Page 28 - IDEA Study 7 2015 Working Beyond Pensionable Age

Improved institutional incentives for the elderly to work could contribute to a higher employment rate among older people, which could reduce the sharp decline in direct public revenues from the elderly and the simultaneous sudden increase in pension system costs. There is a number of policies focused on the differentiation of institutional incentives to work through the tax, benefit and pension systems. Theory of incentives differentiation is described by optimal taxation theory or the Ramsey rule, which claims that the level of taxation should respect the tax elasticity of labour supply: groups of individuals who are tempted to leave the labour market, such as the elderly, should face lower effective taxation than prime age individuals, who are very likely to stay in the labour market despite higher effective taxation. Applications of the theory are described, for example, in Mirrlees review9 There are several possible ways of increasing the institutional incentives for the elderly to work. It is possible to decrease effective taxation by reducing direct tax, social security or health care contributions, or by increasing the bonus for working beyond retirement age. In Tables 1 and 2, we quantify the effect of decreasing social security contributions and the consequent increase of employment. As there are no estimates of appropriate elasticity for the Czech Republic, we present estimates for a variety of scenarios for the increase in employment among the elderly and of the income paid to these "new" employees. In Tables 1 and 2 we quantify the impact of increasing employment by 0 to 25 percent of healthy non-workers between statutory retirement age and 70 years of age, as a result of reducing social security rates for the elderly. Table 1 shows the percentage change in total public tax revenues. Table 2 shows the percentage change to the sum of total public tax revenues and early retirement benefits paid. The second and third columns of Tables 1 and 2 denote the percentage changes when the social security contribution rate is reduced by an amount equal to 1) half of the contribution paid by the employee for individuals eligible for early retirement, and 2) the full contribution paid by the employee for individuals eligible for standard retirement. The fourth and fifth columns of these tables depict the percentage changes when the social security contribution rate is reduced by an amount equal to 1) the full contribution paid by the employee for individuals eligible for early retirement, and 2) twice the contribution paid by the employee for individuals eligible for standard retirement. The “standard wage” columns refer to a situation in which pensioners are employed for the average wage of the same education level and gender individual who is aged between 50 and early retirement age; the "decreased wage" columns refer to a situation in which the elderly are employed for 80 % of the above mentioned average wages. 9 Downloadable at http://www.ifs.org.uk/publications/mirrleesreview/ 26