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Tax and Transfer Research Group, Berlin UNIVERSITÄT POTSDAM WIRTSCHAFTS- UND SOZIALWISSENSCHAFTLICHE FAKULTÄT Lehrstuhl für Finanzwissenschaft Hans-Georg Petersen International Experience with Alternative Forms of Social Protection: Lessons for the Reform Process in Russia Diskussionsbeitrag 44 Potsdam 2004 Hans-Georg Petersen University of Potsdam and German Institute of Economic Research, Berlin Tel.: (+49) 0331 977 3394 E-mail: [email protected] International Experience with Alternative Forms of Social Protection: Lessons for the Reform Process in Russia Prof. Dr. Hans-Georg Petersen1 University of Potsdam and German Institute for Economic Research (DIW Berlin) Report for the Russian Foundation for Social Reforms in the Framework of the Project to Promote Structural Reforming in the System of the Population’s Social Protection Supported by the World Bank Mit den Finanzwissenschaftlichen Diskussionsbeiträgen werden Manuskripte von den Verfassern möglichen Interessenten in einer vorläufigen Fassung zugänglich gemacht. Für Inhalt und Verteilung sind die Autoren verantwortlich. Es wird gebeten, sich mit Anregungen und Kritik direkt an sie zu wenden und etwaige Zitate aus ihrer Arbeit vorher mit ihnen abzustimmen. Alle Rechte liegen bei den Verfassern. ISSN 0948 - 7549 1 The author would like to thank Mathias Brehe and Klaus Müller for great support. Of course, responsibility for any remaining errors rests with the author alone. 1 Contents Charts and Tables 3 1. Introduction 5 2. Basic Issues of Social Protection 8 2.1. Targets, Means and Benefits of Social Protection 8 2.2. Standard Risks and Possible Institutional Settings for Social Protection 12 2.2.1. Market Structure for Pension and Health Insurance 12 2.2.2. Systems of Social Protection and Security 14 2.2.2.1. Purely Private Insurance System 14 2.2.2.2. Social Insurance System 15 2.2.2.3. Social Aid System 16 2.2.2.4. Social (Health) Care System 19 2.2.2.5. Mixed systems 19 2.2.3. Replacement Ratios and Income Taxation 20 2.2.3.1. Replacement Income Levels 21 2.2.3.2. Transfers in Kind 22 2.2.3.3. Gross or Net Orientated Replacement Ratios and Income Taxation 26 3. Social Protection in Selected European Countries 30 3.1. Germany 30 3.1.1. Pension System 30 3.1.2. Health System 33 3.1.3. Unemployment Insurance 36 3.1.4. Accident Insurance 38 3.1.5. Basic Security System 39 3.1.6. Taxation of Wages and Profits 40 3.2. Austria 45 3.2.1. Pension System 46 3.2.2. Health System 47 3.2.3. Unemployment Insurance 48 3.2.4. Accidents Insurance 48 3.2.5. Basic Security System 49 3.2.6. Taxation of Wages and Profits 49 3.3. The Netherlands 50 3.3.1. Pension System 51 3.3.2. Health System 53 3.3.3. Unemployment Insurance 54 3.3.4. Accidents Insurance 55 3.3.5. Basic Security System 55 3.3.6. Taxation of Wages and Profits 56 2 3.4. United Kingdom 58 3.4.1. Pension System 60 3.4.2. Health System 62 3.4.3. Unemployment Insurance 64 3.4.4. Accidents Insurance 65 3.4.5. Basic Security System 65 3.4.6. Taxation of Wages and Profits 66 3.5. The Overall Burden of Taxes and Social Protection Expenses 69 4. Necessary Reforms, Lessons for Russia and a Basic Approach for a Blueprint 76 4.1. Basic Features of the Reform Process 77 4.1.1. PAYGO Versus Funding System 77 4.1.2. Basic Security Versus Upgraded Insurance 82 4.2. Reforms within the Branches of Social Protection 93 4.2.1. Pension System 93 4.2.2. Health Protection and Old-age Care 97 4.2.3. Unemployment Insurance 100 4.2.4. Accidents Insurance 103 4.3. Integrated Tax and Transfer Reform 103 4.3.1. Easy Tax Proposal 103 4.3.2. Value Added and Eco Taxes 109 4.4. Empirical Evaluation of Tax and Transfer Reforms 111 4.5. Some Final Public Choice Remarks 115 5. Summary and Final Remarks 118 Appendix 122 Literature 125 Internet-Links 132 3 Charts and Tables Chart 1: Elements of Social Justice 9 Chart 2: Target and Instrument Cube of the Open Society 11 Chart 3: Market Structure for Pension Insurance 13 Chart 4: Market Structures for Health Protection 13 Chart 5: Marginal Tax and Transfer Rates in Germany 17 Chart 6: Private Health Insurance as a Market System 22 Chart 7: Steering Mechanism of a Social Health Insurance 24 Chart 8: Income Tax Burden of Interest Income in a Traditional Income Tax System (Flat Rate 25 %) 27 Chart 9: Lifetime Burden on Interest Income of a Traditional Income Tax (Flat Rate 25 %) 28 Chart 10: Marginal and Average tax Rates of the Income Tax Schedule 1998 and 2005 42 Chart 11: Marginal burden of an average taxpayer (1998) 44 Chart 12: Contribution Classes for the NIF 59 Chart 13: NIF Contributions and Assessment Limits 59 Chart 14: The UK Pension System 60 Chart 15: Taxable Bands of the Personal Income Tax 67 Chart 16: Taxable Bands of the Corporation Tax 68 Chart 17: Generational Accounting for the German Social Pension, Health, and Old-age Care Insurance 80 Chart 18: Explicit and Implicit Public Debt 1997 in Germany 81 Chart 19: Stylised Overview of Social Benefits in Germany in 1998 85 Chart 20: Linear Negative Income Tax Schedule 91 Chart 21: Negative Income Tax Schedule with 100 % (Above) and 50 % (Below) Marginal Transfer Reduction Rate and 25 % Marginal Tax Rate 92 Chart 22: Four-Pillar System 94 Chart 23: Three Pillars of Old-age Security 96 Chart 24: Taxation of Enterprises 106 Chart 25: Microsimulation as Instrument of Program Planning 112 Chart 26: Basic Structure of a Microsimulation Model 113 Chart 27: Systemic Structure of a Microsimulation Model 114 4 Table 1: Social Pension Insurance 31 Table 2: Overview on the Basic Parameters of the Social Insurance Scheme 2003 32 Table 3: Social Health Insurance 34 Table 4: Social Old Age Care Insurance 35 Table 5: Unemployment Insurance 37 Table 6: Social Accident Insurance 38 Table 7: Social Aid System 40 Table 8: Marginal Tax and Social Contribution Rates (%) in 2003 70 Table 9: Tax and Contribution Burden in an International Comparison 71 Table 10: Direct Taxes, Indirect Taxes and Social Security Contributions 72 Table 11: Unemployment Ratios in an International Comparison 73 Table 12: Social Protection Expenses Related to Payroll and National Income 75 International Experience with Alternative Forms of Social Protection: Lessons for the Reform Process in Russia Hans-Georg Petersen University of Potsdam and German Institute of Economic Research, Berlin 1. Introduction Since more than three decades the systems of social protection and social security have to face serious problems.1 In most of the industrialised countries decreasing fertility and increasing longevity have led to a strongly aging population; within the European social security systems the decline in economic growth connected with the demographic changes caused a trend to permanently increasing deficits, independent from the fact that the systems are more insurance or more aid orientated. Due to the demographic changes many of the existing systems are still not sustainable and have to be subjected to serious political reform processes. Most of the existing systems date back more than a century and were originally orientated to guarantee a minimum social protection especially to the poor and the working classes. Especially after World War II the social security programs have begun to include more and more groups of the population and in the 60s of the last century they grew to cover almost the whole societies based on pay-as-you-go financing (PAYGO) rather than on actuarial funding. Under the influence of growing population and a comparatively positive growth performance even the benefits from the social security systems steadily increased until the early 70s of the last century. While PAYGO systems might be quiet appropriate for risk management if the costs of the insured events can be distributed on the assured within one period, in case of intertemporal insurance problems connected with pension as well as health risks the PAYGO procedures creates serious financial problems if changes in the assured cohort sizes occur. An aging population then means on the one hand a decline in the number of actively assured whereas the number of beneficiaries is increasing.2 On the other hand costs strongly arise within the retirement as well as health care or insurance systems, respectively. If such a process is accompanied by growth retardation in income and wages, PAYGO systems run into structural deficits. 1 Compare, e.g., Boskin (1977) and the early publication of Jean-Jacques Rosa on “The World Crisis in Social Security”; see Rosa (1982). A more recent perspective is developed in Giersch (1997). 2 For details see, e.g., Petersen (1981 and 1986). 6 The trend to an ever-increasing welfare state has led to an enormous burden on wages and profits, thus producing negative incentives on the supply of effort.3 The growing shadow economies as well as the capital mobility towards countries with more favourable conditions for employment and capital investment have forced at least some European countries to implement some hard social reforms. The growth of social expenditure consequently has been mitigated or even reversed; since many redistributive measures were more directed to favour middle and higher income classes,4 the concentration on the really poor and needy people meant a better targeted social protection as well as an increase in the efficiency of income redistribution. Hence, social reform is possible without any social dismantling. The main features of social reform comprehend a shift from PAYGO systems to at least partially funded systems which are more actuarially sound connected with increased primary responsibility for the people, clear definitions of the personal entitlements within the different branches of the social security system as well as improved incentives for the beneficiaries to enter the official labour markets after periods of unemployment.5 The international experiences with the traditional social security systems as well as the reform processes, which have already taken place, are of enormous value for the countries in transition that are currently in a catch up phase.
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