“The debate before the election over tax cuts for pensioners is based on false premises. In actual fact those in work are taxed harder than pensioners in Sweden,” said Helena Svaleryd and Daniel Waldenstein at the Research Institute for Industrial Economics (Institut för Näringslivsforskning – IFN) in a debate article in the Dagens Nyheter (DN) daily on Wednesday.
Svaleryd and Waldenstein argue that if you factor in employer contributions, which at least in part constitute a straight tax, then wage earners pay significantly more, even when taking into account the in-work tax credit introduced by the Alliance government in stages over the mandate period.
“Everybody who knows the Swedish tax system knows that pay is taxed in several stages. Aside from municipal and state income taxes, incomes are also taxed via payroll levies. Even if employer contributions are paid in by the employer it is the employee who in the end pays as incomes decline accordingly,” the researchers argued.
Helena Svaleryd, who is a member of the Swedish Fiscal Policy Council – a body set up by the government in 2007 to provide an independent evaluation of the Swedish Government´s fiscal policy, suspects that the election year could be a contributory factor in why political rhetoric is at odds with current research and available facts.
“One could imagine that as the pensioners are one of Sweden’s largest voter groups, this plays a significant role during an election year when pensioners’ core issues also become the politicians’ core issues,” Helena Svaleryd told The Local on Wednesday.
In recent weeks the Red-Green opposition and representatives for individual Alliance parties have been striving to outdo each other in promising largesse to Sweden’s pensioners and decrying the “penalty tax” levied on the group.
Social Democrat leader Mona Sahlin, speaking in Stockholm on Tuesday, went as far as to promise to spend 27 billion kronor ($3.7 billion) on wiping out the “discrimination” between the income taxes paid by pensioners and wage earners.
The researchers argue that there exists no “penalty tax” on pensioners and in fact wage earners pay more, pointing out that the payroll tax (roughly 20 percent of the total employer contributions and currently standing at 6.03 percent), amounted to 87 billion kronor in 2009, while the in-work tax credit amounted to only 66 billion.
“While there may be good reasons from a redistributive policy perspective to compensate weaker groups in society during a recession, all this talk of ‘penalty taxes on pensions’ just serves to muddy the issue, when openness and clarity are what is needed,” Svaleryd told The Local.
In their article Svaleryd and Waldenstein also slammed the claim, forwarded in a recent report from the Swedish National Pensioner’s Organisation (Pensionärernas Riksorganisation – PRO) that Sweden is the only country that taxes the elderly harder than wage earners, citing an OECD report entitled “Pensions at Glance (2009)” to support their argument.
“Pensioners pay higher income taxes (excluding social charges) than wage earners in a majority of the researched countries, for example Finland, Japan and Germany,” they wrote.
The researchers observed meanwhile that it is very difficult to compare pensions internationally as systems are so different, but even after tax deductions Swedish pensioners were well off in an international perspective.
“In certain countries, such as Sweden and the Netherlands, pensions are, in an international perspective, relatively high and are taxed relatively highly. If you take the US as an example then you can see that while taxes are lower on pensions, pay outs as a proportion of final incomes earned are also lower,” Svaleryd said.
Furthermore it is argued that pensioners as a group have also benefited from measures to encourage work as the pension system is at least in part based on the contributions of wage earners. They have also benefited disproportionately from the abolition of wealth taxes and changes to property taxes, the researchers pointed out.
According to official Statistics Sweden wealth figures from 2007, those aged between 65 and 74 are the wealthiest group in the country, with average wealth after deduction for debts of 1.34 million kronor, while the average for those aged 20-64 was only 682,000 kronor.
Svaleryd and Waldenstein furthermore accused finance minister Anders Borg of jeopardising the principle of the pensions system as an “autonomously regulated welfare system” by using finance policy to compensate for lower pensions resulting from higher unemployment.
Anders Borg on Wednesday defended the billion kronor tax cuts announced in the spring budget to compensate pensioners for the fall out of the finance crisis on the pensions system.
“I don’t think that anyone involved in the pensions agreement predicted that we would have these massive hits on stock prices and the economy. It is not reasonable that pensioners should be so affected by this,” he told Dagens Nyheter.
While Svaleryd agreed that the extent and impact of the crisis was difficult to forecast, she argues that the move should be seen as a warning that does not bode well for the future autonomy of the pensions system.
“What happens in the future when the workforce declines?, as we know it will. If every time pensions payments decline voices are raised across the board for tax cuts, then the principle that the system should be autonomous from finance policy will be eroded.”