Does it pay to work?

252. Once inactive, what are the financial consequences linked to a return to work? As argued above, this question will concern only part of the disabled population drawing benefits, in particular those on temporary or partial benefits. Therefore, taking up part-time or full-time work should be financially attractive for those who are considering this step. Figure 4.4 (and Annex Figure 4.A.2) demonstrate that this is not always the case:

Figure 4.4. Taking up work can be very costly for many beneficiaries

Average effective tax rates for a 40-year old disabled single person, 2004a

0 20 40 60 80 100 120 40 60 80 100 120 140 160 180 200 % of Average Earnings AET R 0 20 40 60 80 100 120

Norway permanent DI Norway temporary DI

Poland full DI Poland partial DI

Switzerland

a) Average effective tax rate (AETR) is the percentage of earnings that is taxed away via increased taxes and reduced benefits when taking up work. Take up of work at between 33% and 200% of average production worker wage (APW). The person is assumed to be on disability benefit after having worked at 100% of APW.

Source: Special module of OECD tax/benefit model. Information provided by national authorities.

• In Norway, AETRs are higher for temporary than for permanent disability benefits, though one would expect recipients of the former to be more likely to consider returning to work. When returning to a lower-paid (or part-time) job which pays less than 70% of average earnings, AETRs are between 50% and 75%. At 70% of average earnings, AETRs jump to very high levels close to and above 100%, due to complete withdrawal of benefits. Only when earning well above average earnings do AETRs return to somewhat lower levels.

• Polish partial disability benefit recipients face the lowest AETRs across the three countries. However, due to the earnings disregard which is reduced at about 70% and suspended at about 130% of average earnings, disability benefit recipients returning to work at 80% of former earnings are penalised with regard to those returning to work at either 60% or 100% of former earnings. As there is no such earnings disregard for full disability benefit recipients in Poland, AETRs are much higher up to two-thirds of average earnings.

• In Switzerland, effective taxation is lowest when returning to a job with very low earnings, below one-third of the average wage. This is because earnings can be accumulated without benefit loss including means-tested supplements up to the first graduation step. However, when returning to the former earnings level (i.e. average earnings), AETRs are at about 80% for disabled persons without children and close to 100% for those with children.

• The household composition can influence financial work incentives. In Norway and Poland, AETRs are highest for disabled persons who live with an inactive spouse and without children, for both types of disability benefits considered. In turn, in Switzerland, couples with children with a working spouse have to face considerably higher AETRs when the disabled partner returns to work. In this constellation, AETRs exceed 100% in the range between 40% and 100% of average earnings. The high level of effective taxation for couples with children is due to the child supplement which is paid without a means-test.

253. The discussion above has focused on inactive disability benefit recipients and the consequences when taking up work. A different yet important question arises for those disabled persons who are in work drawing a partial (“graduated”) disability benefit and who are considering to work more hours. Table 4.5 considers the financial consequences of increasing working hours for a disabled person, in four steps: from 0 to 10 hours (“marginal work”), from 10 to 20 hours (half-time work), from 20 to 30 hours (part-time work) and from 30 to 40 hours (full-time work). The person is assumed to have worked at average earnings before having become disabled and again taking up work at this earnings level and receiving graded pensions, if eligible.

254. There are several “zones” of increases in working hours which actually penalise disabled persons who work more, i.e. with marginal effective tax rates over 100%, and therefore encourage persons to stay in their current benefit position despite their wish to become more active due to, for instance, improvements in their health condition. Such “zones” typically occur when a disability benefit is suspended – taking account of other benefit reductions and taxation:

Table 4.5. Increasing working hours may penalise recipients of partial disability benefits

Marginal effective tax rates for beneficiaries of full or partial disability benefits, 2004a

0>>10 hours 10>>20 hours 20>>30 hours 30>>40 hours marginal work half-time work part-time work full-time work

Norway Single 62 85 146 36

Couple without children

(spouse inactive) 67 85 167 36

Couple with children (spouse

earning 2/3 APW) 53 86 151 36

Poland Single 71 35 73 35

Couple without children

(spouse inactive) 75 35 73 35

Couple with children (spouse

earning 2/3 APW) 43 50 73 35

Switzerland Single 26 138 113 31

Couple without children

(spouse inactive) 58 130 110 41

Couple with children (spouse

earning 2/3 APW) 19 197 154 31

Full Disability benefit

Increase in working time

Temporary disability benefit Partial disability benefit

a) Average earnings refer to average production worker wage (APW). Marginal effective tax rate (METR) is the percentage of earnings that is taxed away via increased taxes and reduced benefits when increasing working hours. The hourly wage is at the APW level throughout. The person is assumed to be on partial disability benefit, if available after having worked at APW earnings. Estimates refer to a 40-years old single person with an earnings history of 22 years at APW earnings. Figures in italics refer to situations where no more partial disability benefits are granted.

• In Norway, a move from half-time to part-time work results in net income losses, in all three household constellations considered.37 _{However, METRs are also very high when disabled}

persons move from marginal to half-time work. The very low net gain in income despite doubling gross earnings is due to decreases in the partial disability benefit and increases in social security contributions and, in particular, taxes.

• In Poland, partial disability benefit recipients face lower METRs when increasing work in 10- hour steps until full-time work because of the earnings disregard. There are, however, higher effective taxes around the part-time zone because this is where the full earnings disregard is reduced by a flat-rate amount (about one-quarter of net national wage). This encourages those disabled people who are able to increase work to move to full-time directly or else to rather marginal increases.

• In Switzerland, disabled persons considering increasing their work from marginal to half-time work or from half-time to part-time work are financially penalised, and heavily penalised when they have children. This also holds for increases from marginal to part-time work directly (data not shown).

• In all three countries, METRs return to “normal” levels of 30-40% when moving from part-time to full-time work, i.e. once all disability payments have been suspended.

D. Summary and conclusion

255. The different tax/benefit systems embed a number of “disability benefit traps” for those disabled persons who consider taking up work, especially half-time or part-time work. Financial disincentives typically arise when graduation steps change or disability or other benefits are suspended. The problems are even larger when considering disabled persons who already combine a partial disability benefit with a half-time job and wish to increase working hours. In Poland, more than three-quarters of their increase in gross earnings would be taxed away, and in Norway and Switzerland, they would even face a METR in excess of 100%.

256. The solution to these benefit traps cannot, of course, simply consist in reducing disability benefit levels, given the equity objectives of the schemes and the fact that many of the beneficiaries cannot be expected to work. There are alternative ways to make work for disability beneficiaries more attractive, namely by raising the net return from earnings. This can be achieved via different approaches or a mix of them:

• The current regulations for earnings disregards could be refined by a better phasing out of counting benefits against earnings. The earnings disregard could also be expanded to full disability benefit recipients.

• Graduation of benefits could be refined and should be harmonised in cases where different graduation systems exist, such as in Switzerland.

37. This occurs because the disability benefit is suspended beyond 50% work capacity. Together with the earnings disregard of around 20% of average earnings, this means that benefits stop at about 70% of average earnings, except the flat-rate family benefit for dependant children in the household.

• The possibility to apply a means test to special supplements (e.g. for children) could be considered. Proportional supplements to disability benefits create significant disincentives to take up work or increase working hours.

• Particular disincentive problems arise in the earnings segments where disability benefits are suspended fully. Such breaks could be tackled with carefully designed in-work benefits for disability beneficiaries taking up work.

• Finally, a better coordination of different benefit schemes is needed. The current design of family and housing benefits in Poland, for instance, clearly lead to conflicting incentives for disability beneficiaries.

3. Rising employer incentives

257. While the issue of work incentives for disability beneficiaries and how best to design schemes to avoid benefit traps has recently received much attention by policy makers, this seems to be less the case when it comes to employers’ incentives. However, the financial consequences for employers of keeping disabled employees or of hiring persons with disabilities need to be taken into account for successful integration and re-integration policies. A study by the Polish Central Statistical Office for the year 2004 has shown that just 5% of Polish employers would consider employing a disabled person, despite a range of subsidies and other incentives in place. Similarly, a recent study in Switzerland concluded that only 13% of those with a new disability in 2001/2002 were retained by their employer (Baumgartner, 2004). The following section discusses the different instruments which are currently in place in the three countries, as summarised in Table 4.6, and points to existing problems of take-up and potential solutions.