Child pensions
and the free-rider taxation
Jaroslav Vostatek
Poznań, September 24, 2015
Overview
• Child pension – an old/new project
• Second-best „solution“: pension contributions as an income tax
• Benefits now
• Czech proposal: Slovakia to be followed?
• Sales arguments
• Family and pension policies
• Conclusions
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Child pension
• Projects, not reality (Germany)
• Sinn, Werding: new (2nd) pension pillar: flat-rate old-age pension per
child (up to 3 children)
• Tax-financed or
• Payroll-tax-financed (PAYG)
• 1st pillar: PAYG social insurance (reduced replacement rates in the future,
frozen contributions), transformation to flat-rate pension or US Social Security
• 3rd pillar: mandatory private insurance for people with less than 3 children
• Premiums: e.g. 9% from wage for childless people
• Minus 3% for each child
• Savings for each newly born child to be paid out (birth allowance)
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Second-best solution: tax-like deductibles
• Introduction of income tax allowances into the pension insurance
contributions
• Werding: basic deformity in the pension insurance not solved
• But immediate financial help for the families
• Germany: optional system of income tax deductibles and/or child benefits
• Conservative tax and family policy
• 2 parallel tax allowances – why?
• Segmented pension system in Germany
• Civil servants: (higher) tax-financed pensions
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Czech proposals
• ING. team proposal (2004): 2 pillars
• Flat-rate child pension (50% of AW)
• Mandatory private insurance (rates similar to Werding)
• Christian Democratic Union (KDU-ČSL, 2011):
• Increase (basic) pension contribution rate for childless employees by 3% (to 31%)
• Reduce basic pension contribution rate by 3% (percentage points per each child
• Rusý et. al. (2011): introduce substantial rate differentiation of (old-age)
the pension contributions: 18% - childless, 13% - 1 child, 9% - 2, 6% - 3,
4% for parents of 4+ children
• CDU (2015) pushed through Pension Commission:
• Increase (basic) pension contribution rate for childless employees by 1% (to 29%)
• Reduce basic pension contribution rate by 1% for 1st child, 2.5% for 2nd child, 5% for
3rd child, 6.5% for 4th+ child (for both parents, if applicable)
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Slovakia 2004 – 2005
• Differentiation of pension contribution rates
• Reduction 0.5% (percentage points) per each child
• Maximum reduction: 4%
• For 1 parent only
• A MP's initiative, against the Ministry
• Replaced by child tax credit increase
• Single „case“ in the world
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Czech state pensions and child benefits
• Czech pension system (1st pillar):
• Implicit flat-rate pension (30% of AW)
• Small earnings-related component – less than 1/3 of the total state pension
• High pension contributions rate (28%)
• Czech child benefits:
• Income tax child credit (refundable, universal)
• Income-tested flat-rate state child benefit
• Highest in the world ?
• One-earner family with two children (2 and 7 years of age)
• (Net) wage level of an average production worker (APW)
• Lower than child existence minimum (housing costs not included)
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Wage level of an average production worker (APW)
One-earner family with two children (2 and 7 years of age)
Ferrarini, T., Nelson, K. and Höög, H. (2012). The Fiscalization of Child Benefits in OECD Countries.
AIAS, GINI Discussion Paper 49
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Child benefit systems in Sweden and Denmark
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Child benefit systems in Switzerland and UK
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Wage level of an average production worker (APW)
Child benefit system in Czechia
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One-earner family with two children (2 and 7 years of age)
Tax credit
Tax allowance
Jaroslav Vostatek
Income-tested
child benefit
11
„Sales“ arguments for child pensions
and pension contributions differentiation
• Intergenerational contract (PAYG system)
• 2 → 3 generations contract
• Intergenerational redistribution under any system
• Children = private investments in human capital
• Socialization of returns: pensions
• Child benefit should replace private investments in human capital, incl. opportunity costs
• Childless people are free riders in public pension systems
------------------------------------------------------------------------------------------------------• „Original“ arguments for more money for families, higher-income families etc.
• Family policy is no task for pension insurance
• Familienpolitik ist nach Auffassung des Bundesarbeitsministeriums nicht Aufgabe der
gesetzlichen Rentenversicherung (2014)
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Different “circles” of family policies
Letablier et al. (2009)
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Child pensions and similar projects might be
realized without violation of pension insurance
• Family supplement in pension regimes
• Child pension → flat-rate supplement instead of earnings-related
supplement (child-care credit)
• Tax deductibles in pension insurance contributions
• Merge with income tax deductibles
• Differentiation of pension insurance contributions
• Reform income tax
• Not enough contributors to social pension insurance
• Reform valorization of earnings base of DB systems – reform indexation of
personal accounts in NDC systems
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Conclusions
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Prevent inefficient and complicated solutions
Child pension pillar is not useful
„Second-best solution“ misuses pension contributions for tax purposes
Social insurance premiums shall be no payroll taxation
Social insurance old-age pensions may absorb population waves (valorization
of pension rights)
Child benefits may cover more child costs
Modernize public DB pensions: NDC systems are more transparent and
understandable
Reduce Czech pension contributions (to finance the insurance part of pensions
only)
Learn international pension theory and policy before reforming (German, Slovak
or Czech) pension insurance
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Thank you for your attention!
jaroslav.vostatek@vsfs.cz
jvostatek@volny.cz
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