The calculations of the effects of social security benefits and taxation are based upon OECD’s ’The Tax/Benefit Position of Production Workers’, an annual publication show-ing disposable income for ’The Average Production Worker’, the APW, in the member countries. The latest publication used in this study is the 1997 edition, covering the years 1995-1996. This publication is now called The Tax/Benefit Position of Employees'.
Two APWs are used, one is the single worker just as in the OECD publication, the other is a couple where both spouses have an income (the husband has the income of the single APW, the wife has 50 per cent of that). OECD now has a considerable variation in income, both for the single and the couple. In this study there is, as mentioned, only two income levels, one for the single person and another for the couple. ’Our’ APW-couple has a varying number of children, OECD’s has none or two. The APW is thus a simplified, stylized family type. The basis for the calculations is 1996 data for the APW from OECD´s publication. These have been projected to 1997 level by national estimates because 1997 is the ’calculation year’ for the study. Some of the 1997 estimates are identical to the entries in the 1998 edition of the OECD publication, for others there are minor deviations.
The countries covered are Denmark, Sweden, Finland, Austria, Germany, the Netherlands, Great Britain, and Canada.
’Standard’ events
The APWs in the 8 countries are exposed to a series of ’standard’ events. The events selected are:
1. Ill for one week. Single APW
2. Unemployed for 3 months during the year, eligible for unemployment insurance benefits. Single APW
3. Unemployed for the whole year, eligible for unemployment insurance benefits.
Single APW
4. Unemployed for 3 months during the year, not eligible for unemployment insurance benefits. Single APW
5. Unemployed for the whole year, not eligible for unemployment insurance benefits.
Single APW
6. Wife unemployed for the whole year, eligible for unemployment insurance. APW-couple
7. Injured from work - single APW, two cases:
1. Working capability completely lost.
2. Loss of D of the working capability.
8. Disability pensioner with former work record. Single APW.
9. Disability pensioner without former work record. Single APW.
10. Wife, usually working part time, becomes a disability pensioner. APW-couple.
11. Old-age pensioner with maximum period of former occupation. Single APW.
12. Old-age pensioner without former occupation. Single APW.
13. Old-age pensioners with maximum period of former occupation. APW-couple.
’Standard’ events in connection with children 1-3. The couple has 1, 2 or 3 children, 1 to 6 years old.
4. The couple gets the second child (at the beginning of the year).
1. Calculation covering the maximum period of maternity leave in each country.
2. Calculation covering a common period of maternity leave for all 8 countries.
Calculations
The calculations cover the gross compensation percentage for the transfers compensating the loss of working income (the net compensation percentage if the compensation is based on net income) and the change in disposable income caused by each ’standard’ event. For pensioners it is the usual net compensation percentages or net replacement rates, which are calculated.
This is not relevant for all the events. E.g. the compensation percentage and the change in disposable income for the pensioner without former occupation have, strictly speaking, no meaning, since there is no loss of income at ’retirement’. The interpretation in this case is relative to the disposable income of the APW. The compensation percentage is also irrelevant where family allowances for children are concerned.
The ’maximum period of former occupation’ is by itself not a well defined concept. In this study the maximum period is 45 years, unless the rules say otherwise (in Sweden the
period is 30 years, and further years in occupation have no influence on the additional pensions in the present pension system, in Austria it is 40 years). This has the implication, that in some cases, e.g. for the Danish additional pension scheme, it is not possible to have had 45 years of membership when retiring in 1997. The interpretation of the calculation in this case is the maximum possible amount the pensioner can get, when he or she retires in 1997 at the official retirement age.
There is another ’timing-problem’ in the case where the couple gets the second child. It is assumed that it is possible to get the child and have it for a whole year, and also to receive maternity leave benefits from some time before the birth, all within the same year. This is hardly possible, but it is, anyhow, the assumption.
The impact of the ’events’ are calculated based upon current income, i.e. 1997 income, disregarding that former income is the proper basis in many cases. Special rules concerning payment for vacation have also been disregarded, all income is used as basis for calcula-tion of income related benefits.
Results
The results of the calculations are presented in a compressed form in the attached tables, cf. Chapter 2, section 2.3. There are only results for two points in the income distribution, those of the single APW and the APW-couple. It is the isolated effect of each event, which is shown. Many of the ’standard’ events have the effect of reducing disposable income.
Other means tested benefits, e.g. for housing, would then increase. These kinds of effects are not included in the results, which in this case can be interpreted as showing the maxi-mum effects on disposable income. Progress in technology will soon make it possible to present results containing much more variation and complexity.
Documentation
There is a short documentation of the calculations for each country, c.f. the following. The documentation is oriented towards the specific calculation of the effect of the ’standard’
events selected, it is not a description of the rules in the social security and taxation sys-tems of the 8 countries. The detailed calculations for each case are also documented and stored, but not printed in the publication. They are available on request.
Ministries and organisations in Sweden, Finland, Austria, Germany, the Netherlands, Great Britain, and Canada have been very helpful in updating the information from 1996 to 1997 and in providing new information for 1997 for their respective countries. This effort is essential for the correctness of the results presented in the report.
Outline of the APW
As already mentioned, the APW is contained in ’The Tax/Benefit Position of Production Workers’, now The Tax/Benefit Position of Employees', an annual publication from OECD.
Characteristics of the APW:
1. The APW is a worker in the manufacturing industry.
2. The wage income of the APW is the average (based on hourly wage and hours worked) in manufacturing industry.
3. Personal characteristics such as being single or married, with or without children, which decide the tax/benefit position of the person or family.
Cf.1. The share of employees in manufacturing (out of total employment) is approx. the same in DK, S, and GB, close to 1/5, while it is higher in FIN, A and D, highest in D, and lower in NL and CAN. The distribution below is based on 1997 figures.
DK S FIN A D NL GB CAN
Per cent ---Share of employees
in manufacturing 21 20 23 24 29 18 21 17
Cf.2. The average production worker is adult, working full time within manufacturing (ISIC division 3), is ’uni-sex’, and is neither ill nor unemployed. Overtime payment and payment for vacation are included in the income. This is calculated as the aver-age hourly waver-ages per month or quarter (weighted after hours worked in these peri-ods), multiplied by the average amount of hours worked during the year. Fringe benefits are not included in the income. The procedure described is followed by most countries, but there is some variation.
Cf.3. The tax calculation includes personal taxes of wage income and standard deductions.
Using only standard deductions is a simplification and ’non-standard’ deductions (e.g. for interest payments in the Danish case) would change the results considerably.
Standard social contributions paid by the employee are also included in the calcu-lation of disposable income. This concept is calculated in the following way:
Gross wage of APW
Social Security contributions (paid by employees) Personal tax
+ Family allowances (cash)
= Disposable income
1. The 1994-edition of the OECD publication contains a study of the position of the APW in the income distribution in Canada, Denmark, Iceland, Sweden, Great Britain and the United States.
This concept of disposable income is ’simple’ and does not catch all the variation of the real world, it is called take home pay' in OECD's publication.
The couple with children receives standard family allowances. Subsidies for housing or day care payments are not considered.
Limitations
Some of the limitations are evident from the procedures already described.
The calculation of disposable income is rather crude.
The calculations are for two points in the income distribution, those of the single APW and the APW-couple. These points are hardly the same in all the countries, which is, in itself, a problem .1
It would be preferable also to calculate for incomes below and above that of the APW (and the ½ APW), which would improve the foundation for the comparisons. This will soon be possible, when appropiate software is impremented.
Even if some of the limitations concern the APW as such, it should not be forgotten that OECD’s APW is the only existing operational framework for this kind of international comparisons. Calculations based upon representative data would be better, and work in this direction is in progress. The Euromod project, when operational, will be a major step forward as a tool for comparative studies.