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William Perraudin is Woolwich Professor of Financial Economics at Birkbeck College, London and Research Associate of the Department of Applied Economics, Cambridge University. Thierry Pujol is an Economist in the European I Department. The paper was begun while William Perraudin was a visiting scholar in the European I Department. The authors thank Ehtisham Ahmad Michael Deppler, Liam Ebrill, Stanislas Gomulka, and Christian Mulder for helpful conversations. All errors are the authors’ responsibility.
The share of the elderly population was 14.6 percent in the last (1988) census, which compares favorably with the situation in Germany (20.7 percent in 1987), the United Kingdom (20.2 percent in 1981), Hungary (18.9 percent in 1990), etc. (see United Nations (1993)).
Grandfather clauses are particularly distortionary.
The main state pension scheme is administered by the Social Insurance Institution or ZUS. Two other state pension schemes exist for private-sector farmers (KRUS) and priests.
Figures for women are given in parentheses after the corresponding figures for men.
Parliament initially approved more generous percentages but backed away from them given the budgetary implications.
Prior to the October 1991 law, the final wage applicable to benefit calculations was simply a workers’ earnings over the last twelve months of his working life. The move toward a longer average implies a significant streamlining of the Pension Administration. Anecdotal evidence suggests, however, that this move is urgently required since firms and workers arbitrage the current system by drastically increasing wages when retirement approaches.
Note that, for a given worker, the averaging rules depend upon the year of retirement, not age. This complicates optimal retirement decisions somewhat.
The new law came into force on January 1,1992, replacing four payroll and income taxes with a single personal income tax. For a detailed description, see Gorecki and Wisniewski (1992).
The deterioration has exceeded that in other Central and Eastern European countries. Unemployment rates in the Czech Republic and Hungary, for example were 3.5 percent and 12.1 percent respectively at the beginning of 1994.
The December 1989 law allowed anyone out of work to claim the unemployment benefit. In July 1990, eligibility was tightened so that that benefit can only be obtained if no job or training program is available and if the claimant has worked for 180 days in the past year.
On average, farmers’ pensions represent approximately 66 percent of occupational workers’ pensions.
For Poland, “back-of-the-envelope” calculations suggest that k equals approximately one third.
Outside the averaging period, the marginal tax rate equals the pension tax rate, τ. Over the averaging period, if αν denotes the length of the averaging period, the marginal tax rate equals Tb R/aν - τ.
The Diamond (1993) example is admittedly more striking: out of exhaustion, an overworked worker, near retirement, was involved in a serious traffic accident.
Here, the contribution rate equals 30 percent.
Note that the simulations assume that households receive no bequests. Including bequests would probably not change matters since these would normally be received around the age of fifty.
This is the approach taken in the U.S. social security benefit system.
Although effective tax payments are, of course, cut since the household receives extra pension benefits in reward for extra supply of labor.
The same argument would apply for any job that does not increase future pensions during the averaging period. Therefore, an old worker who could retain his job only if he accepts a drastic wage cut has an incentive to retire instead.
The tax replaced the old payroll tax as well as the less important income equalization tax and various small taxes on individual crafts and small manufactures.
Of the 45 percent, 43 percent goes toward the social insurance expenditures of the ZUS, while 2 percent is used as a contribution toward the costs of unemployment benefits. This distinction has no impact on the economic effects of these taxes.