Page 18 - IDEA Study 7 2015 Working Beyond Pensionable Age

3.Comparison of institutional incentives to work for prime age and elderly individuals The tax, benefit and pension systems in the Czech Republic are set up in such a way they do not impose the same effective tax rates on all socio-economic groups. There are many ways in which they achieve this, including tax credits, deductions, floors, ceilings etc. The various credits and deductions built into the system are intended to incentivize certain desired economic behaviours and to support specific groups of individuals. For example, the tax system includes a child tax credit, a spouse tax credit, deductions for members paying high contributions to the 3rd pension pillar, and so on. These tax credits and deductions have a significant impact not only on income redistribution among socio-economic groups, but also on individuals' incentives to work. Credits and deductions reduce tax, thereby increasing individuals' net income from work. This presents an incentive for the individual to work, because he receives a higher remuneration for his work (a higher income). In order to maximize employment, the tax system and other public policies should incentivize to work especially individuals who are able to work but tempted to exit the labour market. Therefore, the tax burden imposed on these individuals should be smaller than tax burden on those who would not be discouraged from working by a higher tax burden. Elderly individuals are much more tempted to leave the labour market than prime age individuals. The temptation to leave the labour market usually occurs when they become entitled to an old age pension. From this point onwards, they can receive an old age pension irrespective of their economic status; their income is therefore unconditionally guaranteed, and their incentive to work to earn money could be weakened. The above evidence on reasons for retirement suggests this is indeed the case in the Czech Republic. This increase in the temptation to leave labour market, and its magnitude, could be illustrated by the change in income after retirement. Graph 8 depicts individuals' average working income before statutory retirement age and average old age pension income afterward, both conditional on age, gender and education. Irrespective of education, those eligible for an old age pension are guaranteed an unconditional income. The pension system's high solidarity causes that the individuals most tempted to leave the labour market at retirement age are individuals with primary education, and the least tempted are men with tertiary education. This is consistent with the differences in the timing of retirement for different educational groups presented above.4 In order to increase employment among pensioners, institutional incentives to work must outweigh these strong incentives to retire (such as the guaranteed income). These could, for example, take the form of tax credits or a bonus pension benefit conditional on working after retirement, which would increase pensioners' net income, and thus present a convincing incentive to work during retirement. 4 Of course, there are also other factors which force individuals with lower education to retire earlier on average. For example, people with lower education on average perform physically more demanding work. 16