Basic pay-in

Another important feature of an EUBS is the financing of the scheme. To be able to pay out unemployment benefits, either indirectly through payments to the national governments or directly to the unemployed workers, the supranational fund has to acquire a sufficient amount of funding. This section therefore focuses on how the supranational fund would be financed. We consider who contributes to the supranational fund, how these contributions are calculated, how they could be collected and so on. The section also presents the pay-in formulas, which are adjusted in later sections to incorporate the experience rating and claw-back mechanisms.

The contributions of the countries to the supranational fund are determined as outlined below.

For the equivalent EUBS: Each country contributes x% of its GDP every quarter (multiplied by any national extra coefficients as detailed elsewhere in the analysis), until this cumulates to z% of EU GDP, at which point countries stop their contributions to the supranational fund. If the balance drops below z% of EU GDP, contributions restart (start-and-stop). In these equations, x is equal to 0.1% and z is equal to 0.5%. 𝐵𝑎𝑠𝑖𝑐 𝑝𝑎𝑦 − 𝑖𝑛 = 𝑥 ∗ 𝐺𝐷𝑃𝑖,𝑡 𝑢𝑛𝑡𝑖𝑙 𝑧 % 𝑜𝑓 𝐺𝐷𝑃𝐸𝑈 𝑖𝑠 𝑎𝑡𝑡𝑎𝑖𝑛𝑒𝑑; 𝑥 𝑖𝑠 𝑎 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑖𝑛 𝑡ℎ𝑖𝑠 𝑒𝑞𝑢𝑎𝑡𝑖𝑜𝑛

For the genuine EUBS: Each worker and employer contributes a/2% of the gross salary every month (so that the total sum of the contribution is equal to a% of the gross salary) and multiplied by any national extra coefficients as detailed elsewhere in the analysis. The value of x is derived from the models and is set to be revenue-neutral.

𝐵𝑎𝑠𝑖𝑐 𝑝𝑎𝑦 − 𝑖𝑛 = 𝑥 ∗ 𝑔𝑟𝑜𝑠𝑠 𝑠𝑎𝑙𝑎𝑟𝑦 ; 𝑥 =𝑎

2𝑎𝑛𝑑 𝑖𝑡 𝑖𝑠 𝑎 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑖𝑛 𝑡ℎ𝑖𝑠 𝑒𝑞𝑢𝑎𝑡𝑖𝑜𝑛 The values of parameters x, z and a were validated by the simulations undertaken for the project.

In their study, Beblavý and Maselli (2014) devote a lot of attention to the revenue side of an EUBS. A first issue that they explore is what type of taxation could be used to finance the supranational fund. The authors examine three mechanisms: a dedicated tax on consumption or labour, or a contribution from national governments that is not directly linked to a specific tax. For the genuine EUBS, they propose to use a payroll tax because this generates a clear link between the benefits and the contributions of the scheme. A disadvantage of this tax is that it potentially raises the tax wedge on labour costs, which is already high in many EU countries. Moreover, when the payroll tax is linear, it potentially undermines to some extent non-linear social-security contribution systems (e.g. in which low wages are subject to lower social contributions) that exist in some countries. In their simulations, Beblavý and Maselli (2014) set the pay-in to the harmonised EUBS equal to 0.5% of nominal compensation. This rate was selected because it roughly balances the system. For the reinsurance model, the authors suggest a funding mechanism that is based on a contribution by governments rather than a dedicated tax.

A second issue that Beblavý and Maselli (2014) address is whether the supranational fund should be

pay-as-you-go or funded. The pay-as-you-go system could result in surpluses and deficits, since the

contributions are proportional to the average, long-term, expected annual expenditure. In this pay-as- you-go system, surpluses are used to cover potential future deficits. The funded system, in contrast, is based on a yearly contribution to be paid until a predetermined amount of funds is gathered. In this case, the pay-in used in the simulations is equal to 0.1% of GDP, which has to be paid annually until 0.5% of EU GDP is collected. Pay-in is restarted if the supranational fund falls below the 0.5% cut-off. In

another recent paper, Beblavý et al. (2015a) use the same parameters to set up the pay-in and also propose to halt it when 0.5% of EU GDP is attained. In equivalent systems where the trigger is not too low, it would function as a start–stop system.

In a series of related studies, Dullien (2007; 2012) develops a basic unemployment insurance scheme that is financed through a contribution from employees or employers (or both). In the basic case, his simulation results suggest that the average annual financing volume would reach €54 billion, which could be financed with a payroll tax of 1.75%. When extended benefits are possible, the size of the scheme would go up to €62 or 64 billion, which could be financed through a payroll tax of 2.02% and 2.04% respectively (depending on whether extended benefits are triggered for individual countries or at the level of the EMU). Based on their simulations, Dolls et al. (2014) conclude that the average benefits granted during 2000–13 (about €49 billion annually) could be covered by a contribution rate of 1.6% on employment income (a uniform rate across countries). In this scenario, Austria, Germany and the Netherlands would have paid the largest net contributions while Latvia and Spain would have received the largest net benefits.

This leads us to the following proposal.16

The financing of the equivalent EUBS studied in this research project works as follows: each country contributes x% of its GDP every quarter (multiplied by national extra coefficients as detailed elsewhere in the analysis), until this cumulates to z% of EU GDP, at which point countries stop their contributions to the supranational fund. If the balance drops below z% of EU GDP, contributions restart (start-and- stop). The logic of holding the z% in reserve is to avoid or at least decrease large additional contributions by member states precisely during the period of economic malaise. The likelihood of the negative balance obviously decreases with higher x and higher z.

In other studies, we have previously suggested that x = 0.1 and z = 0.5. The appropriateness of these coefficients was confirmed by the simulation exercises.

The financing of genuine EUBS works in a similar, but not identical way: each worker and employer contributes a/2% of the gross salary every month (so that the total sum of the contribution is equal to a% of the gross salary) and multiplied by national extra coefficients as detailed elsewhere in the analysis. We propose that the parameter (a) is set to balance the fund on average. This implies that the fund would be in deficit in approximately half of the years in which it would operate and in surplus during the other half. If parameter (a) is set to a higher level, then – depending on the calibration – it would both create reserves and decrease the percentage of years in which the fund would run an annual deficit. Still, to prevent an infinite aggregation of reserves, there would need to be a start–stop mechanism similar to the one proposed above for the equivalent schemes, which would make it very complicated for the member states and individuals involved. Revenue-neutral contribution rates x are represented in Table 15 (derived from the results of Dolls and Lewney (2017)). They range from 0.35 for V8 to 1.36 for V7 for the EA-19 case and from 0.36 for V8 to 1.34 in V7 for the EU-27 case.

16 _{One important note here, which also applies to the pay-out, is that we do not account for discounting. In the} current circumstances, this seems to be a straightforward approach. One may argue, however, that in times of high inflation or high interest rates (or both), discounting is important. For more details on how this issue is tackled in the simulations, we refer to Dolls and Lewney (2017) and Jara et al. (2017).

Table 15. Revenue-neutral contribution rates x (as a % of employment income)

Variant EA-19 EU-27

V5 0.84 0.82 V6 0.44 0.50 V7 1.36 1.34 V8 0.35 0.36 V9 0.59 0.58 V10 1.01 0.99 V11 0.81 0.80 V12 0.78 0.77 V13 0.84 0.82 V14 0.80 0.78 V15 0.87 0.84 V16 0.84 0.82 V17 0.84 0.82 V18 0.84 0.82

Note: The revenue-neutral contribution rates are a percentage of employment income without experience rating or claw-back. They balance the supranational fund at the EA-19/EU-27 level over the period 1995–2013.

Source: Dolls and Lewney (2017).