Page 20 - IDEA Study 7 2015 Working Beyond Pensionable Age

institutional incentives are designed to reduce the temptation to leave the labour market, pensioners should have a lower participation tax rate than prime age adults. The simplest specification of participation tax rates is the gross participation tax rate. It quantifies the effect of the additional total direct tax imposed on an individual who works. Technically, it is constructed as a ratio of the worker's additional tax burden and his super- gross wage. The additional tax burden is defined as the difference between the sum of income tax, social security and health care contributions5 payable by a working individual and the sum of income tax, social security and health care contributions payable by the same individual when economically inactive. The gross participation tax rate therefore quantifies the magnitude of income sacrificed when the individual works, because of the existence of tax system. Pensioners should be forced to sacrifice a lower share of their income (face a lower participation tax rate) because they are tempted to leave labour and become economically inactive as they have guaranteed unconditional income (old age pension). However, graph 6 shows that the average gross participation tax rate is almost constant with age. There is no significant change in the participation tax rate at the retirement age, when individuals become tempted to leave the labour market. The tax on a working 50 year old individual very likely constitutes the same fraction of his super-gross wage as the tax on a 65 year old who is eligible to receive an old age pension and is tempted to leave the labour market. The minor variation in participation tax rate with age and gender is caused by the variation in employment status (employees, self-employed) and employment contract types, because taxation is significantly lower for self-employed workers and low earning individuals with special employment contracts. This means that the current Czech tax system does not incentivize the elderly to stay in work more than prime age individuals – the tax system (dis)incentives to work are very similar for individuals around 50 and 60 years of age. Comparable institutional incentives of prime age individuals and pensioners to work together with higher temptation of pensioners to leave labour market, caused by their unconditional income, results in the current economic practise, when majority of individuals retire voluntarily immediately after reaching retirement age. After reaching retirement age individuals become tempted to leave labour market because they have guaranteed unconditional income and there is not significant change in institutional incentives to work, which would offset their increased temptation to become economically inactive. 5 We consider either contribution paid by self-employed workers, or both contributions paid by employees and their employers. 18