Benefit systems and work incentives

OECD BENEFIT SYSTEMS AND WORK INCENTIVES 19 98 ED I T I ON Benefit Systems and Work Incentives E D1I9T9I8O N ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (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) and Korea (12th December 1996) The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention) Publi´e en fran¸cais sous le titre : ` SYSTEMES DE PRESTATIONS ET INCITATIONS AU TRAVAIL ´ Edition 1998  OECD 1998 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre fran¸cais 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: http://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 Andr´e-Pascal, 75775 Paris Cedex 16, France FOREWORD In 1997, the OECD published Making Work Pay which explored how tax and benefit systems may discourage individuals to seek employment It explained how the different elements of the benefit system can combine to make work unrewarding This compendium builds on that work by presenting in a systematic way the complicated interactions of tax and benefit systems It includes analyses of effective tax rates and net incomes in and out of work for a variety of family situations and shows exactly which elements of the benefit system create the most damage to work-incentives This volume includes a description of all the different benefits made available to those without work, the taxes they pay and tables facilitating international comparison of work-incentives It has been prepared by Mr Marco Doudeijns and Mr Mark Pearson and is published under the responsibility of the Secretary General of the OECD It is the first of a biannual series on benefits and work-incentives in the OECD countries The analyses draw on detailed country-by-country information which is available on the Internet site: http://www.oecd.org/els/socpol/ BenefitsCompendium/index.htm The comparative tables are based on Secretariat estimates and make use of information which has been supplied by the delegates to the Working Party on Social Policy The data on income taxes which were needed for the production of the comparative tables were supplied by the delegates to the Working Party on Tax Policy Analysis and Tax Statistics of the Directorate for Financial, Fiscal and Enterprise Affairs The country-by-country descriptions give information on the benefits made available to, and the taxes paid by, those without work They are available in the language (English and French) in which the information was supplied The countries studied are: Australia, Austria, Belgium, Canada, the Czech Republic, Danemark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Portugal, the Republic of Korea, Spain, Sweden, Switzerland, the United Kingdom and the United States These descriptions are available for no charge on the Internet: http://www.oecd.org/els/socpo/BenefitsCompendium/index.htm A printed version (at a cost of FF 160 – to cover reproduction and postage costs) can be obtained by filling in the following form and mailing it to: OECD/DEELSA, Social Policy Division, Benefits and Incentives Compendium, 2, rue André-Pascal, 75775 Paris Cedex 16, France ✄ -❑ I would like to receive a copy of the country-by-country descriptions (FF 160) ❑ Please charge my card Card No.: Expiration date: Signature: ❑ ❑ VISA ❑ MASTERCARD/EUROCARD AMERICAN EXPRESS Send to: (please print) Name: Address: Country: Tel.: Fax No.: Country code: TABLE OF CONTENTS INTRODUCTION DESCRIPTION OF KEY FEATURES OF THE TAX AND BENEFIT SYSTEM 13 Introduction 13 An overview of the key benefits in the system 13 Calculation of gross benefits 15 The tax treatment of benefits 25 Part-time and occasional work 25 COMPARATIVE TABLES AND CHARTS 29 Introduction 29 Benefit income in the first month of receipt 29 Benefit income in the 60th month 32 Young unemployed 36 Child-care benefits 36 Changes in benefit systems over time: OECD’s unemployment benefit index 38 PART-TIME WORK AND TWO-EARNER COUPLES 43 Introduction 43 Explanations of the columns of Tables 4.1 and 4.2 43 POLICY DEVELOPMENTS 49 Introduction 49 Major policy trends in OECD countries 49 ANNEX: ASSUMPTIONS AND LIMITATIONS 51 BIBLIOGRAPHY 59 Benefit Systems and Work Incentives List of tables and charts Table 2.1 Main elements of the tax and benefit system 14 Table 2.2 UA payment rates and benefit duration 16 Table 2.3 UA payment rates and benefit duration 18 Table 2.4 Benefits for dependent family members 19 Table 2.5 Housing benefit allowances 20 Table 2.6 Child-care benefit systems 22 Table 2.7 Employment-conditional tax credits and benefits 23 Table 2.8 Lone-parent benefit arrangements 24 Table 2.9 Maximum social assistance monthly amounts 26 Table 2.10 The tax treatment of benefits 27 Table 2.11 Casual employment and benefit receipt 28 Table 3.1 Net replacement rates for four family types at two earnings levels after tax 30 Table 3.2 The composition of the net benefit income of an unemployed single in the first month of benefit receipt 31 Table 3.3 The composition of the net benefit income of a one-earner couple with two children in the first month of benefit receipt 32 Table 3.4 Net replacement rates for four family types at two earnings levels after tax 33 Table 3.5 The composition of the net benefit income of a single unemployed person in the 60th month of benefit receipt 34 Table 3.6 The composition of the net benefit income of a one-earner couple with two children in the 60th month of benefit receipt 35 Table 3.7 The unemployment benefit entitlements of young unemployed single people 36 Table 3.8a Child-care costs and benefits, reference earnings at APW level (annualised) 37 Table 3.8b Child-care costs and benefits, reference earnings at 2/3xAPW level 38 Table 3.9 Gross replacement rates for three family types, over a five-year period and two earnings levels 39 Table 4.1 Relative incomes for part-time work and two-earner couples 46 Table 4.2 Average effective tax rates for part-time work and two-earner couples 47 Chart 3.1 Index of benefit entitlements, 1961-1995 40 INTRODUCTION The net incomes of those not working are of interest for social, public finance and labour market reasons A key aim of social policy is to ensure that households, particularly those with children, have an adequate standard of living But the higher the benefits paid to families without employment, the lower the immediate financial incentive to enter paid employment The hypothesis that the greater the unemployment benefits, the more difficult the transition from unemployment to employment, is discussed at length in economic literature [for further reference see OECD 1996a] Policy analysts need evidence for this hypothesis and would therefore want to quantify benefit generosity The OECD used an estimate of replacement rates (i.e the proportion of income from work replaced by unemployment and related welfare benefits) as a proxy for benefit generosity in the OECD Jobs Study (issued in 1994) These estimates, however, were based on gross (i.e before taxes) earnings and gross benefits They did not take account of the fact that benefit payment levels are often supplemented with family and housing benefits The need for more accurate information has since then led to an integrated approach, whereby replacement rates are calculated taking account of income taxes and a wide range of social welfare benefits The aim of this report is to illustrate how net incomes of unemployed people are calculated and to compare these with net incomes in work Given the interest in the effects of the tax and benefit system on employment and concerns about the adequacy of incomes of those without jobs, there is a need for international comparisons This publication will: • briefly describe the elements of the tax and benefit system necessary to calculate benefit entitlements for those without work; • give example calculations, showing how the different elements of tax and benefit systems interact in each country; • present comparative tables of benefit entitlements across OECD countries; • indicate the operation of means-tests on the incentive to work part-time in two-earner couples; and • examine the effects of child-care costs and benefits on the incentives to work of relevant families Unemployed/ non-employed Part-time employed/ non-employed Full-time employed/ non-employed Full-time employed/ part-time employed Full-time employed/ full-time employed 0/0 40/0 100/0 100/40 100/100 0/40 0/100 Column Column Column Column Column Column Column Column 86 50 56 68 51 88 93 88 71 67 50 52 55 41 41 52 88 79 84 59 45 86 92 88 80 59 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 142 134 121 132 134 124 141 125 133 138 111 136 135 139 139 140 133 141 127 140 135 136 130 132 141 142 44 98 98 102 113 110 115 104 115 113 76 83 88 100 97 131 111 79 103 75 116 111 119 117 100 121 100 148 133 147 159 138 158 146 157 152 127 125 132 159 159 167 158 100 141 131 168 164 158 162 115 175 72 69 63 59 98 97 100 51 73 59 80 64 11 71 10 77 78 64 72 35 46 100 68 76 51 Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Spain Sweden Switzerland United Kingdom United States 72 71 60 68 77 77 87 79 80 74 59 64 47 59 54 90 82 64 73 42 77 76 85 88 67 59 Note: Waiting periods are not considered Source: OECD 187 182 156 175 174 160 184 173 166 178 146 177 179 197 191 174 181 197 162 200 178 216 179 177 192 196 Unemployed/ Unemployed/ part-time full-time employed without employed benefit entitlements Unemployed after Part-time years of employed unemployment/ after years non-employed of unemployment/ non-employed 0/0 40/0 Column 86 50 67 86 98 68 100 77 87 67 74 89 55 80 41 90 78 79 65 48 45 45 92 65 105 76 Benefit Systems and Work Incentives 46 Table 4.1 Relative incomes for part-time work and two-earner couples Table 4.2 Average effective tax rates for part-time work and two-earner couples Part-time employed/ non-employed Full-time employed/ non-employed Full-time employed/ part-time employed Full-time employed/ full-time employed 0/0 40/0 100/0 100/40 100/100 0/40 0/100 Column Column Column Column Column Column Column Column 71 40 24 27 11 62 52 41 35 12 60 52 16 11 0 46 72 36 20 11 21 31 22 35 -25 76 30 42 32 20 57 49 33 42 28 63 25 30 12 26 42 72 42 14 18 20 41 25 63 - Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland Portugal Spain Sweden Switzerland United Kingdom United States - 71 149 164 100 165 86 92 80 116 117 123 126 84 141 130 195 89 72 77 60 173 79 85 100 75 101 Note: Waiting periods are not considered Source: OECD 76 74 68 72 78 86 92 80 85 76 70 55 56 64 58 91 86 72 77 44 79 78 88 84 74 66 10 22 59 32 15 56 26 40 38 12 26 70 29 14 10 36 22 43 21 19 39 24 20 14 28 25 55 36 28 56 38 30 51 28 36 49 35 15 16 27 38 26 77 29 19 36 27 29 22 Unemployed/ Unemployed/ part-time full-time employed without employed benefit entitlements Unemployed after Part-time years of employed unemployment/ after years non-employed of unemployment/ non-employed 0/0 40/0 Column 71 142 167 44 100 122 100 32 74 81 47 117 10 56 28 70 100 72 100 70 11 102 116 100 93 48 47 Part-time work and two-earner couples Unemployed/ non-employed POLICY DEVELOPMENTS Introduction The situation presented in this publication applies to 1995 Most countries have since adjusted their benefit payment rates Whilst affecting the absolute benefit amounts, such adjustments not alter the relative generosity of benefits or the way in which they interact with each other and with the income tax system However, some countries have also introduced changes to their benefit system The most important of such changes, those that by virtue of altering the functioning of the tax and benefit systems may affect the incentive-structure of working and unemployed households, are briefly described in this chapter More detailed information is available in the country-by-country descriptions on the Internet (see foreword) Major policy trends in OECD countries Tightening eligibility conditions for unemployment benefits With unemployment figures at a persistent high, many OECD countries have started to review the tax and benefit system’s role as a source of financial incentives to work Some countries have introduced a reform in unemployment benefits Canada has put in place a system whereby unemployment benefit recipients can gain credit-points which give them entitlement to spells of paid employment during benefit receipt Some other countries, like Austria, have increased the required employment/contributions record for repeat UI-claims Finland, Iceland, the Netherlands and Norway have tightened eligibility criteria for all claimants Denmark, Finland and Sweden have reduced benefit payments The requirement that one be looking for work in order to qualify for assistance benefits is now more rigorously enforced in Finland (especially for young unemployed), and in the Netherlands Unemployment insurance and assistance benefits in the United Kingdom have been combined into one single benefit (Job-Seeker’s Allowance, October 1996) which involves more active help with the work search Changes to the UI-benefit in Switzerland (which took effect during 1996) are also aimed at a speedier reintegration of beneficiaries Extending the possibilities for part-time and occasional work Regardless of whether part-time and occasional jobs lead to permanent employment, they help the beneficiary maintain contact with the labour market Such jobs can therefore only increase the likelihood of swift re-employment The structure of the tax and benefits system, in many countries, does little to encourage the beneficiaries or their partners to enter short hour or temporary 49 Benefit Systems and Work Incentives employment (see Doudeijns, 1998) Some OECD countries have recently implemented reforms to improve work-incentives The means-test of unemployment benefits in Australia has recently been redefined on an individual basis so that one partner’s earnings not disqualify the other from entitlements Further changes to the Australian benefit system are based on the same principle of individual means-testing At the same time, means-tests are increasingly calculated according to changes in family income In January 1997, Canada defined eligibility for UI benefits on hours-based requirements, thus allowing for “small jobs” to contribute to meeting insurance eligibility requirements The beneficiary may earn up to 25 per cent of his benefit income without being subjected to the means-test The benefit reform in the United Kingdom has extended possibilities for recipients and their partners to work in part-time employment Implementing employment-conditional benefits Employment conditional benefits may result in increased work incentives which does not lead to lower benefits for full-year recipients Table 2.7 (p 23) indicates which such benefits exist in different OECD countries Canada, the United Kingdom and the United States are experimenting with extending their existing benefits to those without dependants In Ireland, New Zealand and the United Kingdom, new benefit types are being introduced Since late 1996, Ireland and the United Kingdom have had a so-called “Back-to-Work Bonus”, which is paid to long-term recipients who leave benefit for paid employment 50 ANNEX: ASSUMPTIONS AND LIMITATIONS Introduction Various assumptions have been made in calculating the net incomes in and out of work on a comparable basis across countries The first section of this annex outlines the assumptions made in calculating benefit amounts The second section looks at the tax treatment of benefit income and earnings, and the third section at the income concept of the average production worker earnings on which calculations are based Both these sections are relatively brief; with greater detail being found in OECD, 1996b The fourth section outlines the treatment of regional differences in tax and benefit systems The fifth one defines the replacement rate concept used in presenting results in the rest of the report All net incomes, replacement rates and other outcomes in Chapters and are based on the tax and benefit system in effect as of July 1995 The typical payment rates and general systems described in Chapter also reflect the situation as of July 1995 Benefit assumptions Benefits included Benefits included in the calculations of “out of work” net incomes 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) as well as benefits strictly related to the purchase of particular goods and services (other than housing or child care as described below), such as rebates for the purchase of butter in some countries in the European Union, reduced price transport, purchase of domestic fuel or purchase of medical insurance and prescriptions are not included either 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 Cash benefits considered consist of unemployment insurance, unemployment assistance, social assistance, family benefits, housing benefits, child-care benefits, lone-parent benefits, and employment-conditional benefits Benefits which are therefore excluded include old-age cash benefits, early-retirement benefits, 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 Guadagni (CIG) and Mobility Benefits in Italy Severance pay, even where legally required of employers, is not included 51 Benefit Systems and Work Incentives All differences in the timing of benefits (e.g whether they are paid in arrears or in advance) have been ignored Certain tables refer to benefits in the first month of unemployment This is after any waiting period between becoming unemployed or registering for benefit and becoming entitled to receive the benefit The results in the tables in the country by country descriptions on the Internet are annualised, as tax systems are based on annual, not on monthly, incomes Where initial benefits are shown, the amounts correspond to those received (after the waiting period) and paid (in the case of income taxes) during the first month, multiplied by 12 Those cases where the actual benefit durations are less than 12 months are indicated in the table notes Unemployment insurance An examination of unemployment insurance entitlement comprises 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 implicitly means that the individual has a full contributions record in the period before unemployment; that where insurance is voluntary (as in some Nordic countries), the individual 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 However, in some of the tables included in Chapter 3, it is assumed that the individual is 20 years old, living alone and has never worked In this case, the requirements for full eligibility for unemployment insurance are usually not met, and insurance benefit will be received, if at all, at a reduced rate or for a short period of time The amount of insurance benefit is normally based on previous earnings The level of previous earnings is defined with reference to the average production worker level of earnings (see below) 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 assumed to be fully unemployed (see Chapter for a relaxation of this assumption) If the family situation of the unemployed person (dependent spouse or children, for example) warrants additional supplementary payments, 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 It is assumed that the individual receives the benefit for the length of time to which he or she is legally entitled This implies that the person meets existing requirements concerning actively seeking work In some countries, individuals have the right to enter an active labour market programme (training, subsidised employment, etc.) and thereby requalify for insurance benefits For the purpose of this study, it is assumed that individuals not enrol in such programmes Special rules for temporary layoffs are not included Special rules for part-time work during unemployment are not included in Chapter 3, but are applied, if relevant, in the calculations in Chapter 52 Annex Unemployment-related means-tested benefits This section considers the assumptions made where cash benefits are means-tested, particularly for unemployment assistance and social assistance The special assumptions made for housing, child-care, employment-conditional and lone-parent benefits are considered in the following sections Means-tested benefits are usually paid only when the assets of a family are less than a certain level, and are reduced in amount as the income of the individual or family increases The degree to which these interact varies greatly in each country Furthermore, social assistance benefits are often discretionary and the level is decided locally Hence the assumptions applied can have a major effect on the benefit income to which those who are out of work are supposedly entitled The general assumptions applied are the following: • Entitlement for 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 when all other sources of support have been exhausted This is sometimes interpreted as meaning the extended family has a duty to support those without resources It is assumed that no such support is forthcoming • The assets of a family must often be below a determined level in order to qualify for 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) It is assumed everywhere that in order to qualify for the benefit the family possesses negligible assets • Benefits are reduced as family or individual income increases For the purpose of this study, however, it is assumed that families have no source of income other than from benefits Chapter considers the effects of relaxing this assumption of no income to allow part-time work and considers the case of multiple earners in a family • Social assistance in some countries may impose conditions on the behaviour of spouses In Sweden, both spouses must be searching for work in order to be entitled to social assistance In Australia, each spouse is entitled to benefits, providing each meets certain activity requirements 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 of benefit officers Where benefit amounts are stipulated in national regulations, these are used Even where there is local discretion, there are often national guidelines, and they are again used 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 rates, are given in Table 2.9 of Chapter 53 Benefit Systems and Work Incentives • In some countries, social assistance may be used to supplement other income sources, including earnings and insurance benefits, where these are below the level of social assistance Unless otherwise indicated, this has not been taken into account in the comparative tables 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 and and the tables in the country-bycountry descriptions on the Internet are based on the assumption that the family has two children, aged and Where different assumptions have been made, the number of children and the amounts relevant for the ages are given in the notes to the tables 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 In some cases, it may be a combination of the two systems 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 per cent of the gross earnings of an average production worker (Country-specific assumptions, where required, are indicated in the country-by-country descriptions on the Internet) This implies: • It is assumed that single people pay the same rent as couples 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 earnings It is further assumed that a household moving from being unemployed to earning the average wage will not undergo a change in housing costs 54 Annex 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 Where housing benefits vary by area, a typical rate has been chosen Assumptions concerning means-testing are the same as in the Section “Unemployment-related means-tested benefits” above Child-care benefits Child-care benefits are not included in the tables in Chapter except where explicitly indicated (Table 3.8) A typical payment for the child-care costs of two children has been assumed for each country This typical amount may reflect subsidies by central or local government, and may therefore be zero Hence, net incomes are shown as a percentage of net incomes in work after child-care costs – a different presentation from those applying to the rest of the comparative tables in this volume Where child-care benefits are means-tested, assumptions are the same as in the Section “Unemployment-related means-tested benefits” above A simple assumption has been made as to the level of child-care costs It is assumed that the total, unsubsidised child-care cost for one child in care equals 15 per cent of the gross earnings level of an average production worker in each country For those countries where child-care costs are contingent upon the claimant’s income level, rather than on case-related subsidies to the claimant or to the day care centre, child-care costs are as dictated by the system Where child care is provided free of charge, the assumption is that child-care costs to the claimant are zero Employment-conditional benefits Employment conditional benefits may be paid via either the tax administrative system (as in Canada, New Zealand, the United States) or the benefit system (Ireland, Italy, the United Kingdom) 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 are working more than a certain number of hours per week They not therefore affect incomes of those families out of work They affect the incomes of those working part-time, however (see Chapter 4), and the assumptions in that chapter about hours worked and incomes earned determine the level of employment-conditional benefit Delays in payment of benefit (which are often long most recipients in the United States receive the payment in arrears at year-end) are ignored, with benefit income being calculated as it accrues Means-testing provisions have been applied following the principles given in the Section “Unemployment-related means-tested benefits” Provincial payments of this sort, which exist in Canada, have not been applied Lone-parent benefits It is assumed that lone parents not receive any alimony Where it is assumed that receipt of benefits depends in part on co-operation with official attempts to identify the absent parent, it is assumed that such co-operation has been forthcoming It is assumed that no other benefits (e.g widow’s pensions) are received, except for other means-tested benefits as outlined in previous 55 Benefit Systems and Work Incentives sections Means-tests are applied to lone-parent benefits following the guidelines in the Section “Unemployment-related means-tested benefits” Assumptions about taxation This section presents an overview of the assumptions used in calculating the tax due on earnings and benefits Greater detail can be found in the methodology section of the OECD publication (1996b) 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 Central, state and local government income taxes are included Only standard tax reliefs are included when calculating tax payments These are reliefs unrelated to the 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 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 exception is made for tax relief for purchase (but not provision) of child-care The assumption 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 OECD publication (1996b) The broad guidelines are as follows • Earnings are calculated for Division 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 White-collar workers are excluded, except in New Zealand, where the inclusion of this group of workers probably increases average earnings by 5-10 per cent • The worker is assumed to be fully employed for the entire year, although the averages for Finland and Ireland include part-time workers It is assumed that the individual will not be absent from work because of illness at any time during the year 56 Annex • Earnings are taken 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 not take the form of dividend payments • Fringe benefits are excluded Treatment of regional differences Variations on the assumptions given above stem from regional differences in tax and benefit systems The broad principles are as follows: • Regional variations consisting of deviations from general national guidelines, 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 result from regional or local autonomy in setting regulations, either the average of the different local regimes, or the regime applying in a particular region, can be considered typical Eight countries have regionally varying tax systems (two others – Japan and Norway – have local income taxes which not ) In five of these eight [Canada (excluding Quebec), Denmark, Finland, Iceland and 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 net incomes in and out of work In the other three countries (Belgium, 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) and Detroit (Michigan) for Switzerland and the United States respectively (see OECD, 1996b, for more details) 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 in social assistance, although housing benefits may also be calculated according to regional variation Where typical rates are used for the tax calculations, the benefit system in that region has been followed for consistency Chapter indicates the payment rates applied in this report Note that the assumptions about housing costs and benefits mean that variations in housing costs across different regions are ignored The definition of replacement rates Comparative tables in Chapter are presented in the form of replacement rates In all cases replacement rates are defined as being net of taxation Except where otherwise noted, the definition of net replacement rates (NRR) is: NRR = benefit income of the family when unemployed – tax on benefit income earned income + benefit income of the family when employed – tax on earnings and benefits (A1) 57 Benefit Systems and Work Incentives Given the assumptions about which benefits are included in this study, as well as the assumption that individuals are fully unemployed, and that there is one earner in the family, this can be rewritten as: NRR = A = gross unemployment benefits + family benefits + housing benefits – income tax + social assistance (A2) B = gross earned income + family benefits + housing benefits – income taxes + social assistance The denominator consists of earned income plus benefits which are due to families meeting those criteria, with that income level The numerator, benefit income, is calculated on the basis of the individual having previously had that level of earnings included in the denominator Hence the NRR can be interpreted in two ways: • The amount of income which someone with a given level of earnings would receive were he or she to stop working, expressed as a percentage of current earnings • The ratio of current benefit income of those without work to the income they would receive were they to find a job with the same level of earnings which they had before they lost their jobs The earnings which those currently without jobs might expect to receive might be higher or (more likely) lower than that level of earnings they had before they lost their jobs This possibility is not considered in this report There are two main options for income concepts: before housing costs and after housing costs In contrast to other studies (e.g., the Seven Country Study), this report uses a before-housing cost concept Before and after housing costs give a similar picture of work incentives, but the absolute level of replacement rate differs This is particularly relevant given the relatively simplistic assumption about housing costs followed in this report If actual housing costs are lower or higher than the standard 20 per cent of APW earnings assumption, then actual net replacement rates facing benefit recipients will differ from those presented in Chapter of this report In Table 3.8, an exception is made to the general definition of NRR given above because of the wide variety of methods used to support child care in OECD countries The NRR is defined as: NRR = A B – child-care costs + child-care benefits (A3) Where provision of child care is subsidised, costs may be lower than where purchase is subsidised By defining incomes when employed as being net of child-care costs and benefits, comparability between those countries which subsidise provision of child care as compared with countries which subsidise purchase of such facilities Representativity Typical cases can never be fully representative of the actual situation in a particular country A study of the representativeness of the APW has been carried out in OECD publication (1996b) 58 BIBLIOGRAPHY CENTRAL PLANNING BUREAU (1996), Net Replacement Rates: A Transatlantic View, The Hague COUNCIL OF EUROPE (1992), Comparative Tables of Social Security Schemes, 5th Edition, Council of Europe Press, Belgium DOUDEIJNS, M (1998), “Are benefits a disincentive to work part-time”, Part-time Paradoxes, in J.O’Reilly & C Fagan (eds.), Routledge, London MISSOC (1995), Social Protection in the Member States of the European Union, Office for Official Publications of the European Communities, Luxembourg OECD (1991), The Employment Outlook, Paris OECD (1994), Evidence and Explanations, Part II: The Adjustment Potential of the Labour Market The OECD Jobs Study, Paris OECD (1995), The Employment Outlook, Paris OECD (1996a), The Employment Outlook, Paris OECD (1996b), The Tax/Benefit Position of Production Workers, Paris OECD (1997), Making Work Pay: Taxation, Benefits, Employment and Unemployment, The OECD Jobs Strategy, Paris SEVEN COUNTRY STUDY (1995), Unemployment Benefits and Social Assistance in Seven European Countries: A Comparative Study, Ministry of Social Affairs, The Hague UNITED KINGDOM DEPARTMENT OF SOCIAL SECURITY (1996), Social Assistance in OECD Countries, HMSO, London UNITED STATES DEPARTMENT OF HEALTH (1995), Social Security Programs throughout the World, Washington DC UNITED STATES HOUSE OF REPRESENTATIVES (1994), Overview of Entitlement Programs: 1995 Green Book, United States Government Policy Office, Washington 59 OECD PUBLICATIONS, 2, rue Andre-Pascal, ´ 75775 PARIS CEDEX 16 PRINTED IN FRANCE (81 98 05 P) ISBN 92-64-16073-6 – No 50127 1998 [...]... Hungary and Norway) Four countries administer flat-rate benefits (Iceland, Ireland, Poland and the United Kingdom) US$ equivalents for the minimum and maximum benefit are in Columns 6 and 8 1 An average income is defined to equal the earnings level of Average Production Workers (APW) For more information refer to OECD (1996a) 15 Benefit Systems and Work Incentives Table 2.2 UA payment rates and benefit. .. Greece, New Zealand, Norway, Portugal and the United Kingdom additions are paid for a dependent spouse) 17 Benefit Systems and Work Incentives Table 2.3 UA payment rates and benefit duration Employment conditions Column 2 Australia Austria Belgium Canada Czech republic Denmark Finland France Germany4 Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand5 Norway Poland Portugal6... Employment conditional benefits may take the form of refundable tax credits 3 In Australia and New Zealand an assistance type benefit is payable which has characteristics of both UA and SA 4 In Italy, a tax credit for house rent is available Source: OECD Benefit Systems and Work Incentives 14 Table 2.1 Main elements of the tax and benefit system Description of key features of the tax and benefit system Other... key features of the tax and benefit system families with children Ireland3 Family income supplement Benefit Systems and Work Incentives Table 2.8 Lone-parent benefit arrangements Type of benefit Rate (yearly)1 National currency Australia2 Austria Belgium Canada Czech Republic Denmark Finland France Germany Separate benefit, and tax rebate for children under 16 9 651 Family benefit supplement for children... Benefit Systems and Work Incentives Table 3.1 Net replacement rates for four family types at two earnings levels after tax Including unemployment benefits, family, and housing benefits in the first month of benefit receipt APW-level Single Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand Norway Poland... of the tax and benefit system Housing benefits To help people on low income pay their private rents and housing costs, most OECD countries operate a separate benefit scheme Housing benefits are broadly distinguishable in two groups In some countries (Denmark, Finland, France, Germany, Hungary, Iceland, the Netherlands, New Zealand, Norway, Poland, Sweden and the United Kingdom), housing benefits are... employment benefits of some form or other with varying payment rates and qualifying requirements Table 2.7 provides an overview 21 Benefit Systems and Work Incentives Table 2.6 Child-care benefit systems Refund possibilities Australia Austria Belgium Canada Czech Republic Denmark Finland France Subsidised provisions; means-tested benefits; tax rebate Child care is treated as a work related expense and is... family benefits in Australia, Italy, New Zealand and the United States In Australia, France, Ireland, Japan, New Zealand and Sweden, lone parents can rely on a separate benefit scheme Employment conditional benefits can only be received by people in paid employment Australia, Ireland, Italy, New Zealand, the United Kingdom and the United States operate such benefits either to increase financial incentives. .. amounts per child Receipt of this benefit entitles to additional benefits 3 Family benefits are means-tested 4 Benefits may be received from the second child onwards Source: OECD 19 Benefit Systems and Work Incentives Table 2.5 Housing benefit allowances Australia Austria Belgium Canada Czech Republic Denmark Finland Housing benefits (maximum payments in % of rent) Column 2 Benefit reduction rate Treatment... of benefit, and so on, up to a limit), be paid out upon finding employment (Iceland) or contribute to future benefit entitlements (Canada) 26 Description of key features of the tax and benefit system Table 2.10 The tax treatment of benefits 1 Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Netherlands New Zealand