Alternatives for financing social security in Luxembourg by resident and cross-border households
Given the rapidly evolving structural socio-demographic determinants in Luxembourg (ageing, migrations, cross-border households) and social needs induced, the concern about the funding of the Luxembourg social security system is high on the agenda. This concern could become even more pressing over time, given Luxembourgs specificity in several respects. According to the 2024 Ageing Report of the EPC’s Ageing Working Group, Luxembourg might face an increase of age-related expenditure from 17.2% of GDP in 2022 to 27.9% in 2070, mostly due to pensions (+ 8.3% of GDP over the period). This is the biggest increase expected in EU-countries, a first particularity for Luxembourg. A second specificity is the importance of cross-border commuters in the Luxembourg economy. These represent 43% of total employment in 2022. Given such a context, the countrys social players are looking for avenues of reflection for future concrete proposals. This paper precisely aims to contribute to such a debate. It examines day-after impact of hypothetical parametric changes in social contributions and personal income taxes (the “alternatives”) on the distribution of household disposable income and total public financial receipts from these sources for Luxembourg. Moreover and given the importance of cross-border commuters for the country, we need a microsimulation modelling EUROMOD-based covering both residents and cross-border commuters’ households, the latter population involving an essential innovative extension to previous assessments. We emphasize the structural discrepancies between residents and cross-border households in terms of socio-economic status as well as regarding gross labor and taxable income. Consequently, we show that total receipts from residents are greater than those from cross-border households, even when controlling for population size. Next, we examine 42 alternatives based on the concerns of a key Luxembourg social partner in the context of an ongoing public debate. This examination takes into account the values achieved for a triplet of standard indicators chosen for their simplicity and acceptability to a broad public, and this within the framework of an independent external expertise : total revenues (cross-border households included), the inequality Gini coefficient and the poverty rate (the latter two for the resident population only). We then complete our detailed overview with an evaluation of each alternative according to the selected dimensions altogether. Finally, we evoke a basic “Global Performance Index” which may enlighten conclusions derived from a one or two-dimensional analysis. Although the analysis is specific to Luxembourg, the policy alternatives and methodology considered here may also be relevant for other countries with comparable socio-economic fundamentals, particularly in the context of the EU-wide concern regarding the fiscal implications of population ageing.
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Read MoreThe direct and indirect effects of green tax reform in Belgium. A micro-macro approach.
Carbon pricing combined with revenue recycling through lower labor income taxation achieves carbon mitigation and a decrease in distortionary labor income tax. However, due to distributional concern, there is large societal opposition towards such reforms. The burden of the carbon price is higher for low-income households due to their higher relative expenditures on carbon-intensive goods, such as heating and transport. Moreover, also indirect effects of the carbon price, e.g. job loss in the economy, are feared to additionally fall on the shoulders of those same households. In this paper we combine a micro- and macroeconomic approach to gauge the distributional direct and indirect impacts of green tax reform. A computable general equilibrium (CGE) model is used to simulate impacts on commodity prices and real wage rates for different types of labor. These impacts are fed to a microsimulation model (MSM) of incomes and expenditures, so that we can gauge the distributional impact of several scenarios in green tax reform. We build on the existing top-down literature, discuss consistency between the two models, the choice of the numéraire and the (implicit) assumption on the uprating of the tax schedule and benefit amounts. Moreover, we show the importance of allowing automatic stabilizers to play out in the computable general equilibrium model, i.e. the role of progressive income taxation and benefits. In a traditional CGE, income taxation is modelled as a (macroeconomically calibrated) proportional tax rate. Change in market incomes would not change the tax burden in such model. However, since taxation is progressive, the tax burden responds to (real) changes in market income. The MSM, with the detailed modelling of the non-linear tax-and-benefit system captures this. We propose in this paper a simple bottom-up feedback, in which we update the proportional tax rates in the CGE with the results of a first run of the MSM, as an alternative to the estimation of a parametric (macroeconomic) progressive tax-and-benefit function to be included in the CGE. Not accounting for automatic stabilizer, overestimates the revenue recycling budget available by one half. This is also relevant for fully integrated CGE-MSM models. We find that medium-skilled employees are on average net losers of the impacts on prices and labor demand. Traditional revenue recycling schemes, such as lumpsum transfers or linear labor income tax cuts cannot overturn this welfare loss for medium-skilled, while still guaranteeing progressivity of the net impacts of the reform. However, more targeted revenue recycling schemes, inspired by the existing low wage subsidies in Belgium (the work boni) are equipped to target revenue recycling towards those most hit by the impacts on the labor market. However, robustness checks show that the adequacy of such revenue recycling design depends on the labor market assumptions in the model, specifically whether the decreased demand for medium-skilled can be translated in higher involuntary unemployment in equilibrium.
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