L
K N
NL
CH
N FI
AU
L
A
DE
PR T IR
DN
FI N
FR
FI N
CH
N CA PR T
N
ES P
CA
DE U
N
A
PR T SW E GB R
HU
US
C GR
IT A
0
70 Lone parent, 2 children 60 50 40 30 20 10
L BE
S AU
PO L
DN K
CZ
E
L
CZ
NZ
L
CZ
DN K AU S
PO
CA N DN K
T AU
D
R
U
NL
NO
E
R GB
L IR
A FR
P SW E PR T
ES
IT A GR C US A HU N
0
70 Married couple, no children 60 50 40 30 20 10
E NL D
NZ L
L
L
BE
T
BE
IR AU
E
R NO
T
CH
D
CA N NO R
A FR
U DE
E SW
AU S
P GB R
N
ES
HU
US A
IT A
GR C
0
70 Married couple, 2 children 60 50 40 30 20 10
L
E
PO
L
L NZ
FI
A SW E CH E DE U GB R
P
FR
A
ES
US
IT A GR C HU N
0
Source: OECD Tax-Benefit Models, and calculations based on Förster, M.F. and M. Mira d’Ercole (2004), “Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s”, OECD Social, Employment and Migration Working Paper, OECD, Paris, forthcoming (available at www.oecd.org/els/workingpapers).
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
83
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
In several countries, the amount of cash benefits depends to a considerable extent on housing costs. The standard assumption throughout this report (explained in Annex A) is that people live in rented accommodation with rent equal to 20% of APW. This simple approach aims at capturing the generosity of housing-related cash benefits available for privately rented accommodation. However, in the case of very-low income households, it is desirable to loosen this assumption since rental costs may be lower, particularly in the case of persistent poverty or where low-income households have access to social housing. To illustrate the sensitivity of benefit amounts with respect to different rent assumptions, Figure 2.4 shows, along with results based on the usual rent assumption, “lower-bound” net income levels for a situation where benefit amounts are calculated based on zero housing costs. However, all net income measures are shown before deducting housing costs (or any other form of “committed expenditure”) and this should be borne in mind when comparing results across countries. The results indicate that, in the majority of OECD countries considered here, benefits of last resort are generally set below the poverty thresholds. In all countries, single persons relying on these benefits are likely to have income below the 60% median poverty line. In most countries where benefit entitlements can potentially lift income close to the poverty line, overall entitlements depend critically on the level of housing costs that qualify for housing-related cash support. If benefits conditional on rental expenditure are not available at all (series labelled “no housing-related benefits”) then incomes are less than half the median income in all countries and are close to or above the lowest poverty threshold in only seven countries (Australia, Belgium, Czech Republic, Netherlands, New Zealand, Norway and Poland). In seven other countries, incomes are close to or below 20% of the median, regardless of whether any housing-related benefits are available or not. In the United States, the income of a single person receiving minimum income benefits is well below 10% of the median, while Greece and Italy do not operate universal minimum income schemes for working-age individuals. Comparing across different family types, it is instructive to consider the effect of children on the relative income position of poor families. While incomes in a sizeable majority of countries are still below the lowest of the various poverty thresholds, incomes in the two-children family situations appear somewhat higher relative to the poverty thresholds than in the no-children family situations. But the ordering of countries is also different so it is useful to compare incomes individually by country. This is done in Figure 2.5, which shows the elasticity of net benefit incomes with respect to the number of children or, in other words, by how much equivalent household incomes differ between families with and without children (percentage changes are not shown for Greece and Italy as benefit incomes for families without children are zero). All benefits available to SA recipients are included. Three issues are worth noting when interpreting these results. First, the elasticity will generally depend on the household type and, particularly, the number of children (i.e. the first or second child will generally give rise to different relative benefit changes than the third or fourth). Secondly, the elasticities show the combined effect of a range of taxbenefit instruments. For instance, while family benefits or social assistance may be highly sensitive to the number of children (see Tables 1.4 and 1.7), overall elasticities may be reduced by inelastic housing benefits. Finally, income changes in Figure 2.5 are measured in terms of equivalent income meaning that cash household incomes of multi-person households are divided by a certain factor in order to make them comparable to single
84
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.5. Net benefit elasticity with respect to the number of children Social assistance recipients, 2001, in per cent Lone parent, 2 children versus single person
Married couple, 2 children versus childless married couple
252% 100 185%
75
50
25
0
L
D NL
E
IR
E
SW
U
CH
N
DE
FI
A
R GB
T
P
FR
ES
L
AU
N
L
NZ
HU
R
L
PO
NO
K
BE
E
S
DN
AU
T
CZ
N
PR
CA
US
A
-25
Source: OECD Tax-Benefit Models, and calculations based on Förster, M.F. and M. Mira d’Ercole (2004), “Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s”, OECD Social, Employment and Migration Working Paper, OECD, Paris, forthcoming (available at www.oecd.org/els/workingpapers).
person households. The factor we use is the square root of the household size (see note 6). A positive (negative) elasticity therefore means that the elasticity implicit in the social transfer system is higher (lower) than that of the scale used for equivalising. While the values of elasticities will change depending on how household incomes are equivalised, the ordering of countries will not be affected as long as the same scale is used across countries. The results shown in Figure 2.5 indicate that in 10 (including Greece and Italy) out of 23 countries, equivalent incomes are higher for families with (two) children. The percentage differences can be very substantial although the benefit levels in the “no-child” situation may be very low (e.g. in the United States). Australia and, to a lesser extent, the Czech Republic combine relatively generous benefits for childless families with large additional transfers for families with children. Given that, in most countries, net incomes of social assistance recipients with no other income are not sufficient to ensure incomes above the poverty line, a relevant question is how much they need to earn in the labour market in order to escape from income poverty. This amount will depend on two factors. Obviously, more earnings are required in countries where the individual “poverty gaps” (the amount by which net income falls short of the chosen poverty line), shown in Figure 2.4 above, are largest. In addition, the earnings necessary to reach the poverty line will be determined by the part of in-work earnings that people can keep and, thus, the fraction of any additional employment incomes that is “taxed away” by the combined effects of taxes and benefits withdrawals.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
85
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.6 shows that, due to the latter effect, the results are not simply the reverse of those shown in Figure 2.4. For instance, single persons of working age in Italy require a smaller fraction of average earnings (39%) to escape poverty than their Irish counterparts (46% of APW) even though the poverty gaps – shown in Figure 2.4 – that these earnings need to bridge are much larger in Italy. The variation across countries is very large: for families with two children in Australia and New Zealand, one person earning significantly less than 50% of APW is sufficient to ensure income above the poverty line while the required earnings are, again relative to APW earnings, two to three times as large in a considerable number of countries including Hungary, Spain, Sweden and the United States. In several countries, wages are subject to statutory minima (see Annex Table A.1). Comparisons based on the gross levels of minimum wages, which do not take into account differences in taxes and benefits, can give misleading indications about the true value of the wage floor. Figure 2.7 shows the net incomes of full-time employees earning the statutory minimum wage. Comparing results with those in Figure 2.6, it is evident that countries where relatively low earnings levels are required to reach the poverty line also exhibit higher net incomes relative to the poverty line for those earning minimum wages. However, there are exceptions to this general pattern as a result of cross-country variations in minimum-wage levels. For instance, French social assistance recipients require relatively high earnings in order to escape poverty but a high statutory minimum wage ensures that full-time employees are less affected by income poverty than in other countries. In the case of single-person households, the opposite pattern is observed for the Czech Republic. While the fraction of APW earnings required to escape poverty is lower than in France, the net incomes of French full-time minimum-wage employees is significantly higher. Full-time minimum-wage earnings in the United States (Spain) are not sufficient to ensure net incomes above the 50% (60%) poverty line in any of the household circumstances considered here, including those where both spouses work full-time. With the exception of Australia, net incomes of one-earner married couples with two children fall short of the (60% of median) poverty line. Incomes resulting from both parents working in full-time minimum-wage jobs are above this poverty line in less than half the countries considered here while net incomes of lone parents in a minimum-wage job are close to or above 60% of median household income in only five countries. However, it should be emphasised that net incomes are shown before deduction of any childcare costs which lone parents working full-time are likely to incur.
86
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.6. In-work earnings required to reach the poverty line 2001, % of average production worker (APW)
No housing-related benefits
With housing-related benefits (rent = 20% APW)
120 Single person 100 80 60 40 20
K
R SW E PR T US A HU N
NO
DN
C
ES P
A FR
GR
T CH E CA N
AU
NL D
E
FI N
CZ
R
L
IR L
GB
IT A
PO
BE L DE U
NZ L AU S
0
120 Lone parent, 2 children 100 80 60 40 20
A
PR T
P ES
US
N GR C
HU
E
A FR
D
CH
A
GR NO
K
FR
NL
N
NL D
E
FI FI N
DN
L
SW
E
AU
PO CH CH
E
NO R D
FR A
E
T
CZ
R
CA
T DN K CA N
AU
N
IT A
K
IR
L
N
IR
CA
L
U
FI
DE
L
R
BE
GB
L
IR
NZ
AU
S
0
120 Married couple, no children 100 80 60 40 20
PR T HU N
NO
R SW E US A
P
C
ES
R
PR T GR C SW E
T
L
E
N
NL
GB
DN
L
CZ
PO
U
L
IT A
DE
BE
S AU
NZ
L
0
120 Married couple, 2 children 100 80 60 40 20
HU N
ES P US A
E
L
AU
PO
CZ
IT A GB R
BE L
U DE
NZ L
AU
S
0
Note: Results are shown in relation to the “60% of median income” poverty threshold and relate to somebody earning hourly wages equal to the weekly APW divided by 40. In countries where tax-benefit rules depend on working hours (e.g. in the case of IW benefits), net incomes may differ for different hourly wage rates. In the married-couple case, it is assumed that there is only one earner. Source: OECD Tax-Benefit Models, and calculations based on Förster, M.F. and M. Mira d’Ercole (2004), “Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s”, OECD Social, Employment and Migration Working Paper, OECD, Paris, forthcoming (available at www.oecd.org/els/workingpapers).
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
87
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.7. Net incomes of full-time minimum-wage earners 2001, in per cent of median household income No housing-related benefits
With housing-related benefits (rent = 20% APW)
Three different poverty thresholds
120 Single person
100 80 60 40 20
S AU AU AU S AU S
L BE R GB BE L R
FR
A FR PO
L BE L PO L L
IR
NZ L NZ IR L
L
D NL N CA NL NZ
R GB CZ E CZ E IR L
L PO
C GR
PR T
HU N
E CZ
N CA
P ES
US
A
0
120 Lone parent, 2 children
100 80 60 40 20
S
L
FR A PR T PR T
IR
L PO L NZ N
D NL
PR T
N HU
A US
C GR
ES
P
0
120 One-earner married couple, no children
100 80 60 40 20
CZ E
BE
A
D L
GB R
CA N
C GR
N HU
US A
ES P
0
120 One-earner married couple, 2 children
100 80 60 40 20
GB
CA
L
A FR
D NL
A US
N HU
C GR
ES
P
0
Note: Only countries where statutory minimum wages are in place are considered. Source: OECD Tax-Benefit Models, OECD Minimum Wage Database and calculations based on Förster, M.F. and M. Mira d’Ercole (2004), “Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s”, OECD Social, Employment and Migration Working Paper, OECD, Paris, forthcoming (available at www.oecd.org/els/workingpapers).
88
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
2.
TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
Figure 2.7. Net incomes of full-time minimum-wage earners (cont.) 2001, in per cent of median household income No housing-related benefits
With housing-related benefits (rent = 20% APW)
Three different poverty thresholds
120 Two-earner married couple, no children 100 80 60 40 20
S
BE L BE
AU
A FR A
IR L
NZ L
NL D
R GB
L PO
GR HU
C
PR T N
N HU
N CA
CZ E
ES P
US
A
0
120 Two-earner married couple, 2 children 100 80 60 40 20
L
S AU
FR
L NZ
L IR
R GB
D NL
L
N
PO
CA
C GR
E CZ
PR T
A US
ES
P
0
Note: Only countries where statutory minimum wages are in place are considered. Source: OECD Tax-Benefit Models, OECD Minimum Wage Database and calculations based on Förster, M.F. and M. Mira d’Ercole (2004), “Income Distribution and Poverty in OECD Countries in the Second Half of the 1990s”, OECD Social, Employment and Migration Working Paper, OECD, Paris, forthcoming (available at www.oecd.org/els/workingpapers).
Notes 1. The change in gross earnings is a result of a combination of changing working hours and changing hourly wage rates. For earnings levels below 100% of average production worker (APW) we consider a wage earner with average (APW) hourly earnings and working hours ranging from zero (in the earnings = 0 case) to full-time (earnings = 100). Above 100% of APW, employment is assumed to be full-time so that any additional earnings are generated by higher hourly wage rates. Annex A provides further details including a comparison of APW levels with statutory minimum wages. 2. The formal definition of the METR and related indicators is provided in Annex A. 3. The Belgian Complément de garde d’enfant and the Irish Back-to-Work Allowance are only available following long-term unemployment and the calculations assume that the relevant criteria are met. 4. The Belgian Crédit d’impôt is in the process of being phased in. See Table 1.11 for details. 5. Following any benefit waiting period. Chapter 3 considers to what extent unemployment benefits change over time for the long-term unemployed. 6. Household income is defined as current cash market income plus cash government transfers minus taxes minus own social security contributions. In order to compare incomes across different household sizes, household incomes are equivalised using the “square root of household
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
89
2. TAX BURDENS, BENEFIT ENTITLEMENTS AND NET INCOME LEVELS
size” equivalence scale. Further details and limitations are discussed in Förster and Pellizzari (2000), Annex A. 7. In Australia and New Zealand, UA benefits shown in Table 1.3 have been considered benefits of “last resort” here. Depending on the family circumstances, other types of benefits may exceed unemployment assistance values (e.g. for lone parents). In these cases, it has been assumed that families receive the highest benefit amount they would be entitled to. 8. It is worth emphasising that not all families formally entitled to these safety-net benefits will claim or receive them. That is, there will be poor families with resources below the net income amounts calculated here even if they resemble our chosen household types in all other respects. Evidence on take-up rates is still relatively scant and only available for a few countries. A recent survey by Hernanz et al. (2004) shows that relevant estimates vary markedly across (and within) countries: for social assistance benefits, more recent studies have found take-up rates ranging from less than 40% in Germany to above 70% (Netherlands, United Kingdom, United States).
Bibliography FÖRSTER, M.F. and M. PELLIZZARI (2000), “Trends and Driving Factors in Income Distribution and Poverty in the OECD Area”, OECD Labour Market and Social Policy Occasional Papers, No. 42, OECD, Paris. HERNANZ, V., F. MALHERBET and M. PELLIZZARI (2004), “Take-up of Welfare Benefits in OECD Countries: A Review of the Evidence”, OECD Social, Employment and Migration Working Papers, No. 17, OECD, Paris. IMMERVOLL, H., et al. (2001), “The Impact of Tax-Benefit Systems on Poverty Rates in the Benelux Countries. A Simulation Approach Using Synthetic Datasets”, Schmollers Jahrbuch – Journal of Applied Social Science Studies, Vol. 121(3), pp. 313-352. OECD (2003), Taxing Wages: 2001-2002, OECD, Paris.
90
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ISBN 92-64-01515-9 Benefits and Wages: OECD Indicators 2004 Edition © OECD 2004
Chapter 3
Financial Consequences of Employment Transitions
Introduction 1. Transitions between work and unemployment a) Income maintenance during unemployment: Net Replacement Rates b) Earnings insurance: Gross Replacement Rates c) Unemployment traps and barriers to moving back into work: Average Effective Tax Rates 2. Transitions between jobs: changing working-hours or work effort
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
91
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Introduction Benefit systems that partly compensate for lost earnings are characterised by a tradeoff between income protection and maximising the financial gain from work. This is most apparent in the case of unemployment benefits. In addition, means-tested benefits, such as social assistance or housing benefits, are reduced as earnings increase and can thus lessen the financial reward of taking up a new job or working longer hours. While benefits provide income during unemployment, taxes and social security contributions can adversely affect work incentives by reducing the net value of in-work earnings. This chapter quantifies the balance of these effects. It measures the income differentials between different work situations in order to determine the financial consequences of moving between them. Results are presented for three different types of transition: employees becoming unemployed, unemployed persons returning to work, and a change in working hours for those already in employment. Absolute income levels in a given period, as computed in the previous chapter, are required for determining the living standards of employees, unemployed persons and their families. At the same time, the income gains and losses that result from moving between different work situations are of interest, as they show to what extent tax-benefit systems provide insurance against lost earnings and succeed in maintaining financial work incentives. It is important in this context to distinguish between “incentives” and “incentive effects”. While measuring financial work incentives is an integral part of any tax-benefit policy evaluation exercise, employment levels, unemployment rates and total hours worked are not determined exclusively by the size of benefits and the taxes needed to finance them. The actual sensitivity of labour supply to changes in net income (and, thus, taxes and benefits) varies across countries and population groups and is not studied as part of the present publication. The indicators presented in this chapter are calculated using the OECD tax-benefit models and are subject to the same assumptions and limitations as the results shown in Chapter 2. Given their potential use as work-incentive indicators, it is, however, useful to reiterate some of the underlying assumptions. First, those becoming unemployed are assumed to be entitled to unemployment benefits which, in most countries, requires participation in certain job-search activities and may depend on whether job losses qualify as involuntary. A second assumption, which is particularly relevant for those in long-term unemployment, concerns the calculation of means-tested benefits. Where means-tested benefits are included in the calculations, it is assumed that people do not have any assets that would make them ineligible and that they receive all the benefits to which they are formally entitled (i.e. there is full benefit take-up). All calculations relate to current income and therefore do not take into account any effects of the current employment status on future earnings or benefit levels. All incomes are before housing costs, childcare costs and other forms of “committed” expenditure. As a result, they do not reflect any impact that work transitions may have on these types of expenditure. Finally, all indicators are
92
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
3.
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
computed for a particular set of individuals whose characteristics, including ages (4 and 6 years for children and 40 years for adults), previous employment record (22 years), or housing costs (20% of APW), have been chosen to illustrate the most relevant mechanisms built into tax and benefit systems rather than being representative of the underlying population in any particular way. Further details are provided in Annex A. A significant caveat applies when comparing Net Replacement Rate and Average Effective Tax Rate indicators reported here to results from 1999 (OECD, 2002) and earlier years. As a result of clarifications received from a number of countries, the calculation models for the years reported on here (2001 and 2002) have been revised in relation to earlier versions, introducing a break in the time-series for a subset of countries. The changes frequently concern tax rules which, in some cases, did not accurately reflect certain special provisions applying to benefit recipients or employees with low earnings. In certain other cases, assumptions underlying the calculations have been brought in line with recommendations received by country experts. Details of relevant model changes are provided in Annex A and need to be kept in mind when interpreting indicators with those shown in earlier editions of this publication as some of the changes are due to clarifications of the calculations rather than policy reforms. The Gross Replacement Rates time-series reported below is, however, not affected by the break since calculated results have been adjusted backwards in order to make them consistent over the entire period.
1. Transitions between work and unemployment This section presents comparative information on Gross Replacement Rates (GRR) and Net Replacement Rates (NRR) as well as Average Effective Tax Rates (AETR) for the family types introduced in Chapter 2. To capture different durations and time profiles of out-ofwork benefits, replacement rate indicators are calculated for the initial phase of unemployment as well as for longer periods of joblessness.
a) Income maintenance during unemployment: Net Replacement Rates Together with benefit durations, NRRs are important indicators of benefit sufficiency. They show the proportion of in-work income that is maintained for somebody becoming unemployed. As indicators of net incomes, they capture the direct effects of all relevant types of taxes and benefits on current household incomes, such as the higher amount of taxes paid by employees or country differences in the taxation of benefits. Given that benefit receipt and tax payments of different household members usually interact, the NRR measures presented here are calculated in relation to the household as a whole: y netOW [1] NRR = --------------y netIW where ynetOW (net income while out of work) and ynetIW (net income while in work) denote household net income before and after a transition from employment to unemployment of one household member. Table 3.1 shows NRRs during the initial phase of unemployment (i.e. following any benefit waiting period) for somebody who was previously employed on a full-time basis with earnings at 67, 100 and 150% of APW. Taxes are computed under the assumption that initial benefits (in the unemployed situation) and earnings (in the in-work situation) remain unchanged during the entire fiscal year. Childcare costs or benefits that depend on having a child in childcare are not taken into account.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
93
2001, different earnings levels1 67% of APW
Single person
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom United States
48 55 83 63 50 85 74 83 63 63 65 63 40 50 73 54 85 80 55 66 68 86 72 76 82 79 64 62
100% of APW
150% of APW
No children
2 children
No children
2 children
No children
2 children
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
42 58 73 65 50 91 81 87 61 66 65 54 59 50 71 54 82 88 81 68 69 84 73 72 82 79 63 63
53 80 96 81 77 93 81 92 90 74 81 81 71 77 89 77 90 85 57 83 76 95 81 88 91 89 63 81
Lone parent 60 75 79 68 56 96 89 91 89 72 73 77 60 54 81 55 90 86 77 90 70 86 77 77 92 81 48 53
79 78 74 69 55 96 87 91 82 72 73 69 67 57 71 54 90 89 83 87 62 86 78 77 90 81 50 53
68 86 96 88 78 93 86 92 99 76 85 86 80 81 88 77 94 85 65 87 77 92 84 89 92 90 72 83
Single person 34 55 63 63 50 60 61 71 61 45 47 46 29 52 63 55 85 71 38 66 47 78 64 72 78 71 45 58
30 57 55 65 50 67 69 67 54 45 47 41 44 56 62 55 84 73 54 67 48 76 68 72 78 71 45 60
44 76 82 78 72 77 75 82 85 62 68 68 59 71 80 72 89 83 46 80 62 88 78 84 87 82 53 75
Lone parent 56 72 63 75 55 76 82 78 82 49 58 63 54 60 74 56 89 76 62 85 49 76 72 76 89 82 46 56
69 73 58 76 55 77 81 78 78 49 57 57 54 62 62 55 89 77 67 74 51 76 75 74 82 82 46 55
56 81 84 85 75 78 80 83 96 62 73 75 68 76 81 72 92 83 52 83 63 87 83 87 88 88 60 78
Single person 25 55 46 45 50 45 48 70 62 32 35 33 21 46 62 47 87 61 27 53 32 83 47 49 56 72 31 42
22 56 41 47 50 52 54 69 51 32 35 30 31 49 61 47 85 63 39 53 33 79 49 50 56 71 31 41
36 72 67 62 67 64 66 79 80 49 57 55 47 63 75 62 88 74 37 69 48 88 64 66 71 80 42 59
Lone parent 42 65 48 58 55 61 67 70 78 35 46 49 41 57 63 47 92 66 45 66 34 80 56 63 69 82 35 40
52 66 45 58 53 61 65 69 70 35 46 45 40 60 62 47 89 64 49 59 35 78 56 63 61 82 35 39
48 76 70 69 70 66 70 79 91 49 63 62 55 67 76 62 91 74 42 72 50 87 69 76 72 87 49 63
1. Initial phase of unemployment but following any waiting period. No social assistance “top-ups” are assumed to be available in either the in-work or out-of-work situation. Any income taxes payable on unemployment benefits are determined in relation to annualised benefit values (i.e. monthly values multiplied by 12) even if the maximum benefit duration is shorter than 12 months. See Annex A for details. For married couples the percentage of APW relates to one spouse only; the second spouse is assumed to be “inactive” with no earnings in a oneearner couple and to have full-time earnings equal to 67% of APW in a two-earner couple. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. Comparability with 1999 results (OECD, 2002, Benefits and Wages): for some countries, calculation models have been revised in line with clarifications received from country experts and this introduces a break in the time-series. Details are provided in Annex A and need to be kept in mind when interpreting observed changes as some of them are due to clarifications of the calculations rather than policy reforms. Source: OECD Tax-Benefit Models.
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
94
Table 3.1a. Net Replacement Rates for six family types: initial phase of unemployment
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 3.1b. Net Replacement Rates for six family types: initial phase of unemployment (cont.) 2002, different earnings levels1 67% of APW
Single person
No children
2 children
No children
2 children
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
40 58 77 65 50 90 82 78 61 67 61 55 62 50 70 53 82 88 79 67 66 83 72 73 82 79 63 61
53 80 92 81 77 92 82 91 90 75 79 82 71 77 88 77 90 85 56 83 74 94 81 88 91 89 63 81
Lone parent 61 75 82 67 55 95 90 91 90 74 71 80 60 54 81 54 90 85 77 89 67 85 76 77 92 81 47 54
79 78 77 68 55 96 88 90 83 74 70 68 68 56 70 52 90 89 82 84 60 85 77 77 90 81 48 52
65 85 93 87 78 93 87 91 99 77 82 87 79 81 88 77 94 85 63 86 79 92 83 89 92 90 73 83
Single person 32 55 66 64 50 59 64 71 61 46 44 49 29 52 63 54 85 71 37 66 44 78 62 70 81 72 45 56
29 57 58 66 50 66 70 67 54 46 44 43 45 56 61 54 84 74 54 67 46 76 65 71 81 71 45 57
44 76 78 78 72 76 77 82 85 62 66 69 60 71 79 72 89 83 45 80 61 88 78 83 89 82 52 74
Lone parent 54 71 66 75 54 75 83 76 83 50 55 65 54 60 74 54 89 78 62 81 50 76 69 76 90 82 46 54
66 73 61 76 54 76 82 76 78 50 54 57 55 60 61 53 89 78 67 73 51 77 72 75 83 82 46 53
54 81 80 85 74 78 81 82 96 62 71 76 67 76 81 73 93 83 51 83 64 87 82 87 90 88 61 76
Single person 24 55 49 44 50 45 50 70 62 33 34 35 22 46 62 42 87 61 26 53 30 83 44 48 58 72 31 40
21 56 43 46 50 51 54 69 51 33 34 32 32 49 60 42 84 63 38 54 31 79 46 49 58 71 31 39
36 72 65 62 67 64 67 80 80 50 57 56 47 63 75 61 88 74 36 69 47 88 63 66 72 80 42 58
Lone parent 41 65 51 57 54 60 67 69 79 36 45 51 40 57 63 42 92 65 45 63 34 80 52 62 69 82 34 39
50 67 47 57 54 60 65 69 71 36 44 45 40 59 61 41 89 64 48 59 35 78 54 62 61 81 34 38
46 77 68 68 69 66 71 79 91 50 62 64 54 67 76 61 91 74 41 72 50 87 67 75 73 87 49 62
1. Initial phase of unemployment but following any waiting period. No social assistance “top-ups” are assumed to be available in either the in-work or out-of-work situation. Any income taxes payable on unemployment benefits are determined in relation to annualised benefit values (i.e. monthly values multiplied by 12) even if the maximum benefit duration is shorter than 12 months. See Annex A for details. For married couples the percentage of APW relates to one spouse only; the second spouse is assumed to be “inactive” with no earnings in a oneearner couple and to have full-time earnings equal to 67% of APW in a two-earner couple. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. Comparability with 1999 results (OECD, 2002, Benefits and Wages): for some countries, calculation models have been revised in line with clarifications received from country experts and this introduces a break in the time-series. Details are provided in Annex A and need to be kept in mind when interpreting observed changes as some of them are due to clarifications of the calculations rather than policy reforms. Source: OECD Tax-Benefit Models.
95
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
46 55 87 63 50 84 78 80 63 64 61 66 40 50 73 53 84 79 54 66 65 85 69 76 82 79 63 62
150% of APW
2 children
3.
Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom United States
100% of APW
No children
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Given benefit floors and ceilings, replacement rates are frequently higher for low levels of previous earnings. However, as a result of progressive tax systems, higher earnings levels are taxed more heavily. This reduces the denominator for high-wage workers in the above equation and can cause NRRs to be higher for better-paid individuals (e.g. Italy, Luxembourg, Portugal). In 2002, low-earning lone parents (67% of APW) in six OECD countries face net income losses of 10% or less during the initial period of unemployment (NRRs of 90% or higher). Clearly, replacement rates of this magnitude result in very limited short-term gains from work. Yet, when interpreting them, it is important not only to focus on NRR measures in isolation but to also consider the income situation prior to the transition into unemployment. From an income security point of view, both relative income maintenance and absolute income levels are relevant. Hence, even high replacement rates may leave households below the poverty line if they are poor while in work. For instance, in the case of lone parents with low levels of previous earnings (67% of APW), Table 3.1 shows that NRRs in 19 OECD countries exceed 70% during the initial phase of unemployment. At the same time, Figure 2.6 in the previous chapter indicates that in about half of these countries, earnings higher than 67% of APW are required to ensure family income above the poverty line. In these countries, the lone parent considered here would therefore be at high risk of poverty both with and without work. Given a concern with income poverty, this limits the scope for reducing NRRs through reducing out-of-work benefit levels and suggests an important role for measures aiming to increase net incomes of working lone parents. Comparisons between family types show that NRRs tend to be higher for larger families since family-related additions to unemployment benefits and other benefit entitlements combine to reduce the relative drop in household resources. Some benefits (e.g. family benefits) may be available in both the in-work and out-of-work situations while others (e.g. housing benefits) may be income-related. In both cases, benefit payments increase NRRs although the effect is stronger for benefits targeted towards low-income groups. NRRs compare total family resources across two different work situations of one particular household member. They thus capture the degree of income protection provided by both the tax-benefit system and any incomes of other household members. As a result, NRRs for two-earner married couples are, to a large extent, driven by the employment income of the second earner (whose employment status and hours of work are assumed to remain unchanged following the job loss of the other spouse), particularly in countries where unemployment benefits are low. In these cases, the earnings of the second earner can serve an insurance function and represents an important complement of unemployment benefits, which would, by themselves, maintain only relatively small proportions of in-work earnings. NRRs during the initial period of unemployment do not capture country differences in benefit duration and/or benefit levels over time. Long-term unemployed persons may receive unemployment insurance or assistance, social assistance or no out-of-work benefit at all. The resulting NRRs after five years of unemployment are shown in Table 3.2. Since conditions governing the eligibility for receiving social assistance (such as having assets below any asset limits) are more likely to be met after a prolonged period of unemployment, the long-term NRRs in Table 3.2 assume that social assistance can be
96
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 3.2a. Net Replacement Rates for six family types: long-term unemployment 2001, different earnings levels1 67% of APW
Single person
No children
2 children
No children
2 children
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
42 82 73 51 75 87 88 76 85 0 36 84 87 0 71 46 98 90 81 70 70 57 100 43 98 91 78 17
53 52 89 55 55 54 60 52 74 50 50 81 54 54 52 50 52 56 57 53 52 60 56 53 50 52 50 53
Lone parent 60 83 79 64 80 85 73 79 92 4 43 77 65 0 92 64 83 80 77 74 80 61 92 55 67 93 65 45
79 97 74 69 96 82 99 81 84 4 41 90 90 0 87 79 107 89 83 91 90 69 100 62 100 100 76 51
68 70 90 69 60 72 72 65 79 51 59 86 63 62 63 50 55 60 65 58 62 77 74 52 59 55 69 57
Single person 34 51 47 23 33 51 51 42 60 0 25 46 50 0 34 19 51 58 38 43 32 24 45 25 52 52 45 7
30 60 55 38 55 76 68 52 63 0 25 65 64 0 48 31 67 69 54 50 48 46 75 31 68 64 56 12
44 47 76 45 44 55 51 43 71 41 42 68 46 45 42 40 43 47 46 44 42 49 45 45 41 43 42 43
Lone parent 56 68 63 56 63 74 63 62 72 3 34 63 59 0 74 44 59 63 62 63 56 49 71 39 56 67 62 36
69 76 58 60 75 79 85 68 69 3 32 74 72 0 71 54 76 72 67 69 73 61 96 43 79 73 71 42
56 67 78 59 51 60 61 53 77 41 51 75 53 53 52 40 47 51 52 49 51 64 64 44 49 46 58 48
Single person 25 51 34 16 23 38 37 29 54 0 19 33 38 0 23 13 38 39 27 32 22 17 31 18 37 36 31 5
22 52 41 26 38 58 50 36 46 0 19 48 45 0 33 22 48 47 39 36 33 32 52 22 49 44 39 8
36 48 62 36 35 46 42 34 67 32 35 55 36 36 33 31 35 37 37 36 33 39 36 36 33 34 33 34
Lone parent 42 61 48 42 46 59 49 43 68 2 27 49 45 0 52 30 46 45 45 48 38 36 53 28 44 47 46 25
52 62 45 45 55 62 64 47 64 2 26 59 53 0 50 37 56 50 49 52 51 50 69 31 59 51 53 30
48 64 65 47 41 51 51 42 74 33 44 62 43 43 41 31 39 40 42 41 41 51 51 35 41 37 47 39
1. After tax and including unemployment benefits, social assistance, family and housing benefits in the 60th month of benefit receipt. For married couples the per cent of APW relates to one spouse only; the second spouse is assumed to be “inactive” with no earnings in a one-earner couple and to have full-time earnings equal to 67% of APW in a two-earner couple. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. Comparability with 1999 results (OECD, 2002, Benefits and Wages): for some countries, calculation models have been revised in line with clarifications received from country experts and this introduces a break in the time-series. Details are provided in Annex A and need to be kept in mind when interpreting observed changes as some of them are due to clarifications of the calculations rather than policy reforms. Source: OECD Tax-Benefit Models.
97
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
48 68 62 32 49 71 70 58 81 0 36 63 69 0 50 27 71 79 55 61 47 34 66 35 75 74 64 10
150% of APW
2 children
3.
Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom United States
100% of APW
No children
2002, different earnings levels1 67% of APW
Single person
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom United States
46 64 72 31 45 71 69 56 82 0 33 66 71 0 50 25 70 79 54 60 45 34 62 37 74 73 63 10
100% APW
150% of APW
No children
2 children
No children
2 children
No children
2 children
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
40 84 77 50 72 88 88 77 86 0 33 86 90 0 71 42 99 89 79 70 66 57 100 44 97 90 78 16
53 52 85 55 54 53 60 52 74 50 50 83 54 54 52 50 51 57 56 53 52 60 53 53 50 52 50 52
Lone parent 61 82 82 63 77 85 77 81 92 4 41 80 66 0 92 58 84 78 77 79 75 61 91 54 66 91 66 44
79 100 77 68 91 82 94 83 84 4 39 90 90 0 87 72 107 87 82 86 85 69 100 59 100 99 78 50
65 71 86 68 60 71 75 63 79 51 58 87 63 61 63 50 56 61 63 56 64 77 71 53 58 55 71 58
Single person 32 51 55 22 31 50 51 41 61 0 24 49 51 0 34 17 50 58 37 42 30 24 42 27 51 51 45 7
29 62 58 37 52 75 67 54 64 0 24 66 66 0 48 28 67 69 54 50 46 46 71 32 67 63 56 12
44 47 72 45 44 54 51 44 71 41 42 70 45 45 42 41 42 48 45 44 42 49 43 45 41 43 42 43
Lone parent 54 68 66 55 59 72 66 63 76 3 31 65 59 0 74 39 61 64 62 65 55 50 68 38 55 65 64 35
66 78 61 59 71 78 85 70 68 3 30 74 73 0 71 49 78 72 67 64 73 61 91 41 78 71 73 41
54 68 75 58 51 60 64 52 77 41 49 76 54 53 52 40 47 52 51 47 52 64 60 44 48 46 60 49
Single person 24 51 40 15 21 37 37 29 54 0 18 35 38 0 23 12 37 39 26 31 21 17 29 19 37 36 31 5
21 52 43 25 36 58 49 37 46 0 18 49 47 0 33 20 47 47 38 36 31 32 49 22 48 43 39 8
36 48 60 36 34 46 42 35 67 33 36 57 36 36 33 33 34 37 36 36 33 39 34 36 33 34 33 34
Lone parent 41 61 51 41 43 58 52 44 69 2 26 51 45 0 52 28 46 45 45 49 37 36 50 27 43 46 48 25
50 63 47 44 53 61 64 48 64 2 25 59 54 0 51 34 56 50 48 48 50 50 67 30 57 50 55 30
46 65 63 47 40 51 53 42 74 33 43 64 43 43 41 33 38 41 41 39 41 51 49 35 40 36 48 40
1. After tax and including unemployment benefits, social assistance, family and housing benefits in the 60th month of benefit receipt. For married couples the per cent of APW relates to one spouse only; the second spouse is assumed to be “inactive” with no earnings in a one-earner couple and to have full-time earnings equal to 67% of APW in a two-earner couple. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. Comparability with 1999 results (OECD, 2002, Benefits and Wages): for some countries, calculation models have been revised in line with clarifications received from country experts and this introduces a break in the time-series. Details are provided in Annex A and need to be kept in mind when interpreting observed changes as some of them are due to clarifications of the calculations rather than policy reforms. Source: OECD Tax-Benefit Models.
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
98
Table 3.2b. Net Replacement Rates for six family types: long-term unemployment (cont.)
3.
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
received as long as relevant income conditions are met. Where social assistance amounts exceed unemployment benefit levels, this can cause long-term NRRs to exceed initial NRRs in several cases (e.g. Iceland, Ireland and United Kingdom). In part, this is a direct result of the assumption that social assistance can be received by the long-term unemployed. In addition, there can be linkages between social assistance and other benefits. For instance, social assistance in Austria (Vienna) acts as a “passport” benefit in the sense that certain cash housing benefits are only available to social assistance recipients. Both benefits increase calculated incomes out of work and therefore NRRs. The time-profiles of NRRs over the full 5-year unemployment period are illustrated in Figure 3.1 for a single-earner couple with two children. Without social assistance benefits, NRRs drop by more than 70% in 14 OECD countries (Figure 3.1a) while incomes are much more stable over the entire 5-year period for those entitled to and receiving social assistance (Figure 3.1b). Social assistance can also enhance family incomes during the initial period of unemployment. In several countries, such top-ups of low unemployment benefits are possible (e.g. Finland, Slovak Republic or United Kingdom) while in others, the concurrent receipt of these benefits is not common (Belgium, Ireland, Sweden) or explicitly ruled out (Denmark, Hungary). As in previous editions of this publication, NRR calculations for different family types, earnings levels and unemployment durations are combined to derive an overall measure of the generosity of benefits relative to net earnings. The resulting measure is a simple average of NRRs with each family type and month of benefit receipt weighted equally. This global indicator does not intend to cover all existing salary levels and family types and is not meant to take into account the relative numbers of each of the family types considered. When using this measure for international comparisons, it is therefore important to keep in mind that population structures differ across countries.1 Results are again computed separately for unemployed individuals entitled and not entitled to social assistance (see Table 3.3).
b) Earnings insurance: Gross Replacement Rates Gross Replacement Rates (GRRs) express gross unemployment benefit levels as a percentage of previous gross earnings. While NRRs are the more comprehensive measure, GRRs are reported here in order to maintain and update existing GRR time-series. As part of the OECD Jobs Study (OECD, 1994), an index was constructed for OECD member countries summarising gross (i.e. before tax) unemployment benefit entitlements relative to gross earnings. The index is the unweighted average of 18 GRRs: three household types (single, dependent spouse and spouse in work); three time periods (the first year, the second and third years, and the fourth and fifth years of unemployment); and two earnings levels (average earnings and two-thirds of this level). The summary measure of generosity index as included in Table 3.4 and Figure 3.2 is calculated for all odd numbered years from 1961 to 2001.
Assumptions used for computing GRRs Social assistance benefits are not generally included in the GRRs used in construction of this index, unless there is a general entitlement. Where they have been included, “typical” rates of social assistance benefits have been used since entitlements may in fact vary by region or pattern of household expenditure. In some countries, contributions to unemployment insurance funds are voluntary. Where this is the case (Denmark, Finland BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
99
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Figure 3.1a. Net Replacement Rates over a five-year period 2002, no entitlement to social assistance, one-earner married couple with 2 children, in per cent1 AUS
AUT
BEL
CAN
CZE
DNK
FIN
100 80 60 40 20 0 0
5
10
FRA
15
20
DEU
25
30
GRC
35
40
HUN
45
ISL
50
IRL
55 60 Time (months) ITA
100 80 60 40 20 0 0
5
10
JPN
15
20
KOR
25
30
LUX
35
40
NLD
45
NZL
50
NOR
55 60 Time (months) POL
100 80 60 40 20 0 0
5
10
PRT
15
20
SVK
25
30
ESP
35
40
SWE
45
CHE
50
GBR
55 60 Time (months) USA
100 80 60 40 20 0 0
5
10
15
20
25
30
35
40
45
50
55 60 Time (months)
1. Month one refers to the first month of benefit receipt, i.e. following any waiting period. Previous in-work earnings are equal to APW. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. Source: OECD Tax-Benefit Models.
100
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
3.
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Figure 3.1b. Net Replacement Rates over a five-year period (cont.) 2002, with social assistance where applicable, one-earner married couple with 2 children, in per cent1 AUS
AUT
BEL
CAN
CZE
DNK
FIN
100 80 60 40 20 0 0
5
10
FRA
15
20
DEU
25
30
GRC
35
40
HUN
45
ISL
50
IRL
55 60 Time (months) ITA
100 80 60 40 20 0 0
5
10
JPN
15
20
KOR
25
30
LUX
35
40
NLD
45
NZL
50
NOR
55 60 Time (months) POL
100 80 60 40 20 0 0
5
10
PRT
15
20
SVK
25
30
ESP
35
40
SWE
45
CHE
50
GBR
55 60 Time (months) USA
100 80 60 40 20 0 0
5
10
15
20
25
30
35
40
45
50
55 60 Time (months)
1. Month one refers to the first month of benefit receipt, i.e. following any waiting period. Previous in-work earnings are equal to APW. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. Source: OECD Tax-Benefit Models.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
101
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Table 3.3a. Average of Net Replacement Rates over 60 months of unemployment 2001, for four family types and two earnings levels, in per cent1 Without social assistance No children Single person
With social assistance
2 children
No children
One-earner married couple
Lone parent
One-earner married couple
Overall average
2 children
Single person
One-earner married couple
Lone parent
One-earner married couple
Overall average
52
Australia
41
36
58
74
52
41
36
58
74
Austria
52
54
71
73
62
59
71
76
86
73
Belgium
58
64
71
66
65
58
64
71
66
65
Canada
11
12
27
28
20
33
49
63
68
53
4
4
14
14
9
42
65
71
86
66
Denmark
59
64
76
73
68
70
78
85
81
79
Finland
57
63
75
70
66
63
78
75
92
77
Czech Republic
France
63
66
74
74
69
63
70
77
78
72
Germany
57
54
80
75
67
71
74
83
77
76
Greece
22
22
29
29
25
22
22
29
29
25
Hungary
34
34
42
41
38
34
34
42
41
38
Iceland
54
48
70
63
59
54
74
70
82
70
Ireland
34
51
47
61
48
60
75
62
81
69
Italy
5
5
6
6
6
5
5
6
6
6
Japan
7
7
27
10
13
45
60
83
79
67
6
6
8
6
7
27
40
55
67
47
Luxembourg
Korea
17
17
31
31
24
66
85
75
94
80
Netherlands
60
66
68
69
66
71
80
78
81
77
New Zealand
46
68
70
75
65
46
68
70
75
65
Norway
40
40
80
59
55
60
68
80
82
72
Poland
22
22
31
29
26
43
59
68
82
63
Portugal
44
46
51
51
48
56
63
66
66
63
Slovak Republic
31
35
45
48
40
57
88
82
98
81
Spain
29
28
32
31
30
45
48
55
58
51
Sweden
17
25
50
42
33
66
83
67
90
77
Switzerland
30
30
33
33
31
68
79
83
88
79
United Kingdom
34
34
32
33
33
54
67
63
73
64
United States Average
6
6
5
5
6
13
19
42
48
31
34
37
47
47
41
50
61
65
72
62
1. Unweighted averages, for earnings levels of 67% and 100% of APW. Any income taxes payable on unemployment benefits are determined in relation to annualised benefit values (i.e. monthly values multiplied by 12) even if the maximum benefit duration is shorter than 12 months. See Annex A for details. For married couples the per cent of APW relates to one spouse only; the second spouse is assumed to be “inactive” with no earnings. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. Comparability with 1999 results (OECD, 2002, Benefits and Wages): for some countries, calculation models have been revised in line with clarifications received from country experts and this introduces a break in the time-series. Details are provided in Annex A and need to be kept in mind when interpreting observed changes as some of them are due to clarifications of the calculations rather than policy reforms. Source: OECD Tax-Benefit Models.
and Sweden in 2001), the replacement rates have been weighted by the proportion of the workforce covered by the scheme. In France, for the years 1975-83, replacement rates are an average with a weight of one-quarter on a case that qualified as an “economic” lay-off (receiving the allocation supplémentaire d’attente and later allocation special benefits) and the replacement rates for regular benefits receiving a three-quarters weight. In Italy, the Cassa Integrazione Generale (CIG) has not been included, as recipients are not usually classified as unemployed.
102
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
3.
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Table 3.3b. Average of Net Replacement Rates over 60 months of unemployment (cont.) 2002, for four family types and two earnings levels, in per cent1 Without social assistance No children
With social assistance
2 children
No children
2 children
Single person
One-earner married couple
Lone parent
One-earner married couple
Overall average
Australia
39
34
57
72
51
39
34
57
72
Austria
52
55
70
73
62
58
73
75
89
74
Belgium
66
67
74
69
69
66
67
74
69
69
Canada
11
12
27
28
20
32
47
62
67
52
4
4
13
13
9
39
62
68
81
63
58
64
75
73
67
69
78
84
81
78
Czech Republic Denmark
Single person
One-earner One-earner married Lone parent married couple couple
Overall average
51
Finland
60
64
77
73
69
64
78
77
89
77
France
62
64
74
74
68
62
69
78
78
72
Germany
57
54
81
76
67
72
75
85
77
77
Greece
22
23
29
29
26
22
23
29
29
26
Hungary
32
32
40
39
36
32
32
40
39
36
Iceland
57
49
72
63
60
57
76
72
82
72
Ireland
71
35
53
47
61
49
61
78
63
82
Italy
5
5
6
6
5
5
5
6
6
5
Japan
7
7
27
10
13
45
60
83
79
67
6
6
7
6
6
25
37
49
61
43
Luxembourg
Korea
17
17
33
33
25
65
87
76
95
81 77
Netherlands
60
67
64
70
65
71
80
76
81
New Zealand
45
66
69
75
64
45
66
69
75
64
Norway
39
40
80
57
54
60
67
80
78
71
Poland
21
21
31
29
26
41
56
65
79
60
Portugal
44
46
51
51
48
56
63
66
66
63
Slovak Republic
28
33
42
45
37
54
86
79
96
79 51
Spain
29
28
32
31
30
46
48
54
57
Sweden
17
17
50
42
32
67
83
67
89
77
Switzerland
30
30
33
33
31
68
78
81
87
79
United Kingdom
34
34
32
32
33
54
67
65
75
65
6
6
5
5
6
13
19
42
47
30
34
37
47
47
41
49
60
65
71
61
United States Average
1. Unweighted averages, for earnings levels of 67% and 100% of APW. Any income taxes payable on unemployment benefits are determined in relation to annualised benefit values (i.e. onthly values multiplied by 12) even if the maximum benefit duration is shorter than 12 months. See Annex A for details. For married couples the per cent of APW relates to one spouse only; the second spouse is assumed to be “inactive” with no earnings. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. Comparability with 1999 results (OECD, 2002, Benefits and Wages): for some countries, calculation models have been revised in line with clarifications received from country experts and this introduces a break in the time-series. Details are provided in Annex A and need to be kept in mind when interpreting observed changes as some of them are due to clarifications of the calculations rather than policy reforms. Source: OECD Tax-Benefit Models.
However, for 1993 and 1995, the Mobility Benefit, paid to those who become unemployed as a result of a collective lay-off, is weighted by stocks of beneficiaries. For 1997, 1999 and 2001, Italy figures correspond to Mobility Benefits. The above assumptions and other limitations of the index are discussed in greater detail in Annex 8.A of the OECD Jobs Study (1994).
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
103
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Table 3.4. Gross Replacement Rates for three family types over a five-year period 2001, average of 2/3 and 100% average production worker (APW) earnings levels First year
Single
Second and third year
With With spouse dependent in work spouse
Single
Fourth and fifth year
With With spouse dependent in work spouse
Single
With With spouse dependent in work spouse
Overall average
Australia
26
47
0
26
47
0
26
47
0
Austria
40
44
32
38
43
0
38
43
0
25 31
Belgium
46
46
42
34
46
27
34
46
27
38
Canada
46
46
46
0
0
0
0
0
0
15
Czech Republic
18
18
18
0
0
0
0
0
0
6
Denmark
65
65
65
65
65
65
33
33
33
51 32
Finland
52
52
52
38
38
30
25
25
0
France
61
61
61
53
54
46
27
27
0
44
Germany
38
38
38
34
34
0
34
34
0
28
Greece
35
36
35
5
6
0
0
0
0
13
Hungary
39
39
39
0
0
0
0
0
0
13
Iceland
41
41
41
41
41
41
41
41
41
41
Ireland
30
48
30
30
48
4
30
48
0
30
Italy1
59
59
59
44
44
44
0
0
0
34
Japan
27
27
27
0
0
0
0
0
0
9
Korea
29
29
29
0
0
0
0
0
0
10 27
Luxembourg
80
80
80
0
0
0
0
0
0
Netherlands
70
74
70
58
69
58
23
32
23
53
New Zealand
31
52
0
31
52
0
31
52
0
28
Norway
62
69
62
62
69
62
0
0
0
43
Poland
34
34
34
0
0
0
0
0
0
11
Portugal
70
70
70
60
66
35
0
0
0
41
Slovak Republic
35
35
35
0
0
0
0
0
0
12
Spain
64
64
64
33
33
25
0
0
0
31
Sweden
74
74
74
3
3
3
0
0
0
24
Switzerland
75
75
75
38
38
38
0
0
0
38
United Kingdom2
18
28
9
18
28
0
18
28
0
17
United States2
29
32
26
6
11
0
6
11
0
14
1. In Italy, figures correspond to Mobility Benefits. 2. In order to preserve consistency with the previous publication (OECD, 2002, Benefits and Wages), social assistance in the United Kingdom and Food Stamps in the United States are included. Source: OECD Tax-Benefit Models.
Relationship of the index to NRRs The GRRs presented here differ from NRRs in the following ways:
104
●
Tax and social security contributions on earnings and on benefits are not taken into account. If tax systems are progressive, then taxes paid while in work will be a greater percentage of income than during unemployment. This decrease of in-work income in relation to out-of-work income is captured by NRRs, which will therefore tend to be higher than GRRs. Furthermore, changes in the tax treatment of benefits will mean that the time series of GRRs may appear different from that of NRRs.
●
No children are included in the household types considered in the index. It does not capture the effects of changes in family-related benefits. The absence of such benefits will generally lead GRRs to be lower than NRRs.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
3.
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Figure 3.2. The OECD summary measure of benefit entitlements1 1961-2001, in per cent AUS
AUT
BEL
CAN
DNK
FIN
FRA
70 60 50 40 30 20 10 0 1961
63
65
67
69
DEU
71
73
75
GRC
77
79
81
IRL
83
85
87
ITA
89
91
93
JPN
95
97
99
NLD
2001
NZL
70 60 50 40 30 20 10 0 1961
63
65
67
69
NOR
71
73
75
PRT
77
79
81
ESP
83
85
87
SWE
89
91
93
CHE
95
97
99
GBR
2001
USA
70 60 50 40 30 20 10 0 1961
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
2001
1. The OECD summary measure is defined as the average of the gross unemployment benefit replacement rates for two earnings levels, three family situations and three durations of unemployment. For further details, see OECD (1994), The OECD Jobs Study (chapter 8) and Martin J. (1996), “Measures of Replacement Rates for the Purpose of International Comparisons: A Note”, OECD Economic Studies, No. 26. Pre-2001 data have been revised. The numerical values underlying the time-series graphs, including any revisions, are available at: www.oecd.org/els/social/workincentives. Source: OECD Tax-Benefit Models.
●
No housing benefits are included. As Figures 2.3, 2.4, 2.6 and 2.7 show, these benefits provide a significant part of income for households without earnings. GRRs will again be lower than NRRs.
●
Social assistance is not included in most countries, unless it consists of a general income guarantee at nationally determined level. In the part of the index reflecting incomes in years 4 and 5 (and even years 2 and 3), benefit income is therefore assumed to be zero in
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
105
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
many countries. Were it to be assumed that social assistance was paid, average GRRs would be higher. ●
In-work benefits are not included. In countries where they exist, the exclusion may, for certain earnings levels, tend to reduce NRRs in relation to GRRs since in-work incomes are higher when in-work benefits are taken into account.
c) Unemployment traps and barriers to moving back into work: Average Effective Tax Rates In cases where the unemployed person shares a household with individuals who have employment income of their own, Section a) has shown that NRRs can, to a large extent, be driven by the size of these other earnings. Regardless of the number of earners in the household, the NRR is a useful indicator since it shows the relative drop of household incomes when one person becomes unemployed. Yet, in the case of households with more than one potential earner, the fact that other earnings in the household largely determine its value, it is not an ideal indicator of the influence of the tax-benefit system on financial work incentives. Replacement rates show the amount of income available during unemployment as a fraction of in-work income. A related, but different, question is what part of any in-work earnings is effectively “taxed away” for somebody moving into work. The Average Effective Tax Rate (AETR) is the relevant measure for addressing this question. It measures by how much benefits decrease and taxes increase when entering employment. As done in recent analyses at the EU level, this measure can thus be used as an indicator of so-called “unemployment traps” and “inactivity traps” where entering employment either from unemployment or inactivity without unemployment benefits does not result in sufficient increases of households’ current incomes (Carone et al., 2004). The AETR should not be confused with the effective tax burden or “tax wedge”, which is often shown as a percentage of gross earnings for a particular employee and does not relate to any transition between different work situations. Compared to the NRR, the AETR is a better indicator of the influence of the tax-benefit system on financial work incentives because it relates the change in net household income to the change in gross earnings and is therefore not directly affected by the level of any earnings received by other household members. It is defined as: y netIW – y netOW ∆ y net AETR = 1 – ---------------- = 1 – ------------------------------------------y grossIW – y grossOW ∆ y gross
[2]
As in equation [1] above, ynetIW and ynetOW are, respectively, household net income while in and out of work, while ygrossIW and ygrossOW denote household gross earnings in and out of work. The second term thus represents that part of any gross earnings increase that ends up adding to net household income. One minus this fraction is therefore the part of the earnings increase that is “taxed away” through increased taxes and reduced benefit payments. Gross incomes are wages and salaries paid to employees before deducting taxes and compulsory employee social security contributions. Given this publication’s focus on current incomes, contributions paid by employers are not included in ygross (see Annex A for a discussion of this assumption). Differences in employer contribution rates will therefore not affect country comparisons (except through a possible influence on wages and, therefore, the APW value). Net incomes are gross incomes minus taxes minus own compulsory contributions plus benefits.
106
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
3.
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
For an unemployed person who is single or lives in a household where nobody else has any income from work, there is a straightforward relationship between the AETR and the NRR: for those with high NRRs, net incomes during unemployment are not much lower than during employment. When moving back into work, they will thus tend to see only small increases in net income and, hence, have high AETRs as well. This direct link between NRR and AETR is most easily seen in the case of NRR = AETR = 1 and is shown formally in Annex A (in general, NRR ≠ AETR). AETRs for a transition into work are shown in Table 3.5.2 As with NRRs, the numbers relate to an employment transition of one particular household member (i.e. in multiperson households, the employment status of all other individuals is assumed to remain unchanged). Calculations assume that the person making the transition into work has recently become unemployed and receives the benefit amounts that are available in the first month of benefit receipt (i.e. following any waiting period). Benefits are based on previous full-time work with previous earnings at the APW level. AETRs are then calculated for this person re-entering employment at different working-hours ranging from 1/3 to full-time. Calculations do not take into account social assistance benefits as they are assumed not to be available (e.g. because of asset limits) given the short time spent in unemployment. In a separate study, also using OECD tax-benefit models, Carone et al. (2004) have computed “Unemployment Trap” and “Inactivity Trap” indicators that are conceptually equivalent to AETRs. That study also shows results for a number of different transitions including re-employment of an unemployed person with below-average previous wages. Very high rates for those entering part-time employment can act as a strong disincentive to take up employment at lower earnings levels or working hours than in the previous job. They often arise because of the complete withdrawal of unemployment benefits once earnings or working hours exceed an allowed maximum set at relatively low levels (e.g. Czech Republic, Germany, Japan, Slovak Republic, see Table 1.2, column 11). Stopping the entire benefit for people seeking to re-enter employment can, as indicated by AETRs exceeding 100%, cause part-time employment to reduce household net income. Unemployed individuals facing such high AETRs may therefore not take up existing employment opportunities or may do so on an informal level and attempt to hide incomegenerating employment activities from benefit agencies. Other countries operate more gradual benefit phase-outs (e.g. Denmark) or disregard a certain level of earnings or number of working-hours (e.g. Austria, Korea, Portugal) and thus have lower AETRs for those taking up low-paid or part-time employment. Unemployment benefits in Switzerland are calculated as a proportion of the difference between previous and current earnings and therefore provide an opportunity for benefit recipients to improve their income situation by accepting temporary jobs paying less than the previous one. In Korea and Japan, unemployed persons finding a regular job before unemployment benefits expire can receive part of the remaining benefit payments they would otherwise be entitled to (the re-employment allowance). This measure thus provides incentives to re-enter employment and, given that the allowance depends on the remaining duration of unemployment benefits, to do so as early as possible. For those entitled to receive in-work benefits, low AETRs are also found for other countries (e.g. lone parents with low earnings in the United Kingdom). AETRs also tend to be low in countries with low net incomes during unemployment (see Figure 2.3) but, as shown in Chapter 2, this may lead to high risks of poverty for unemployed persons and their families. BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
107
2001, different working hours, in per cent1 0 >> 1/3 No children
0 >> 1/2 2 children
No children
0 >> 2/3 2 children
No children
0 >> full-time 2 children
No children
2 children
OneTwoOneTwoOneTwoOneTwoOneTwoOneTwoOneTwoOneTwoSingle earner earner Lone earner earner Single earner earner Lone earner earner Single earner earner Lone earner earner Single earner earner Lone earner earner person married married parent married married person married married parent married married person married married parent married married person married married parent married married couple couple couple couple couple couple couple couple couple couple couple couple couple couple couple couple
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom United States
70 54 130 72 133 76 44 75 21 16 113 58 33 125 17 16 78 71 67 75 89 62 146 80 85 74 80 69
59 54 127 72 132 82 61 67 26 16 113 35 47 136 15 16 74 71 68 75 89 62 146 78 85 73 63 69
19 59 140 72 138 76 36 73 40 16 113 58 28 118 23 16 66 69 39 75 65 64 168 80 85 71 50 69
69 74 124 56 135 87 73 76 24 16 128 65 16 152 43 19 69 71 54 91 65 62 146 81 90 81 47 31
68 74 124 59 138 89 72 77 36 16 128 41 56 159 15 16 69 73 68 78 65 62 146 77 88 80 47 28
62 59 140 83 140 76 48 71 39 16 113 65 42 114 20 16 66 68 57 78 65 62 168 87 85 78 72 67
67 70 100 83 96 77 64 75 101 32 84 79 36 92 19 47 86 75 66 75 92 78 111 80 85 75 78 69
55 70 92 83 95 80 75 68 96 32 84 67 47 93 15 47 83 75 69 75 93 78 110 78 85 74 68 69
21 73 107 83 100 77 59 74 118 16 84 78 35 92 23 47 78 74 33 75 77 81 118 80 85 73 43 69
70 83 91 73 94 86 83 79 116 38 89 84 33 100 33 49 80 75 60 91 77 78 109 81 90 82 17 47
69 83 87 75 95 87 83 78 111 38 89 73 45 104 15 47 80 76 70 78 78 78 109 78 87 81 21 44
50 73 107 93 97 77 66 72 138 16 84 84 47 95 20 47 78 73 51 78 77 78 118 86 85 80 54 67
58 77 89 89 79 77 69 77 88 71 75 68 40 77 74 50 90 78 61 76 77 110 95 80 85 76 70 78
50 77 80 89 78 79 78 71 79 71 75 53 50 76 71 50 88 78 72 76 77 108 93 78 85 75 70 78
24 80 95 89 81 77 65 76 101 59 73 68 40 77 77 50 84 77 30 76 66 113 94 80 85 75 41 78
61 90 79 83 76 85 80 81 104 76 71 74 10 73 71 51 86 78 68 91 77 108 92 81 90 83 35 62
76 93 76 85 75 85 83 81 95 76 71 62 57 73 69 49 86 80 76 78 66 108 91 79 87 82 38 60
45 80 95 97 79 77 66 74 116 59 73 74 52 81 75 50 84 76 44 78 66 108 94 85 85 82 49 78
50 68 78 72 62 78 73 79 77 55 64 58 41 65 57 38 89 80 49 76 63 81 71 77 85 77 58 69
44 69 70 73 60 78 79 74 68 55 64 48 50 67 55 38 87 81 63 76 63 79 74 76 85 76 58 69
27 70 82 71 63 78 71 78 85 47 62 58 42 65 59 36 85 80 28 76 55 83 71 77 85 76 38 69
62 74 71 77 60 83 84 81 87 56 61 65 32 67 64 38 89 81 67 87 63 78 72 79 90 84 51 63
73 76 68 78 60 83 86 81 82 56 61 57 54 66 53 37 89 82 71 78 63 78 75 77 86 83 51 60
41 73 82 80 64 78 75 76 95 45 62 65 51 69 60 36 88 79 37 78 55 80 75 82 85 83 43 68
1. Results relate to the situation of a person who has just become unemployed and receives unemployment benefits (following any waiting period) based on previous earnings equal to APW. Hourly earnings following the subsequent transition into work correspond to the APW level throughout so that a person making a transition into a half-time job would have total earnings equal to 50% of APW. No social assistance “top-ups” are assumed to be available in either the in-work or out-of-work situation. Any income taxes payable on unemployment benefits are determined in relation to annualised benefit values (i.e. monthly values multiplied by 12) even if the maximum benefit duration is shorter than 12 months. See Annex A for details. Given the transition into employment, in-work benefits that depend on the transition are available. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. For married couples the percentage of APW relates to one spouse only; the second spouse is assumed to be inactive with no earnings in a one-earner couple and to have full-time earnings equal to 67% of APW in a two-earner couple. Comparability with 1999 AETR results (OECD, 2002, Benefits and Wages): for some countries, calculation models have been revised in line with clarifications received from country experts and this introduces a break in the time-series. Details are provided in Annex A and need to be kept in mind when interpreting observed changes as some of them are due to clarifications of the calculations rather than policy reforms. Source: OECD Tax-Benefit Models.
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
108
Table 3.5a. Average Effective Tax Rates for short-term unemployed persons re-entering employment
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Table 3.5b. Average Effective Tax Rates for short-term unemployed persons re-entering employment (cont.) 2002, different working hours, in per cent1 0 >> 1/3 No children
0 >> 1/2 2 children
No children
0 >> 2/3 2 children
No children
0 >> full-time 2 children
No children
2 children
OneTwoOneTwoOneTwoOneTwoOneTwoOneTwoOneTwoOneTwoSingle earner earner Lone earner earner Single earner earner Lone earner earner Single earner earner Lone earner earner Single earner earner Lone earner earner person married married parent married married person married married parent married married person married married parent married married person married married parent married married couple couple couple couple couple couple couple couple couple couple couple couple couple couple couple couple 61 54 129 72 131 81 82 67 26 16 108 37 49 135 14 14 71 74 69 76 92 62 146 77 87 73 63 66
20 59 128 72 138 75 66 73 41 16 108 60 27 119 22 14 66 69 36 76 70 62 167 79 87 70 49 67
70 74 123 57 135 86 81 85 22 16 125 66 15 151 42 16 68 73 55 91 70 62 146 81 91 81 47 30
68 74 123 60 137 88 81 85 36 16 125 43 57 158 14 14 68 74 69 78 70 62 146 79 87 80 47 25
53 59 128 83 139 75 66 71 40 16 108 66 40 117 19 14 66 67 56 78 81 62 166 87 87 77 75 63
66 70 103 83 96 76 74 75 101 33 80 81 36 92 18 45 85 75 66 76 89 79 111 79 87 75 78 70
54 70 93 83 95 79 82 68 93 33 80 70 48 93 14 44 82 77 70 76 90 79 110 77 87 74 68 67
23 73 99 83 100 76 68 74 118 16 80 81 34 92 22 45 78 74 31 76 74 81 118 79 87 73 43 69
69 83 94 74 94 85 84 80 111 39 87 86 34 100 33 46 80 77 60 91 74 79 109 81 91 82 14 50
70 83 88 76 95 86 84 80 105 39 87 76 44 103 14 44 80 78 70 78 75 79 109 79 87 81 18 43
45 73 99 93 97 76 69 72 140 16 80 86 46 95 20 45 78 73 47 78 82 78 117 86 87 80 57 66
57 77 91 89 78 77 72 77 88 72 70 71 40 77 73 48 89 78 61 76 75 110 92 79 87 76 70 79
50 77 83 89 78 78 78 70 79 72 70 53 51 76 70 48 87 79 72 76 75 108 93 77 87 75 70 78
25 80 89 89 81 77 67 76 101 60 68 71 40 77 76 48 84 77 29 76 64 113 93 79 87 74 40 79
62 90 81 84 77 84 80 80 105 77 69 76 10 72 70 49 86 80 69 91 75 108 92 81 91 83 33 65
77 93 78 85 75 84 83 79 96 77 69 60 59 72 69 47 86 82 77 78 64 108 91 80 87 82 36 60
41 80 89 97 79 77 68 74 117 60 68 76 51 81 75 48 84 76 41 78 70 108 93 85 87 81 50 77
49 68 80 72 62 77 75 78 77 56 60 60 41 65 56 35 88 73 49 76 62 82 69 76 87 77 58 67
44 69 72 73 61 77 79 74 68 56 60 49 51 67 54 35 86 74 62 76 62 80 72 75 87 76 58 65
27 70 78 72 63 77 72 78 85 47 59 60 42 65 58 35 85 80 27 76 54 83 70 76 87 76 38 66
60 74 73 78 61 82 84 79 87 57 59 66 31 66 63 36 89 75 68 84 65 78 70 79 91 84 50 61
70 76 69 79 60 82 86 79 82 57 59 55 55 65 52 35 89 76 72 78 65 78 72 77 87 83 51 58
38 73 78 80 64 77 76 76 96 46 59 66 50 70 60 35 88 79 35 78 58 80 73 81 87 83 44 65
1. Results relate to the situation of a person who has just become unemployed and receives unemployment benefits (following any waiting period) based on previous earnings equal to APW. Hourly earnings following the subsequent transition into work correspond to the APW level throughout so that a person making a transition into a half-time job would have total earnings equal to 50% of APW. No social assistance “top-ups” are assumed to be available in either the in-work or out-of-work situation. Any income taxes payable on unemployment benefits are determined in relation to annualised benefit values (i.e. monthly values multiplied by 12) even if the maximum benefit duration is shorter than 12 months. See Annex A for details. Given the transition into employment, in-work benefits that depend on the transition are available. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. For married couples the percentage of APW relates to one spouse only; the second spouse is assumed to be inactive with no earnings in a one-earner couple and to have full-time earnings equal to 67% of APW in a two-earner couple. Comparability with 1999 AETR results (OECD, 2002, Benefits and Wages): for some countries, calculation models have been revised in line with clarifications received from country experts and this introduces a break in the time-series. Details are provided in Annex A and need to be kept in mind when interpreting observed changes as some of them are due to clarifications of the calculations rather than policy reforms. Source: OECD Tax-Benefit Models.
109
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
71 54 134 72 133 75 76 74 21 16 108 60 32 125 16 14 76 71 68 76 92 62 146 79 87 74 80 68
3.
Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom United States
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Comparing across family types, Table 3.5 shows that unemployed people with working spouses face very high AETRs in several cases (e.g. Belgium, Germany, Slovak Republic). For potential second earners, barriers to moving into work can be particularly pronounced in countries where spouses’ incomes are assessed jointly for the purpose of determining tax liabilities or benefit entitlements. In these cases, taking up employment not only reduces or stops entitlement to the individual’s own unemployment benefit but can also reduce benefits received or increase taxes paid jointly by the couple or family as a whole. Australia and New Zealand exhibit markedly lower AETRs for unemployed persons with working spouses. This is mainly due to unemployment benefits which are low compared to most other countries and which are means-tested. As a result, the unemployed person with a working spouse with moderate or higher earnings does not receive any unemployment benefits in the first place and is, therefore, not affected by any benefit withdrawal upon taking up employment. An interesting illustration of the influences on AETRs is the case of the United Kingdom, which combines a strongly individual-oriented tax system with an in-work benefit that is withdrawn in relation to family income. AETRs for unemployed individuals with working spouses are lower than for those with non-working spouses in the case of childless families. These families are not entitled to the Working Families’ Tax Credit (WFTC). Those with non-working spouses have incomes sufficiently low to be entitled to housing benefits while unemployed and this benefit is then reduced when earnings increase upon entering work. In the “two-earner” case, however, the earnings of the working spouse make family incomes exceed relevant housing benefit limits both before and after the transition into work. A larger part of additional earnings therefore translates into family net income increases (AETRs are lower in the “two-earner” case). The opposite is true for families with children: the phase-out of WFTC initially paid to the working spouse introduces work disincentives for second earners (higher AETRs in the two-earner„ case, particularly for transitions into part-time work).
2. Transitions between jobs: changing working-hours or work effort As with the barriers to leaving unemployment or non-employment, a combination of tax increases and benefit withdrawals can reduce the financial incentives for increasing working-hours or work effort for those already working. Marginal effective tax rates (METRs) can be used to measure these disincentives. For low-income groups, METRs are useful indicators of so-called “low-wage traps”; situations where higher gross earnings result in no or very little net income gains. To “make work pay” it is essential that any work disincentives facing employees are understood and measured alongside the “unemployment traps” discussed in the previous section. This section evaluates METRs for a range of working-hours transitions. METRs are equivalent to AETRs, except that they are computed for a transition between different inwork states rather than for a move between unemployment and employment. Similar to the AETR, they are defined as: ∆y net METR = 1 – ----------------∆y gross
[3]
and measure the part of any change in gross income ygross that is absorbed or, in the case of positive ∆ygross, “taxed away” through changing taxes and benefits. Analytically, it can be desirable to compute METRs for very small changes of ygross. However, for the purposes of
110
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
3.
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
this publication, it is more useful to evaluate METRs for realistic changes in earnings and, particularly, working-hours that employees may consider when evaluating the relative attractiveness of different degrees of work effort. The definition of gross and net incomes is the same as for AETRs shown above except that ynet does not include any unemployment benefits as individuals are not unemployed. As in previous sections, changes in net incomes are evaluated for the household as a whole since the additional gross earnings of one individual can affect the taxes paid and benefits received by other household members. Results for different working-hours transitions are shown in Table 3.6. Further estimates of METRs and an illustration of the influence of each tax-benefit instrument are provided in the detailed “budget constraint” graphs discussed in Section 2.1 and available on the Internet at www.oecd.org/els/social/ workincentives. The METR measures shown in these graphs are conceptually equivalent to those derived in Carone et al., (2004), which are also based on calculations using OECD tax-benefit models. For a doubling of working-hours from 1/3 to 2/3 of full-time hours, very high METRs are observed in a number of countries, particularly for larger households which are, for any given level of earnings, more likely to receive means-tested benefits such as social assistance. These benefits are withdrawn at high rates as earnings increase and can therefore severely reduce the immediate financial reward of longer working hours. Where benefits are withdrawn based on gross rather than net earnings (e.g. Luxembourg), the combination of higher taxes and lower benefits can cause METRs in excess of 100% and therefore make additional work effort non-rewarding in the short term. METRs are low in countries where tax burdens are small (e.g. Korea) or where meanstested benefits play less of a role (e.g. Greece, Italy, Spain). For short working hours, METRs can be very low in cases where some benefit payments are conditional on having employment income of a certain minimum level or are conditional on working a certain minimum number of hours. For transitions from 1/3 to 2/3 of full-time hours in the case of families with children, this is, for instance, evident in Italy (where family benefits increase in line with the number of days worked) and the United Kingdom (where in-work benefits are available for those working 16 hours per week or more). At the same time, these employment-conditional benefits are targeted towards low-income families and are therefore reduced at higher earnings levels. For in-work benefit recipients in the United Kingdom (i.e. families with children), this leads to much higher METRs for transitions from a part-time job to full-time working hours.
Notes 1. A recent international comparison of net replacement rates based on representative household micro-data is provided by Immervoll and O’Donoghue (2003). 2. It should be noted that, for most tax-benefit instruments, the direction of the transition does not matter. However, certain in-work benefits are only available following a transition into work. For the transition into work, these benefits are thus included in ynetIW (while they were not included for the NRR measures which are computed for a transition from employment to unemployment).
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
111
2002, different working-hours transitions, in per cent1 1/2 >> full
Single person
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom United States
32 40 57 32 27 48 50 36 54 20 41 39 30 38 21 9 30 51 32 34 34 22 26 29 35 26 37 29
1/3 >> 2/3
2/3 >> full
No children
2 children
No children
2 children
No children
2 children
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
One-earner Two-earner married married couple couple
33 44 50 33 36 81 63 40 52 20 41 38 38 41 31 9 66 59 55 34 33 53 52 23 54 38 48 26
32 40 57 31 27 48 42 37 51 20 39 39 30 38 21 9 26 45 23 34 34 23 22 29 35 28 32 28
Lone parent 72 39 57 56 40 57 64 62 66 16 31 46 75 33 71 10 34 60 76 56 57 49 37 25 55 37 87 51
70 60 50 61 48 88 85 73 55 16 31 45 50 26 66 13 79 64 74 41 61 59 83 22 65 47 84 53
32 40 57 40 31 48 42 30 52 16 39 46 30 44 27 9 16 46 23 34 34 19 29 28 35 27 32 26
Single person 43 45 49 28 34 69 68 56 77 16 33 38 48 30 40 6 72 72 59 58 34 30 40 21 64 56 61 32
39 75 44 37 53 110 94 93 78 16 33 72 81 19 71 6 110 87 80 58 51 55 100 10 95 83 76 38
30 28 51 27 26 44 33 29 51 16 30 39 25 35 21 7 22 37 22 33 34 21 22 21 31 26 32 25
Lone parent 67 62 49 59 54 85 61 99 86 16 16 46 58 –5 103 21 91 64 86 67 62 56 80 17 41 82 35 53
86 99 37 67 82 111 100 100 69 16 16 74 77 –13 93 47 110 80 89 75 74 55 100 18 100 99 57 55
30 28 51 39 26 44 33 22 51 16 30 46 25 46 21 7 14 37 26 33 34 28 22 16 34 24 26 17
Single person 31 41 56 35 28 50 44 40 54 22 40 39 30 41 21 9 32 46 24 36 34 24 22 30 35 28 32 29
31 41 51 36 33 64 51 28 45 22 40 38 27 47 21 9 43 51 42 36 34 51 28 27 35 24 33 27
32 41 55 32 28 50 44 38 52 22 41 39 30 41 21 9 27 46 24 36 34 23 22 30 35 28 32 29
Lone parent 71 43 56 63 40 53 62 43 52 17 37 46 69 55 50 9 14 54 67 53 46 45 25 24 55 23 86 48
56 41 51 63 40 70 77 58 54 17 37 45 42 50 52 9 63 58 62 36 68 61 75 19 47 22 81 52
32 41 55 42 34 50 44 32 52 17 41 46 30 46 30 9 17 46 24 36 34 23 33 30 35 27 32 29
1. Hourly earnings correspond to the APW level throughout so that a half-time employee would have earnings equal to 50% of APW. Social assistance and any other means-tested benefits are assumed to be available subject to the relevant income conditions. Children are aged 4 and 6 and neither childcare benefits nor childcare costs are considered. In-work benefits that depend on a transition from unemployment into work are not available since the person changing working-hours is already in employment prior to the change. For married couples the percentage of APW relates to one spouse only; the second spouse is assumed to be “inactive” with no earnings in a one-earner couple and to have full-time earnings equal to 67% of APW in a two-earner couple. Source: OECD Tax-Benefit Models.
3. FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
112
Table 3.6. Marginal Effective Tax Rates for part-time employees
3.
FINANCIAL CONSEQUENCES OF EMPLOYMENT TRANSITIONS
Bibliography CARONE, G. et al. (2004), “Indicators of Unemployment and Low-Wage Traps (Marginal Effective Tax Rates on Employment Incomes)”, OECD Social, Employment and Migration Working Paper, No. 18, OECD, Paris, available at www.oecd.els/workingpapers (also published as European Economy Economic Papers, No. 197, European Commission, Directorate-General for Economic and Financial Affairs, Brussels). IMMERVOLL, H. and C. O’DONOGHUE (2003), “Employment Transitions in 13 European Countries. Levels, Distributions and Determining Factors of Net Replacement Rates”, CESifo Working Paper, No. 1091, CESifo, Munich. OECD (1994), The OECD Jobs Study, OECD, Paris. OECD (2002), Benefits and Wages, OECD, Paris.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
113
ISBN 92-64-01515-9 Benefits and Wages: OECD Indicators 2004 Edition © OECD 2004
Chapter 4
Policy Developments
Introduction 1. Out of work benefits and benefits of “last resort” a) Reforms of eligibility rules and job-search requirements b) Changes to applicable benefit rates, amounts or durations c) Changes related to means-tests 2. Family benefits 3. Childcare and home-care benefits 4. Employment-conditional benefits
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
115
4. POLICY DEVELOPMENTS
Introduction This publication describes the tax-benefit systems that were in operation in OECD countries in 2001 and 2002. Some countries have introduced or are introducing changes that may affect the functioning of the tax and benefit systems and so affect the income situation and work incentives of persons in different household circumstances. This chapter discusses trends in those reforms as they apply to the working-age population and summarises important changes since the previous publication of Benefit and Wages which covered the period up to 1999. The most notable reforms aimed at “making work pay”. Several countries have introduced employment-conditional benefits, modified existing schemes or restructured the overall design of tax systems in order to reduce tax burdens. Where poverty reduction was an aim, relevant measures have mainly targeted the working poor while the degrees of income protection provided by benefits of “last resort” have largely remained unchanged. The present chapter focuses on cash benefits as well as tax reductions that are largely equivalent to benefit payments. It should be noted, however, that together with the trends in benefits outlined here, there have been tax reforms in several countries. A main feature of these reforms is a reduction in direct tax burdens. In some countries, this has resulted in a reduction of the difference between gross and net income, particularly for people in work. Between 1999 and 2002, significant tax burden reductions were observed in Australia, Ireland, Luxembourg, Netherlands, United Kingdom and United States. These and other tax changes are described in more detail in the publication Taxing Wages 2001-2002 (OECD, 2003a).
1. Out-of-work benefits and benefits of “last resort” Between 1999 and 2002, the general trend towards tightening eligibility conditions continued but affected fewer countries than in previous periods. Contrary to the decline in benefit amounts seen in earlier period, payment rates were made more generous in several countries. More generally, services to benefit recipients have been individualised by providing assistance and support that is more responsive to changes in peoples’ circumstances. A similar trend has also been observed for means-tested and minimum income benefits. Tied into this relationship between benefit recipient and benefit agency is a notion of “mutual obligations” although the meaning and significance of this concept varies markedly across countries (see OECD, 2004). Three different types of relevant policy changes can be distinguished: a) reforms of eligibility rules; b) changes to applicable benefit rates, amounts or durations; and c) changes related to income-tests or means-tests where these are applicable.
a) Reforms of eligibility rules and job-search requirements ●
116
In Australia, initiatives have aimed at improving the accuracy of the evaluation of benefit claims and subsequent benefit payments. Also, changes are to be made to
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
4. POLICY DEVELOPMENTS
relevant processes for updating information on payment recipients, with a view to possible lodgement and claiming on-line by customers in the future. To help understand the relationship between specific customer characteristics and program outcomes, a socalled “profiling” initiative was announced in 2001. Risk profiles would be developed to enhance payment correctness, activity testing and economic and social participation. Profiling is about identifying those income support recipients most at risk of not achieving program outcomes and providing service and support to better suit their circumstances. ●
Belgium has tightened the favourable entitlement conditions for unemployed persons over 50 years of age. In addition, a measure has been introduced to encourage work following job-loss: for a period of up to nine months, work not subject to statutory unemployment insurance (e.g. self-employment) does not cancel benefit entitlements that are earned through previous employment periods.
●
Canada further raised contribution requirements to 630 hours of work in the previous year.
●
France extended the reference period for the required four months of work from 8 to 18 months.
●
In Germany in August 2002, the so-called Hartz-Commission, a working group set up to identify options for reforming the Federal Labour Office, released its final report. The proposed measures largely shaped further labour market reforms introduced by the government and include a tightening of job-search requirements, an expansion of the type of jobs that unemployed persons have to accept and an extension of relevant sanctions for non-co-operation. The reference period (Rahmenfrist) during which 12 months of insurance contributions have to have been made has been shortened (from three to two years). In 2002, profiling of job seekers was also introduced in Germany as part of a law aiming at better “activation” of the unemployed.
●
Hungary (from 12 months to 200 days), Korea (from 12 to 6 months) and the United States (from 6 to 5 months) have shortened required employment/contribution periods. In response to labour market downturns Portugal has, more recently, also shortened required contribution records from 540 days (within the previous 24 months) to 270 days (within 12 months).
●
In New Zealand, work test obligations were made part of an individual “job seeker agreement” developed between the beneficiary and their case manager. Participation in unpaid community work is no longer required.
b) Changes to applicable benefit rates, amounts or durations In some countries, replacement rates for employees earning given fractions of average earnings decreased despite unchanged or even increased benefit rates. This can be a result of relatively strong increases in nominal wages. If benefit amounts do not go up by the same fraction, then replacement rates will decline. Prior to 2002, such declines have, for instance, been observed for Finland, where nominal wage increases have outpaced adjustments of benefit amounts and related parameters. In several other countries, social assistance benefits have decreased in comparison with wage levels. Significant declines have, for instance, occurred in Austria, Canada, Hungary or Iceland and are mainly due to the benefit indexing regimes that are in place, which raise benefit amounts, if at all, by less
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
117
4. POLICY DEVELOPMENTS
than wage growth. Other changes leading to lower benefit entitlements included the following: ●
Austria reduced payment rates for insurance benefits (and thus also for unemployment assistance benefits which are a percentage of insurance benefits).
●
The Danish Government introduced in 2002 a qualifying principle for social assistance cash benefits so that only persons who have resided in Denmark for at least seven out of the preceding eight years are entitled to full cash benefits, with lower rates (called Starting Allowance) applying to other benefit claimants. Persons coming to Denmark from 1 July 2002 are subject to the new rules (this applies to both foreigners and Danes, with exceptions according to EU legislation). The lower rates are intended to make it financially attractive for benefit recipients to accept a job at the minimum wage level, regardless of family circumstances. In addition, people on Starting Allowance will be allowed to keep a larger part of their earned income during the seven-year period without giving rise to benefit reductions. The relevant income disregard amounts to DKK 28 per hour against DKK 11.50 under ordinary social assistance rules.
●
Further tax-benefit reforms in Germany (to be introduced in 2004) include a simplification of rules underlying the calculation of reference earnings and reduced tax or contribution burdens for unemployed persons with limited self-employment incomes (up to EUR 25 000 per year) as well as for low-wage jobs. A major reform initiative consists of abolishing unemployment assistance. Benefits for the long-term unemployed are to be integrated with the social assistance scheme. As a result of more comprehensive income and asset testing, this would result in lower (or, in certain cases, no) benefits for a substantial number of long-term unemployed persons. In its current form, the proposed means-tests would, however, exclude certain types of savings from the means-tests (e.g. private pension assets).
●
In Hungary, unemployment assistance is no longer available to new claimants since the year 2000.
●
The experimental minimum income support in Italy (reddito minimo di inserimento – RMI), adopted in 39 Italian municipalities and originally planned to end in 2000, was prolonged until the end of 2002 and extended to a further 266 municipalities (out of a total of more than 8 000). The scheme has now been terminated without further extension of the trial and the new government has announced the intention of introducing new social assistance schemes administered at the regional level.
●
Unemployment assistance amounts were reduced in Spain.
●
Maximum durations of unemployment insurance benefits were further limited in Canada, Denmark, France and Hungary.
●
The duration of unemployment assistance was reduced to 14 months in Sweden.
In several countries, benefits have become more generous or have been newly introduced:
118
●
In Belgium, the decline of payment rates during a given spell of unemployment is now more moderate with gross replacement rates after 12 months of unemployment dropping from 60 to 50% in 2002 for single households (60 to 43% in 1999).
●
In France, time-dependent benefit reductions during the initial period of unemployment have also been eased.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
4. POLICY DEVELOPMENTS
●
In 2002, unemployment assistance and basic insurance benefits in Finland were increased and the rate in the first tier of the earnings-related part was raised from 42 to 45%. In addition, child supplements payable to recipients of unemployment assistance were increased as well (they now equal the child supplements of basic unemployment benefit and earnings related benefit). In addition, the maximum housing costs covered by housing allowance were increased in 2002.
●
Greece announced the introduction of a general social assistance scheme which has, however, not yet been implemented.
●
In Iceland, rent benefits are, since 2002, no longer considered taxable income.
●
Gross replacement rates of ordinary unemployment benefits in Italy have increased from 30 to 40% as of 2000, and benefit durations were extended from six to nine months for those aged 50 years or more.
●
Maximum durations of unemployment insurance were extended in Japan.
●
In Korea, the government has enacted a new social assistance system which came into effect in October 2000 as part of the National Basic Livelihood Security Act. The scheme is based on a concept of “productive welfare”, which, among other features, involves the use of active labour market programmes to promote clients’ employability. Compared to the rather low benefit levels of 1999, benefit amounts have increased significantly although net incomes of social assistance recipients are still low relative to average wages (see Table 3.2 in Chapter 3).
●
In Portugal, benefit entitlements have been increased for unemployment benefit recipients working part-time and benefit supplements were introduced for dependent family members. However, these latter changes have only been introduced in 2003 and so are not reflected in the results reported in the present publication. The Portuguese Guaranteed Minimum Income programme was replaced by the Social Insertion Income (May 2003) which reinforced the differentiation of applicable social assistance amounts depending on family circumstances (in particular for families with several children as well as during pregnancy).
●
A new housing benefit (housing bonus) was introduced in the Slovak Republic in 2000. In addition, social assistance amounts went up relative to the average wage level.
c) Changes related to means-tests There were few relevant changes under this heading. They all aimed at limiting the adverse effects of means-tests on work incentives: ●
In Australia, the Australians Working Together (AWT) package was announced in 2001. It has been described by the authorities as a first step on the path of a longer-term approach to welfare reform. As the next step in the welfare reform process, the Government announced in December 2002 that it would undertake a major review of the payment system. As part of the AWT package, a new Working Credit was introduced in September 2003. This instrument is an addition to existing means-testing rules and is designed to increase incentives for working-age benefit recipients to take up full-time, substantial part-time or irregular casual work. Benefit recipients taking up employment will, for an initial period, be able to keep more of their income support as long as they have earned sufficient Working Credits to use as an offset against earnings that would otherwise reduce benefit entitlements. Working Credits are obtained for each period (fortnight) of benefit receipt
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
119
4. POLICY DEVELOPMENTS
when the recipient’s income remains below the disregard limit. During periods (fortnights) when incomes are above the limit, built-up credits are then used to reduce how much income is assessed under the income test. Working Credit applies to a wide range of meanstested benefits including unemployment benefits (Newstart Allowance and Youth Allowance) and child-raising allowances (Parenting Payments). ●
In Finland, the government has announced that, from 2004, a substantially larger part of spouse’s income will be disregarded in means-testing unemployment assistance amounts. The relevant disregard will increase from EUR 236 to 536 per month, reducing work disincentives for partners of unemployment assistance recipients.
2. Family benefits Prior to 1999, several countries made means-testing of family benefits more systematic to restrict benefit entitlements to low and middle-income households (see OECD, 2002). These measures have generally remained in place so that, as in 1999, just under one half of the countries covered here have operated means-tested family benefits in 2002. However, in Iceland, benefit supplements for children under seven are no longer means-tested from 2001. In the Slovak Republic, the basic family allowance is no longer means-tested as of July 2002. In some countries, there have been continuing attempts to reduce the adverse incentive effects of means-tests. Australia has reduced the benefit withdrawal rate for the means-tested Parenting Payment from 50 to 40% (see also the discussion of the new Working Credit scheme in the previous section). The regulations underlying family benefit means-tests in Poland have been amended to include a somewhat higher income disregard for working lone parents. Between 1999 and 2002, family benefit amounts in Germany, Ireland, Spain and Sweden have increased significantly (in absolute terms and relative to average wages). In addition, family benefits in Spain no longer constitute taxable income. While explicit reforms to benefit amounts have been relatively rare, most countries do not adjust benefit amounts for changes in wages levels. With relatively strong wage growth, the generosity of benefits relative to wages has therefore declined significantly in a few countries (e.g. Czech Republic, Hungary). These relative decreases also reduce calculated Net Replacement Rates for families with children, particularly where family benefits are means-tested and therefore often not available in the in-work situation (see Chapter 3). In New Zealand, the main child benefit (Family Support) and a range of other child-related payments are to be increased in 2005, 2006 and 2007 as part of the Working for Families policy package introduced in 2003. In a few countries, payment-schedules for family benefits have become more differentiated with respect to the number or ages of children (details are provided in Table 1.7). For instance, Austria has introduced income-dependent benefit supplements for families with multiple children. The opposite development was, however, observed in Norway, where extra supplements for families with more than two children are no longer available. Japan extended benefit entitlements to children aged up to 6 years (the previous age limit was 3 years). In Australia, a new structure and delivery of family benefits called Family Tax Benefit (FTB) was introduced in July 2000, merging ten types of assistance into two. Part A is an income-tested payment intended to help families with the cost of raising children. Part B is also income-tested, but only on the earnings of the lowest earner in the household; there is no income-test for lone parents. One continued trend in family benefit reforms consists of administering benefit payments through the tax administrative system. In Spain, an income tax reform
120
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
4. POLICY DEVELOPMENTS
in 2003 lowered the tax burden of families with children using a range of measures including special allowances for working mothers of young children. In the United States, Congress enacted the Economic Growth and Tax Relief Reconciliation Act of 2001, which also increased tax benefits for families with children and expanded the child tax credit. Finally, in the United Kingdom, a Children’s Tax Credit was introduced in 2001, reducing income tax burdens for a large number of tax-paying families with children. In 2003, and as announced in the previous edition of this publication, an integrated Child Tax Credit was introduced. This credit replaces and integrates a large number of child-related tax and benefit provisions, including the Children’s Tax Credit. At the same time, child additions for new claimants of National Insurance benefits were abolished. In 2004, child allowances and family additions to Income Support and income-related Job Seeker’s Allowance were subsumed within the Child Tax Credit.
3. Childcare and home-care benefits Reforms to childcare benefits have recently been introduced in several countries. One trend, in line with initiatives to make work pay, has been to support parents directly rather than provide subsidies to childcare institutions. Financial support paid directly to parents can be seen as a means to give parents more choice in the use of different childcare arrangements: ●
Austria substantially modified the rules underlying maternity leave and the associated child-raising allowance/home-care benefit (see OECD, 2003b, Box 5.1). From the second half of 2002, new parents are entitled to post-natal leave/home-care benefit for 30 months (one parent on maternity leave) or 36 months (leave shared between parents). Previous employment is no longer an eligibility condition (students without previous work experience are, for instance, entitled to the benefit). After 8-12 weeks following childbirth, the new benefit may be combined with income from work (subject to an upper limit). The benefit payment amounts to EUR 436 per month (around 22% of APW).
●
In Finland, the government has announced plans to increase the home care allowance and maternity daily allowance during 2004-07. In January 2002 the public day care fees were revised. The maximum amount for the first child was increased to EUR 200 per month and a new maximum amount of EUR 180 per month for the second child in day care was introduced.
●
From January 2004, childcare benefits in France have been replaced by the Prestation d’accueil pour jeune enfant (PAJE). This consists of a means-tested basic allowance and a supplement (the complément de libre choix) which is available to parents who are either using formal care or interrupt their career in order to care for their children at home. A main aim of the basic allowance is to also enable low-income household to make a real choice concerning the form of childcare. The supplement replaces the previous programmes (see Table 1.8) and is only available to those with previous work experience. The employment requirements are stricter for second and further children. The aim of this structure is to avoid incentives for additional career interruption for women whose employment history is already considered “precarious”. On the labour demand side, the reform also introduced a tax credit for employers who contribute either to the payment of childcare cost or to the funding of training sessions for parents returning from parental leave.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
121
4. POLICY DEVELOPMENTS
●
In Italy, reforms to parental leave and benefits were started in 2000. Here too, more flexibility was introduced on both the demand and supply sides. Employees can spread their (unchanged) leave entitlements over a longer period. Small firms are granted a 50% reduction on social contributions for new employees hired to temporarily replace workers on parental leave. In addition, maternity allowances were increased and a tax credit for children under three years of age was introduced.
●
In 2001, Japan raised rates for childcare (and family care) leave benefits from 25 to 40% of previous wages.
●
Working parents in Luxembourg benefit from a new tax allowance which covers childcare costs up to a limit.
●
The income-dependent benefits for childcare in the Netherlands are to be replaced by a childcare tax credit in 2004.
●
Portugal introduced, in 2003, a benefit that partially compensates for expenses incurred for social services such as nursery, nannies or pre-school education.
●
New Zealand introduced new childcare provisions aimed at assisting parents into work. The maximum number of hours qualifying for the income-related Childcare Subsidy (payable to the childcare provider) and Out-of-School Care and Recreation (OSCAR) subsidy was increased from 30 to 37 hours per week. On the supply side, additional funding was provided to improve the number and quality of OSCAR providers so that lack of access to childcare is less of an impediment to beneficiaries and low-income workers entering and/or remaining in the paid workforce. Further increases of benefit amounts and income disregards are planned for 2004 and 2005 as part of the Working for Families reform package. Access to the New Employment Transition Grant, previously only available to sole parents, was extended to married people with a dependent child or children. For six months following the cancellation of the benefit to enter employment, the grant provides assistance to people who are required to take unpaid leave due to personal illness, illness of their partner or their child, or as a result of a breakdown in their childcare arrangements. The government also announced a state funded paid parental leave scheme. The maximum payment amounts to NZD 325 gross per week and is payable for 12 weeks; however, employees must have worked for their current employer for a period of at least one year. Substantial changes to the Domestic Purposes Benefit (DPB) and Widows Benefit (WB) came into effect in early 2003. The work test was abolished and both groups are now required to develop an annual plan detailing the steps they intend to take to move back into the workforce when parenting responsibilities and individual circumstances allow. The age of the youngest child in a family will no longer determine whether sole parents on DPB and WB are required to work. This change is supported by the introduction of a single abatement rate for DPB/ WB clients allowing them to keep a greater proportion of any income they receive while on the benefit.
4. Employment-conditional benefits Between 1999 and 2002, the trend towards employment-conditional (or in-work) benefits or tax credits has continued. Several countries have introduced in-work benefits
122
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
4. POLICY DEVELOPMENTS
for the first time while others have refined and partly reinforced existing schemes. Newly introduced policy instruments included the following: ●
Belgium introduced the complément de garde d’enfant in 2000. This measure is targeted towards long-term unemployed lone parents and provides a lump-sum cash benefit upon taking up a new job. In addition, the crédit d’impôt (introduced in 2002 as part of a general tax reform) has been phased in. This tax credit is subject to a maximum of only EUR 90 per year in 2002 but this is set to increase to EUR 500 by the end of the phase-in period (in 2004). The credit operates like a cash benefit (it is non-wastable) and depends on the earnings of the claimant only. As of 2002, certain older long-term unemployed persons also qualify for a monthly benefit (complément d’ancienneté) when taking up a new job.
●
Like Belgium, the Netherlands also introduced a lump-sum “back to work” payment and an employment-conditional tax credit as part of a structural tax reform. The Work Credit is a wastable tax credit whose value increases (up to a maximum) for higher earnings levels. In addition, there is a premium for unemployed persons returning to work. This is a rather generous lump-sum payment providing an income supplement of around 7% of APW upon taking up a full-time job. Reduced one-off payments are subsequently available after one, two and three years of work. Finally, the Combination Credit aims at making childcare more affordable for working parents by providing an income supplement for parents earning more than a specified minimum.
●
An employment-conditional tax credit was also introduced in France in 2001 (prime pour l’emploi, PPE). In contrast to the Belgian individual-based crédit d’impôt, the PPE meanstest is based on family income. The maximum tax credit amounts to 2-3% of APW. It is non-wastable and, subject to the family income test, is available to all low-wage employees earning more than about 19% of APW. The PPE is phased out rather slowly so that, depending on the family situation, a person with above-average earnings may still receive it.
●
In Germany, in March 2002, a regional in-work benefit scheme (Mainzer Modell) was extended to the country as a whole. The Mainzer Modell benefit was a means-tested benefit covering part of employees’ social security contributions and paying a supplement to family benefits. In April 2003, this tax-financed benefit scheme was replaced by a direct reduction of social security contributions for employees earning between EUR 400 and 800 per month. This effectively introduces a more gradual phasein of employee contribution burdens (previously, lower contribution thresholds gave rise to very high marginal effective tax rates: once exceeded, all earnings had been subject to the full contribution rate of around 21%). However, the new scheme no longer provides additional family benefit supplements to low-wage employees with children.
For several reasons, one can expect to see further reforms in this area in the future. “Making work pay” features prominently on the policy agenda in most OECD countries. Employment-conditional benefits are intended to increase labour supply and improve the income situation of certain groups of employees. Given the relatively recent adoption of these benefits, a continued evaluation of their effectiveness in furthering these policy aims is essential and is likely to lead to further reform initiatives. This is particularly the case because in-work benefits are complex policy instruments. More than other types of taxbenefit instruments, their effects depend critically on a range of factors such as the situation of the labour market or interactions with other parts of the tax-benefit system.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
123
4. POLICY DEVELOPMENTS
Once the context in which these benefits operate changes, their design may have to be reconsidered as well. In fact, employment-conditional benefits are sometimes designed in part to remedy certain undesirable features (such as high replacement rates) caused by other taxes or benefits. Reforms to individual parts of the tax-benefit system can therefore trigger a need for reforming in-work benefits as well. During the 1999-2002 period, three countries introduced changes to existing in-work benefit schemes or tax advantages. In all three cases, relevant amounts were made more generous: ●
Compared to the 1999 situation, Finland further increased the maximum value of the earned income tax allowance and introduced a two-tier phase-in schedule resulting in more generous allowances for low-wage employees. The tapering of the tax allowance has become slightly steeper with phase-out rates increasing from 3 to 3.5%.
●
In New Zealand, the policy parameters of the Family Tax Credit in-work benefit have remained unchanged in nominal terms between 1999 and 2002. Several measures, although not necessarily classified as employment-conditional benefits, are aimed at reducing financial burdens associated with transitions into employment. The Work Start Grant, which covers some of the costs associated with the transition into a new job, was made more generous in 2001 and a special version of the grant for students was introduced. Another newly introduced transition-to-work measures is the “Pathways Payment” and benefit debt suspension for long term beneficiaries with children who move off benefit and into full time work. This initiative provides a payment equivalent to 2 weeks’ benefit and a 3 month suspension of benefit debt repayments.
●
In the United Kingdom, benefit amounts paid through the Working Families’ Tax Credit (WFTC) were increased between 1999 and 2002, particularly for families with young children. The childcare benefit part of the WFTC has also been made more generous. In April 2003, the WFTC and other child-related payments were replaced by two separate tax credits. The new Child Tax Credit has been briefly discussed in Section 2 above. The Working Tax Credit now provides income supplements to low-wage employees and, for the first time, extends entitlements to these benefits to workers without children.
Bibliography OECD (2002), Benefits and Wages, OECD, Paris. OECD (2003a), Taxing Wages: 2001-2002, OECD, Paris. OECD (2003b), Babies and Bosses – Reconciling Work and Family Life (Vol. 2): Austria, Ireland and Japan, OECD, Paris. OECD (2004), OECD Employment Outlook, OECD, Paris
124
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ANNEX A
ANNEX A
Methodology Introduction Various assumptions have been made in calculating gross and net in-work and out-ofwork incomes on a comparable basis across countries. The first section of this annex explains the reference periods used in the calculations and for expressing results. Section 2 outlines the assumptions made in calculating benefit amounts. Section 3 looks at the tax treatment of benefit income and earnings, and Section 4 introduces the income concept of the Average Production Worker (APW) earnings on which calculations are based. The latter two sections are kept relatively brief since a more detailed discussion can be found in Taxing Wages 2001-2002 (OECD, 2003). Section 5 outlines the treatment of regional differences in tax and benefit systems. Section 6 discusses how the various work incentive indicators used in this publication relate to each other. Section 7 describes the types of family situation considered in this publication. The final section discusses limitations regarding the comparability with results from earlier editions.
1. Income definition and time-period issues Only cash incomes are considered. Gross incomes are regular gross earnings (see Section 4). Net incomes are gross incomes plus cash benefits (Section 2) minus income taxes and own social security contributions (Section 3). Any taxes or contributions not paid directly by the wage earner or benefit recipient are not included in gross incomes (and not deducted to arrive at net incomes). Thus, cross-country comparisons do not capture differences in social security contributions paid by employers or benefit agencies except to the extent that they influence the APW average earnings measures (Section 6 below takes a closer look at the role employer contributions play in net replacement rate calculations). Housing costs, childcare costs and any other forms of “committed expenditure” are not deducted when computing net incomes. All income measures relate to the current period and therefore do not take into account any longer-term effects of today’s labour market status on future earnings, pension entitlements, (re-)qualification for unemployment insurance benefits, etc. To the extent that individuals are aware of these future income implications and take them into account when considering their labour market status, it would clearly be desirable to allow for them when considering work incentives. Yet, this is beyond the scope of the static modelling framework. For low-income groups who frequently face liquidity constraints, current incomes may, in any case, often be the more immediate concern.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
125
ANNEX A
All tax and benefit amounts shown in this publication are computed using the rules and regulation that were in force on 1 July of the relevant year (2001 or 2002). Unless otherwise noted, the same day is used as reference for the description of tax-benefit instruments in Chapter 1 as well as the individual country chapters (available on the Internet at www.oecd.org/els/social/workincentives). Throughout this publication (and also in the summary tables at the end of the country chapters), taxes, benefits and net income values are determined for a particular month (e.g. the first month of unemployment benefit receipt) but shown on an annualised basis (i.e. multiplied by 12) unless otherwise noted. This approach has two implications. First, the annualised amounts of certain benefit values may exceed allowable annual maxima (e.g. unemployment benefits that are available for less than 12 months). Second, income taxes, which depend on annual incomes, are determined in relation to the annualised amounts (i.e. the values for the particular month of interest multiplied by 12). Assuming unchanged income during the entire year has the advantage of being straightforward and informative in a situation where benefits can be received for at least 12 months. In cases where benefits are taxable and durations are shorter than 12 months, it is necessary to make an assumption about income earned in the remaining months. Taxing annualised values is, in this case, seen to be most consistent with the aim of determining taxes and benefits for a particular month. In addition, it is likely to be a reasonably good approximation of how authorities determine income tax pre-payments that are deducted at source in the month when income is earned. In effect, taxing annualised monthly values is equivalent to dividing all annual income tax parameters by twelve and taxing monthly incomes. Since the aim of the model calculations is to provide an illustration of the tax-benefit rules in a given year, any time-lags delaying (e.g. for administrative reasons) the assessment of claimants’ entitlement or the payment of benefits are disregarded. All differences in the timing of benefits (e.g. whether they are paid in arrears or in advance) are ignored as well. For instance, where social assistance benefits payable in the current year depend on previous year’s net income, they are, instead, computed based on the family’s current income situation. Thus income instantaneously affects benefits, rather than affecting them after some period of time. Unemployment benefits often depend on previous gross earnings. In the model calculations, these benefits are computed in relation to a specific percentage of APW earnings using the APW value for the current (rather than the previous) year. Where previous net earnings are the basis for benefit entitlements, relevant taxes are computed using the current year’s tax rules.
2. Benefit assumptions a) Benefits included Benefits included in the calculations exclude benefits “in-kind”. Hence free school meals, subsidised transport, free health care, etc. are not included. Occasional, irregular or seasonal payments (e.g. for Christmas or cold weather) are not included. Also excluded are benefits strictly related to the purchase of particular goods and services (other than housing or childcare as described below), reduced price transport or purchase of domestic fuel or the purchase of medical insurance and prescriptions. An exception is made for food stamps in the United States, as these are considered to correspond closely to social assistance cash benefits paid in other countries.
126
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ANNEX A
Cash benefits considered include unemployment insurance, unemployment assistance, social assistance, family benefits and lone-parent benefits, housing benefits, child-raising allowance paid to parents assuming childcare responsibilities for their own children and employment-conditional (or “in-work”) benefits. Benefits which are therefore excluded are, amongst others, old-age cash benefits, early retirement benefits, childcare benefits for parents with children in externally provided childcare, sickness, invalidity and occupational injury benefits and benefits relating to active labour market policies. Also excluded are payments made to those unemployed as a result of collective dismissal, such as the Cassa Integrazione Generale (CIG) and mobility benefits in Italy (except for the timeseries on Gross Replacement Rates in Chapter 3). Severance pay, even where legally required of employers, is not included.
b) Unemployment insurance Unemployment insurance entitlement can be considered in three parts: the conditions for being entitled to benefit; the amount of benefit to which a person is entitled; and the length of benefit duration. The standard assumption is that the benefit recipient is 40 years old and has been continuously full-time employed and contributing to the unemployment insurance fund since the age of 18. This means that in most countries the individual has a full contributions record in the period before unemployment; that where insurance is voluntary (as in some Nordic countries), the individual considered has contributed to the fund; and that the individual falls into the “standard” unemployment insurance system (older workers are often eligible for a longer duration of benefit receipt). The assumption means that in virtually every case the individual is entitled to unemployment insurance, where such insurance exists. The amount of insurance benefit is often based on previous earnings. The level of previous earnings is defined with reference to the APW level of earnings in the current year. It is assumed that the stated proportion of this level of earnings has been earned over whatever period upon which assessment for benefit is calculated. Where minimum or maximum levels of benefit are included in benefit regulations, these are applied. The individual is generally assumed to be fully unemployed but special rules for part-time work during unemployment are applied if relevant to the calculations.* If supplements are paid reflecting the family situation of the unemployed person (e.g. for dependent spouses or children), these are included. Benefits are sometimes reduced after a period of receipt. The reductions may be related to age and/or contributions record. Such reductions are applied as appropriate, using the assumptions about age and contributions record given in the previous paragraph. For the calculations of replacement rates over a 5-year period, the individual is assumed to receive the benefit for the length to which he or she is legally entitled. This implies that the individual satisfies whatever requirements for actively seeking work are imposed throughout the period of legal entitlement. In some countries there is a right to enter an active labour market programme (training, subsidised employment, etc.) after a certain period of unemployment. The individual is assumed not to participate in such schemes. Hence, even where participation in such schemes can requalify an individual for * Some of the “budget constraint” graphs (described in Chapter 2 and available on the Internet at www.oecd.org/els/social/workincentives) show the income consequences of part-time work for a recipient of unemployment benefits.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
127
ANNEX A
an insurance benefit and benefit receipt is in effect indefinite, the individual is assumed to exhaust benefit according to the de jure rather than the de facto duration of benefit receipt. Special rules for temporary layoffs are not included.
c) Unemployment-related means-tested benefits This section considers the assumptions made where cash benefits are means-tested, particularly for unemployment assistance and social assistance. Means-tested benefits are usually paid only when the assets of a family are less than a certain level, and are reduced as the income of the individual or family increases. The exact details of how these two features apply in each country vary greatly. Furthermore, social assistance benefits are often discretionary and the level is decided locally. Hence, eligibility assumptions can have a great effect on the benefit income which those out of work are indicated as receiving. The general assumptions applied are the following:
128
●
Entitlement to means-tested unemployment assistance and labour market support programmes may depend on age and employment and/or contributions record. Where this is the case, the assumptions outlined in the section on unemployment insurance are applied. Similarly, job-search activity and duration of benefit are as described in that section.
●
Social assistance may only be paid where all other sources of support have been exhausted. In certain cases this means the extended family has a legal duty to support those without resources. It is assumed that no such support is forthcoming.
●
The assets of a family must often be below some level for there to be entitlement to benefit. The assets ceiling may be relatively high (several hundred thousand dollars, excluding the value of housing in Australia) or very low (often requiring sale of housing and even of cars). For calculations where social assistance amounts are explicitly included (see notes to the tables and figures), it is everywhere assumed that the family possesses negligible assets, and qualifies for the benefit subject to relevant income and other eligibility conditions.
●
Benefits are reduced as family or individual income increases. Hence families with other sources of income (capital, alimony) may get reduced means-tested benefits. It is everywhere assumed that the family has no sources of income other than from benefits and/or employment.
●
Social assistance in some countries may impose conditions on the behaviour of spouses. For example, in Sweden it is necessary for both spouses to be searching for work for entitlement conditions for social assistance to be satisfied. In Australia, each spouse has an individual entitlement to benefit, with individual activity requirements required. In these cases, it is assumed that both spouses are fulfilling all requirements for full social assistance benefits to be received.
●
Social assistance often varies according to local guidelines, the individual needs of families, and discretion given to benefit officers. Where benefit amounts have been set in national regulations, these have been used. Even where there is local discretion, there are often national guidelines. These guidelines have been used where available. In other cases, “typical” rates for each family type have been used. The full listing of social assistance amounts, and whether they are based on national rates, national guidelines or typical regional rates, are given in Table 1.4 of Chapter 1.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ANNEX A
●
Social assistance may be used to “top up” other income sources, including earnings and insurance benefits, where these are below the level of social assistance. For countries where relevant information has been received, this has been indicated in Table 1.4 of Chapter 1.
●
In some countries the means-test is reduced in amount or removed altogether for payments made to beneficiaries participating in active labour market policies. Such schemes are not considered.
d) Housing benefits Housing benefits are included where they consist of a cash benefit paid to individuals with low incomes or who are unemployed and who are living in private rented accommodation. Housing benefit may consist of a general means-tested benefit which supplements other benefits, or it may consist of special rules concerning the treatment of housing costs in the calculation of social assistance levels, or there may be the two types of system running in parallel. In the United Kingdom, Council Tax Benefit (available in Great Britain only) is excluded (as is Council Tax). Subsidies for the construction of housing, purchases of owner-occupied housing, subsidies for the interest payments on owner-occupied housing, and other similar payments are not included. Similarly, the assumption of living in private rental accommodation means the benefits in kind provided by social housing, usually involving rents below the market rate, are not taken into account in the comparative tables. Housing benefits are often very complex. A very simple assumption has been applied in this study, which has to be taken into account when interpreting the results. It is that housing costs consist entirely of rent, and the level of rent for all family types regardless of income level and income source is 20% of the gross earnings of an average production worker. Where size is relevant, it is assumed to be 70 square meters. (Country specific assumptions, where required, are indicated in the country chapters available on the Internet.) This implies: ●
Single persons are assumed to pay the same rent as a couple with two children.
●
Special rules (e.g. social assistance for non-rent-related housing costs, such as water and electricity) are not explicitly covered.
●
A household living on social assistance is assumed to be paying the same rent as a similar household with average or above-average earnings.
●
A household does not adjust its housing consumption according to income level, an assumption which is valid for the short-term unemployed, but less so for those households which have been without work for an extended period.
The 20% of APW used approximates the average level of housing consumption across the OECD. In some countries, however, housing costs can differ from this level, sometimes by substantial amounts. Furthermore, actual households without work will presumably on average spend less than this amount (reflecting their recognition of lower long-term consumption possibilities than more employable households, and also the effects of regional concentrations of unemployment on housing costs), and households with work will (again, on average) spend more. The housing cost assumption may not therefore reflect the typical housing costs of those living on benefit income in each country. It is justified on the grounds that, first, no practical alternatives are obviously preferable, and second, that it is transparent and easily understood. Any assumption other than fixed housing costs for those in-work and out-of-work would make interpretation of replacement rates difficult. BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
129
ANNEX A
Where housing benefits vary by area, a typical rate has been chosen. Assumptions concerning means-testing are as in Sub-section c above.
e) Family benefits Family benefits may be unrelated to the incomes of the family or means-tested. Where they are means-tested, the assumptions given in the previous section are applied. Benefit amounts are often related to the age of the child; the tables in Chapters 2 and 3 and the country tables available on the Internet are based on the assumption of two children aged 6 and 4. Where different assumptions have been made, the number of children and the amounts relevant for the ages are given in the footnotes to the tables.
f) Childcare benefits All results assume that no childcare services are used and families are therefore not entitled to any benefits or tax reductions that depend on certain levels of childcare expenditures or on utilising certain types of childcare services. However, any benefits or tax reductions that are not subject to these conditions are assumed to be available as long as other relevant criteria are met (e.g. children’s ages, family income). Childcare benefits paid to parents looking after their children at home (child-raising allowances) are also available subject to relevant conditions (e.g. number of working hours).
g) Lone-parent benefits It is assumed that lone parents do not receive any alimony. Where receipt of benefit depends in part on co-operation with official attempts to identify the absent parent, it is assumed that such co-operation has been forthcoming. No other special transfers (e.g. widow’s pensions) are assumed to be received, except for the benefits considered in this publication. Any means-tests are applied following the guidelines in Sub-section c.
h) Employment-conditional benefits Employment-conditional (or in-work) benefits may be paid via either the tax administrative system (as in New Zealand, United Kingdom and United States) or that of the benefit system (as in Ireland). Both types of payment are considered benefits for the purpose of this report. Such benefits are paid only to those with earnings or those who have worked more than a certain number of hours per week. They do not therefore affect incomes of those families out of work. They do affect the incomes of those working parttime, however, and the assumptions about hours worked and incomes earned determine the level of employment-conditional benefits. Delays in payment of benefit (which are often long – most recipients in the United States receive the payment in arrears at yearend) are ignored, with benefit income being calculated as it accrues. Means-testing provisions have been applied following the principles given in Sub-section c. Some in-work benefits are only available following a recent transitions into employment. Where this is the case, these conditions are taken into account in calculating net incomes so that benefits are only available if a transition into employment is assumed to have taken place.
3. Assumptions about taxation This section gives a brief discussion of the assumptions used in calculating the tax due on earnings and benefits. The calculations of tax payments are based on the models used for Taxing Wages (OECD, 2003). These have been modified or extended where different or additional tax rules apply to the unemployed, to benefit recipients or to people earning income below 67% of APW.
130
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ANNEX A
Only personal income tax and employees’ social security contributions payable in respect of earnings and benefits are included. Social security contributions made to the private sector are excluded, except when required by law (as in Finland or Iceland). Central, state and local government income taxes are included. Council tax in the United Kingdom is excluded. Only standard tax reliefs are generally included when calculating tax payments (but see below for exceptions). These are reliefs unrelated to actual expenditures incurred by the taxpayer and are automatically available to taxpayers who satisfy the eligibility rules specified in legislation. Typical standard reliefs include the basic reliefs available to all taxpayers, or wage earners, or benefit recipients, irrespective of family status; standard reliefs available to taxpayers depending on their marital status; standard reliefs granted to families with children (where relevant); and the standard relief relating to work-related expenses. Non-standard reliefs are not included. Non-standard reliefs include those relating to costs of owner-occupied housing, relief for interest on qualifying loans, insurance premiums, contributions to savings’ or pension plans, purchase of medical insurance, and charitable donations. An exclusion to this rule occurs when non-standard reliefs contain a “minimum benefit” clause, i.e. when the benefit is equal to the larger of some fixed amount or actual expenses. In these cases the benefit is taken as the fixed amount. Another exception to the general rule is made in order to improve comparability between countries where particular expenditures give rise to social benefit entitlements and those where they attract tax relief: unlike the tax burdens presented in the Taxing Wages publication, the calculations reported here therefore consider tax reliefs related to particular types of expenditures that trigger entitlements to social benefits in other countries (such as expenditures for rent or childcare).
4. Assumptions about earnings Gross earnings in-work are expressed as a percentage of the average production worker earnings. Details of how the APW earnings are calculated in each country can be found in Taxing Wages (OECD, 2003). The broad guidelines are as follows: ●
Earnings are calculated for Division 3 of the International Standard Classification of all Economic Activities (ISIC, United Nations, New York, 1968). However, in Finland, France and Luxembourg it is not possible to separate mining from manufacturing earnings.
●
Data relate to the average earnings for the country as a whole.
●
The worker is an adult (male or female) directly engaged in a production activity. This definition includes manual workers and minor shop floor supervisory workers. Whitecollar workers are excluded, except in New Zealand, where the inclusion of this group of workers probably increases average earnings by 5-10%.
●
The worker is assumed to be fully employed during the year, although the averages for Finland and Ireland include part-time workers. The individuals are assumed not to be subject to sickness or unemployment during the year.
●
Earnings are assumed to include average amounts of overtime and regular cash supplements (Christmas Bonuses, thirteenth month payments, vacation month payments). Regular annual bonuses are included where they do not take the form of dividend payments.
●
Fringe benefits are excluded.
APW earnings for 2001 and 2002 and statutory minimum wages (for those countries where they exist and information is available) are shown in Table A.1.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
131
ANNEX A
Table A.1. APW earnings and statutory minimum wage1 In national currency2 2001 Average production worker wage (APW)
2002
Minimum wage
Minimum wage in % of APW
Average production worker
Minimum wage
Minimum wage in % of APW
Australia
44 215
21 497
49
48 568
22 433
Austria
23 401
–
–
23 881
–
–
Belgium
30 032
13 570
45
30 629
13 956
46
Canada
46
37 627
14 061
37
38 867
14 227
37
Czech Republic
192 024
60 000
31
206 412
68 400
33
Denmark
293 000
–
–
304 925
–
–
Finland
27 045
–
–
27 682
–
–
France
21 371
13 254
62
21 978
13 684
62
Germany
32 384
–
–
32 902
–
–
Greece
10 961
5 469
50
11 395
5 760
51 56
956 412
480 000
50
1 077 816
600 000
Iceland
Hungary
2 496 507
–
–
2 567 086
–
–
Ireland
23 762
12 017
51
25 477
12 624
50
Italy
20 901
–
–
21 408
–
–
Japan
4 310 304
1 370 720
32
4 254 270
1 381 120
32
Korea
20 428 200
5 057 880
25
22 885 416
5 695 200
25
Luxembourg
30 303
15 388
51
31 358
15 641
50
Netherlands
29 484
14 009
48
30 575
–
–
New Zealand
38 078
16 016
42
39 912
16 640
42
Norway
278 000
–
–
292 200
–
–
Poland
24 118
9 120
38
26 352
9 120
35 50
Portugal Slovak Republic Spain Sweden Switzerland
7 985
4 010
50
8 410
4 176
125 860
52 000
41
137 316
60 320
44
15 716
5 196
33
16 360
6 109
37
231 134
–
–
237 820
–
–
62 726
–
–
64 169
–
–
United Kingdom
18 950
7 904
42
19 420
8 590
44
United States
31 220
10 712
34
32 360
10 712
33
1. All amounts are shown on a full-time basis (assuming 40 weekly working hours in countries where hourly minimum wages apply). 2. Euro for euro area countries. Source: OECD Tax-Benefit Models and Minimum Wage database (May 2004).
5. Treatment of regional differences Several of the assumptions given above refer to how regional differences in tax and benefit systems have been taken into account. The broad principles are as follows: ●
Where regional variations consist of deviations from general national guidelines which would otherwise apply, these are not taken into account. Hence, for example, extensions of unemployment benefit duration in high unemployment provinces and states in Canada and the United States are not considered.
●
Where regional variations arise as a result of regional or local autonomy in setting regulations, three alternatives could be applied: the average of the different local regimes, the regime applying in a particular region which can be considered typical, or national “guideline” rules.
Eight countries have regionally varying tax systems (two others – Japan and Norway – have local income taxes which do not, however, vary). In Denmark, Finland, Iceland and
132
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ANNEX A
Sweden it is possible to calculate a weighted average of the single rate which applies in each area to a tax base which does not differ significantly from that of the central government tax system. This is used in the calculations of in-work and out-of-work net incomes. In Belgium, Canada, Switzerland and the United States calculation of such an average rate is not possible. Typical rates are used instead; the maximum permitted rate for Belgium, and the rates applying in Zurich (Canton and Commune) for Switzerland and the rates applying in the state of Michigan for the United States and the province of Ontario in Canada. Information making it possible to calculate country-wide average benefit payments is not available to the same degree, and typical cases are more commonly used. Variations in rates are typically found for social assistance and housing benefits. Where typical rates are used for the tax calculations, the benefit system in that region has been followed for consistency. Note that the assumptions about housing costs mean that variations in housing costs across different regions are ignored.
6. Work-incentive indicators a) Marginal Effective Tax Rate (METR) An indicator that can be used for measuring the extent to which taxes and benefits reduce the financial gain from work is the Marginal Effective Tax Rate (METR). This indicator measures what part of any additional earnings is “taxed away” through the combined effect of increasing tax and decreasing benefit. In other words, the METR measures the effective tax burden to which the additional earnings are subject to. Formally, we have:
∆ y net AETR = 1 – ----------------∆ y gross
[A1a]
where ygross are the “additional earnings” referred to above and ynet is the change in net income obtained after taxes and benefits so that the change in gross earnings between labour market states A and B is:
∆ y gross = y grossB – y grossA
[A1b]
and the change in net income is:
∆ y net = y netB – y netA = ( y grossB – t B + b B ) – ( y grossA – t A + b A )
[A1c]
where t denotes total taxes and b denotes total benefits. The earnings change ygross can relate to a large or small change of working hours and/ or hourly wages. In Chapter 3 (Section 2), METRs are calculated for a range of working hours transitions for somebody already in employment.
b) Average Effective Tax Rate (AETR) In addition, this same type of indicator can also be used to analyse the income consequences of transitions between employment and non-employment, in which case the change is equal to total earnings. In order to keep the notation consistent with previous editions of this publication, the METR for a transition into work is called AETR since it
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
133
ANNEX A
relates to a discrete transition between non-employment and employment rather than a “marginal” income change. Its definition is equivalent to [A1] with labour market state B being “in work” (IW) and labour market state A being “out of work” (OW): y netIW – y netOW ∆ y net - = 1 – -----------------------------------------------AETR = 1 – ----------------y grossIW – y grossOW ∆ y gross
[A2]
Other studies have referred to the AETR as “Unemployment Trap” (METRUT) indicator for transitions from unemployment to employment and as “Inactivity Trap” (METRIT) indicator for a transition into work from inactivity without unemployment benefits (Carone et al., 2004), and also as “Participation Tax Rate” (Immervoll et al., 2004) or “TaxBenefit to Earnings Ratio” (Immervoll and O’Donoghue, 2003). The AETR should not be confused with the effective tax burden or “tax wedge”, which is often shown as a percentage of gross earnings for a particular employee and does not relate to transitions between different work situations.
c) Net Replacement Rate (NRR) The other measure used in this publication to analyse the effects of labour market transitions on household incomes is the Net Replacement Rate (NRR), usually defined as the ratio of net income while out of work divided by net income while in work: y netOW NRR = ---------------y netIW
[A3]
The NRR measures the fraction of net income in work that is maintained when becoming unemployed.
d) Relationship between AETR and NRR Throughout this publication, all incomes y are assessed at the household level with one person changing between status A and B (or OW and IW) while the work status and earnings of all other household members remain unchanged. In the case of computing NRR for a two-earner couple, this means that the earnings of the partner whose earnings remain unchanged will, to a large extent drive the NRR results since these unchanged earnings appear in both the numerator and denominator of [A3]. While the degree of income maintenance as expressed by the NRR is a useful indicator regardless of the number of earners in the household, the AETR is a better indicator of the influence of the tax-benefit system on financial work incentives. It relates the change in net household income to the change in gross earnings and is therefore not directly affected by the level of any earnings received by other household members. To show the relationship between NRR and AETR formally, one can combine [A3] with [A2] and rearrange to obtain:
∆ y gross ( 1 – AETR ) NRR = 1 – ----------------------------------------------y netIW
[A4]
For a transition into work, the numerator of [A4] is the part of in-work earnings that is not “taxed away” (and is thus equal to ∆ynet).
134
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ANNEX A
e) Employers’ social security contributions and comparability of indicators across countries Social security contributions paid by employers (SSCer) can be substantial and the relative importance of taxes and contributions paid by employers and employees differs markedly across countries (see OECD, 2003). Since SSCer are not considered in the calculations presented here, it is therefore useful to consider how they might affect the comparability of results. A first consideration is whether the insurance value or any future benefits bought by social security contributions should be taken into account in the calculations. As explained above, while taking into account future income streams may be desirable, the static modelling employed for the present analysis considers current incomes only. A second, and separate, issue concerns the incidence of social security contributions (see OECD, 1990, chapter 6). To the extent that SSCer reduce wages, they might usefully be considered a tax on employees. Similarly, any part of employee contributions that is incident on the employer may not be considered as reducing employees’ take-home pay. However, any “forward” or “backward” shifting of contribution payments will take place via adjustments to contractual wages. If APW values are measured in an equilibrium situation where these adjustments have taken place, then any wage adjustments will already be reflected in the average wage figures used as the basis for the calculations. Given the concern with current cash incomes (and, in particular, takehome pay in the case of employed persons), it is therefore appropriate to fully deduct employee contributions when computing net incomes. Similarly, any parts of SSCer that may be incident on employees should not be deducted (since these will already be reflected in lower APW values). The relevant mechanisms can be illustrated as follows. To the extent that contributions are incident on employees, higher employer SSCer will, other things being equal, result in lower contractual wages. What does this mean in terms of the measurement of financial work incentives using the current cash income concept as in this publication? If SSCer are raised from zero to X and a fraction of 0 ≤ s ≤ 1 of X is shifted to employees, then average wages w will, by definition, decrease by sX. Once this adjustment process is complete, the NRR for a single person earning the average wage might be b / [(1 – t)(w – sX)], where b is the net unemployment benefit, t is the individual’s average tax rate while in work and w is the average wage prior to the SSCer increase. This is the same NRR one would obtain if, instead of raising X through employer contributions, employees would pay contributions of X: they would only end up paying sX with the remainder of X shifted to employers. It is clear, therefore, that once any forward or backward shifting of contributions is complete, the current cash income concept results in the same NRR measures regardless of whether contributions are paid by employees or employers. By virtue of [A4], this also holds for the AETR and METR measures. Subject to the assumption that the shifting processes are complete, the work incentive indicators presented in this publication are therefore comparable across countries with different levels of employer and employee contributions. It is nonetheless important to keep in mind that they are based on current income concepts and therefore do not take into account country differences in the rights to future incomes or services bought by social security contributions.
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
135
ANNEX A
7. Family situations used as the basis for tax-benefit calculations The use of “typical” households allows many of the determinants of tax and benefit amounts to be held constant while changing one household characteristic (e.g. the number of children) at a time. A focus on one aspect at a time helps improve our understanding of existing policy instruments as well as the differences between them across countries and at different points in time. These types of result thus provide a useful complement to population-based approaches such as incidence studies based on micro-data alone or microsimulation models capable of simulating the effects of fiscal and social policy instruments on a sample of actual households. Computing tax and benefit amounts using existing policy rules illustrates the features of these instruments. And by repeating these calculations for a number of different household situations, they permit an assessment of the circumstances (e.g. family situation or income level) for which each of these features becomes relevant. Taxes, benefits and net incomes are computed for a set of different family types: 1. Single adult without children (employed/unemployed). 2. Lone parent with two children (employed/unemployed). 3. One-earner married couple (first spouse employed/unemployed, second spouse “inactive”). 4. One-earner married couple with two children (first spouse employed/unemployed, second spouse “inactive”). 5. Two-earner married couple (first spouse employed/unemployed, second spouse full-time employed). 6. Two-earner married couple with two children (first spouse employed/unemployed, second spouse full-time employed). The standard assumption is that adults are 40 years old and children are aged 4 and 6. The age assumption for adults allows cross-country comparisons of maximum amounts of unemployment benefits, which may depend on age or contribution records (see Section 2b above). For each of these family types, net incomes are determined for a range of different earnings levels and/or working hours. The resulting indicators therefore cover a large number of family, labour market and income situations and provide a broad picture of how taxes and transfers potentially affect the incomes of different population sub-groups. Yet, typical cases can never be fully representative of the actual situation in a particular country. This point is particularly relevant when comparing results across countries as certain family situations (such as lone-parenthood or two-earner families) may be much more common in one country than in others. Similarly, the earnings distribution will differ so that various percentages of APW will be more or less common across countries and for different family types (a study of the representativeness of the APW was carried out in OECD, 1999a).
8. Comparing results with earlier editions of this publication Many of the indicators presented in Chapter 3 are also available for earlier years (OECD, 1998, 1999b and 2002). An important caveat applies when comparing Net Replacement Rate and Average Effective Tax Rate measures reported here to these earlier results. Due to clarifications received from a number of countries, the calculation models
136
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ANNEX A
for the years reported on here (2001 and 2002) have been revised in relation to earlier versions, introducing a break in the time-series for a subset of countries (the Gross Replacement Rates time-series is, however, not affected by the break since all figures have been adjusted backwards in order to make them consistent over the entire period). The changes concern tax rules which were in some cases not accurately reflecting special provisions applying to benefit recipients or employees with low earnings. In certain other cases, assumptions underlying the calculations have been brought in line with recommendations received by country experts. Details of relevant model corrections are described below and need to be kept in mind when interpreting year-on-year changes of NRRs and AETRs. Information on most of the clarifications mentioned below can be found in the country chapters available on the Internet. ●
Australia: a problem concerning the tapering of housing benefits has been corrected. In earlier results, some families with employment income were incorrectly receiving housing benefits, increasing their net in-work income and, thus, reducing replacement rates.
●
Canada: the modelling of the family addition to unemployment benefits did not correspond to actual legal rules and has been revised. As a result, NRRs for families were overestimated in OECD (2002) and are now considerably lower.
●
Czech Republic: in earlier results, the reference earnings used for computing unemployment benefits were too high as certain taxes were not subtracted. NRRs were too high as a result. For single persons, earlier NRRs were too low due to an inaccurate unemployment benefit parameter.
●
Finland: housing benefit rules have been corrected. This affects NRRs for singles which have been too high in earlier results.
●
France: social contributions payable on unemployment benefits (CRDS) were too high in the 1999 results reported in OECD (2002) due to an incomplete implementation of the ceilings which these contributions are subject to.
●
Germany: in computing results for 1999 and before, income taxes for employees with children were too low since the modelling of the choice between child tax credits and child allowances was incorrect. As a result, NRRs of families with children reported for earlier years were too low. In addition, the modelling of housing benefits has been revised following clarifications received from the country delegate. In earlier calculations, several housing benefits were inappropriately received by several family types in the in-work situation. This has, again, produced a downward-bias of 1999 NRRs.
●
Greece: the computation of unemployment benefits has been based on incomplete information for NRRs for 1999 and earlier. As a result of benefit ceilings and floors, unemployment insurance benefits are earnings related only in a very narrow band of previous earnings levels. Since the benefit floor had been specified incorrectly in earlier benefit rules received for Greece, NRRs for 1999 were too low in the 67% of APW case.
●
Iceland: the APW value originally submitted for 1999 has been underestimated by some 28% and has recently been revised upwards. Since unemployment benefits are flat-rate, NRRs were too high in previous editions of this publication.
●
Netherlands: new information has been received for housing benefits which resulted in a revision of previous calculation models and a downward adjustment of these benefits
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
137
ANNEX A
for most families receiving unemployment benefits or earning employment income. NRRs for the years prior to 2001 were too high. ●
Norway: housing benefits in earlier editions were withdrawn based on net income but should be tapered in relation to gross income. Hence, housing benefits for large families with low-wage employment (the 67% APW single-earner couple with children) were overestimated and thus caused NRRs for years prior to 2001 to be underestimated for this particular case.
●
Spain: social security contributions were deducted from unemployment benefits in earlier editions of this publication while these benefits are not in fact subject to contributions. NRRs for 1999 and earlier years were too low for this reason.
●
Sweden: pre-2001 NRRs for couples without children and earnings equal to 67% of APW are too low. The computation of housing benefits has been refined for years 2001 and 2002 which corrects this problem.
●
Switzerland: social security contributions deducted from unemployment benefits were too low in earlier years resulting in an overestimation of NRRs.
Bibliography CARONE, G. et al. (2004), “Indicators of Unemployment and Low-Wage Traps (Marginal Effective Tax Rates on Employment Incomes)”, OECD Social, Employment and Migration Working Paper, No. 18, OECD, Paris, available at www.oecd.org/els/workingpapers (also published as European Economy Economic Papers, No. 197, European Commission, Directorate-General for Economic and Financial Affairs, Brussels). IMMERVOLL, H. and C. O’DONOGHUE (2003), “Employment Transitions in 13 European Countries. Levels, Distributions and Determining Factors of Net Replacement Rates”, CESifo Working Paper, No. 1091, CESifo, Munich. IMMERVOLL, H. et al. (2004), “Welfare Reform in Europe: A Micro-simulation Analysis”, CEPR Discussion Paper, No. 4324, Centre for Economic Policy Research, London. OECD (1990), OECD Employment Outlook, OECD, Paris. OECD (1998), Benefit Systems and Work Incentives, OECD, Paris. OECD (1999a), The Tax/Benefit Position of Employees 1997, OECD, Paris. OECD (1999b), Benefit Systems and Work Incentives, OECD, Paris. OECD (2002), Benefits and Wages, OECD, Paris. OECD (2003), Taxing Wages: 2001-2002, OECD, Paris.
138
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
ANNEX B
ANNEX B
Using the OECD tax-benefit models The models we use for the calculation of taxes and benefits are written in STATA®, a statistical analysis program, which was chosen primarily for its ease of use and graphical features. At the most basic level, these models allow a user to calculate benefits and wages for a particular family type, either in a steady state – employed or unemployed – or a changing state – moving into or out of unemployment. The models can be operated in two ways, either with a standard menu interface, or in batch mode, with multiple family and country options. The menu driven option allows the user to select a country and various options concerning family type and the nature of individual work or unemployment situations. The batch mode reads the various options from a control file, and allows for a faster and more automated generation of data for a large number of different family and work/unemployment circumstances. Readers of this publication who wish to use the models for their own work can now obtain a copy of the relevant programs. The files (STATA® source code along with very brief instructions) are available on the Internet at www.oecd.org/els/social/workincentives. A PC with STATA® (version 7 or above) installed is required to run the tax-benefit models. The programmes are often complex and their proper operation requires a minimum degree of familiarity with both STATA® and the tax-benefit systems operating in the countries of interest. While we welcome feedback and corrections, we are, unfortunately, unable to offer user support. Users of the programs who wish to contact us with corrections or suggestions for future modelling innovations should contact us at
[email protected].
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
139
LIST OF ACRONYMS
List of Acronyms AETR AFEAMA AGED APE API APW BTWA CCDP CIG DPB FB FIS FTB FTC GROSS GRR HB IT IW LIER METR NCB NET NRR OCCS OSCAR OW PAJE PPE PTJI SA SSC SSCer STATA® UA UI WFTC WB WSG
Average Effective Tax Rate Aide à la famille pour l’emploi d’une assistante maternelle agréée (France) Allocation de garde d’enfant à domicile (France) Allocation parentale d’éducation (France) Allocation de parent isolé (France) Average Production Worker Wage Back-to-Work Allowance (Ireland) Continued Child Dependent Payment (Ireland) Cassa Integrazione Generale (Italy) Domestic Purposes Benefit (New Zealand) Family Benefit Family Income Supplement (Ireland) Family Tax Benefit (Australia) Family Tax Credit Gross Earnings Gross Replacement Rate Housing Benefit Income Tax In-work (Employment-conditional) Benefit Low Income Earner Rebate (New Zealand) Marginal Effective Tax Rate National Child Benefit (Canada) Net Incomes Net Replacement Rate Ontario Child Care Supplement (Canada) Out-of-School Care and Recreation (New Zealand) Out-of-work Prestation d’accueil pour jeune enfant (France) Prime pour l’emploi (France) Part-time Job Incentive (Ireland) Social Assistance Social Security Contributions Social Security Contributions Paid by Employers Statistical Software for Professionals (United States) Unemployment Assistance Unemployment Insurance Working Families’ Tax Credit (United Kingdom) Widows Benefit (New Zealand) Work Start Grant (New Zealand)
BENEFITS AND WAGES: OECD INDICATORS – ISBN 92-64-01515-9 – © OECD 2004
141
OECD PUBLICATIONS, 2, rue André-Pascal, 75775 PARIS CEDEX 16 PRINTED IN FRANCE (81 2004 07 1 P) ISBN 92-64-01515-9 – No. 53651 2004
