Tag: Poland

Financial Support for Families with Children and Its Trade-Offs: Balancing Redistribution and Parental Work Incentives

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Authors: Michal Myck, Anna Kurowska and Michal Kundera, CenEA.

Reforms of tax-benefit system of financial support for families with children have a broad range of consequences. In particular, they often imply trade-offs between effects on income redistribution and work incentives for first and second earners in the family. Understanding the complexity of the consequences involved in reforming family policy is crucial if the aim is to “kill two birds with one stone” namely to reduce poverty and improve incentives to work. In this brief, we illustrate these complex trade-offs by analyzing several scenarios of reforming financial support for families with children in Poland. We show that it is possible to create incentives for second earners in the family to join the labor force without destroying the work incentives of the first earners. Moreover, the same reform would allocate resources to families with lower incomes, which could result in a direct reduction of child poverty.

Financial support for families with children is an important and integral part of the broad family policy package, the goals of which fall into two basic categories of reducing child poverty and increasing labour market activity of parents (Whiteford and Adema, 2007; Björklund, 2006; Immervoll, et al., 2001). However, the particular policy aimed at one of these objectives may be detrimental to the achievement of other goals. For example, family/child benefits may directly increase family income and thus reduce child poverty. These same benefits could have a negative effect on parental incentives to work, particularly for so-called second earners, usually mothers (see e.g. Kornstad and Thoresen, 2007). However, employment of both parents often turns out to be crucial for a long-term poverty reduction (Whiteford and Adema, 2007).

The trade-offs implied by the different family policy instruments are often poorly understood or treated superficially in the policy debate. The effect of this lack of understanding may result in badly designed policy reactions to identified problems, which in turn may imply that one of the objectives is achieved at the cost of the other, or even that policies work against all of them in a longer perspective.

Using the Polish microsimulation model SIMPL, we simulate modifications of several elements of the Polish tax and benefit system to demonstrate the complex nature of trade-offs between income and employment policy, and within employment policy itself. The underlying assumption of the analysis is that any effective policy that aims at lowering child poverty in the long run ought to realize and address issues of parental labour market activities. Governments should therefore aim at a design of financial support for families to provide assistance to poor households and at the same time strong work incentives for parents.

The Polish system of support for low-income families, Family Benefits, consists primarily of Family Allowance (FA) with supplements. These are means-tested and are available to families with net incomes below 504 PLN (€121) per month and per person. The value of the FA depends on the age of the child and ranges from 68 PLN to 98 PLN (€16.40 to €23.60) per month. For eligible parents this is supplemented by additional means-tested payments to such groups as lone parents, families with more than two children, and those with school-aged children. Eligibility for Family Benefits is assessed with reference to a threshold, which once exceeded makes the family ineligible to claim the benefits. This point withdrawal of benefits implies very high effective marginal tax rates and has significant implications for average effective rates of taxes (see Myck et al., 2013). In addition to Family Benefits, financial support for families is also channelled through the tax system. Tax-splitting (joint taxation) is available to married couples and lone parents, and since 2007 parents can set their tax liabilities against the Child Tax Credit, which is a non-refundable tax credit, the maximum value of which is 1,112.04 PLN (€268) per year for every dependent child.

The starting point for our analysis, and a reference in terms of potential costs of the reform, is the move to tapered withdrawal of Family Benefits (System 1). For this purpose we use the rate of withdrawal at 55%, which is the rate used in a broadly studied in-work support programme in the UK, the Working Families’ Tax Credit (WFTC) in the late 1990s and early 2000s (see, e.g.: Blundell et al., 2000; Brewer et al., 2006; Clark et al., 2002). Application of the taper implies that with an increase of net income of 1 PLN beyond the withdrawal threshold, the total value of benefits is reduced by 0.55 PLN. Such a change would imply greater certainty and predictability of benefit receipt, compared to the current point withdrawal system. However, as it extends the availability of benefits to families who currently no longer qualify for them, it would carry additional costs. We estimate this cost to be in the range of about 1.04 billion PLN (€250mln) per year, an increase in the total value of family benefits by about 14%.

Changes in Family Benefits under System 2 involve simple increases in the values of Family Allowance, which is raised by 20% given the above cost benchmark of 1.04 billion PLN. The final reform to Family Benefits (System 3) combines introduction of the withdrawal taper (at 55%) with a bonus system for two-earner families with the specific aim of providing stronger work incentives for second earners. The bonus consists of an increase in the level of the withdrawal threshold by 50% for families where both parents work compared to the baseline threshold value.

The first reform of Child Tax Credit (System 4) assumes an increase in the value of the CTC by 19.8% (calibrated to cost same 1.04 billion PLN), while the second uses this tax credit instrument to reward two-earner status. In the latter case, double-earner couples are granted an additional value of the credit (92.70 PLN per month). The cost of this reform is again calibrated to the level of other reforms by adjusting the earnings requirement set for both parents to qualify as double-earner couples. This calibrated requirement is 2,324.50 PLN per month and per person, which is equivalent to 176.5% of the minimum wage.

The assumptions underlying the modelled scenarios are very clearly reflected in the (static) distributional effects of the simulated changes. The proportional changes in incomes among families with children by population decile groups resulting from the simulated reforms are demonstrated in Figure 1A for Systems 1-3 and Figure1B for Systems 4-5.

Figure 1. Distributional consequences of modelled reforms: Proportional changes in incomes of families with children by income deciles.
CenEA_fig1
CenEA_fig2 
Source: Authors’ calculations using the SIMPL microsimulation model on PHBS 2010 data.

Figures 2 and 3 show how the modelled reforms would affect incentives to work for first and second earners measured as average changes in replacement rates[1] (RRs) by centiles of the baseline distribution of replacement rates for modelled families. The RR for the first earner is the ratio of the family income when neither partners work and the family income when the first earners works full time. The RR for the second earner is the ratio of the family income when only first earners work and the family income when both partners work full time. Lowest values of RRs imply the strongest incentives and highest values reflect the weakest incentives to work. When the difference in RR between the Baseline and a particular System is greater than zero it implies that this System increases incentives to work for a particular earner compared to the Baseline. This approach provides evidence on the trade-off between improving work incentives for those facing strong and weak incentives in the baseline system. The pattern that emerges from Figures 2 and 3 reflects to some extent the distributional effects of the chosen reforms (Figure 1). This is because richer families are usually those with high labour market incomes and thus low RRs (high labour market incentives), while poorer families face weaker incentives given their low actual (or potential) earnings, and thus face higher replacement ratios.

Figure 2. Changes in RRs by baseline work incentives – first earners
CenEA_fig3
Source: Authors’ calculations using the SIMPL microsimulation model on PHBS 2010 data.
Notes: Based on a sample of couples with children. System 5 does not change first earner incentives.
 
Figure 3. Changes in RRs by baseline work incentives – second earners
CenEA_fig4
Source: Authors’ calculations using the SIMPL microsimulation model on PHBS 2010 data.
Notes: Based on a sample of couples with children.

Apart from the well-established trade-off between equity and labour market concerns, our paper draws attention to the need to balance out first and second earner work incentives as well as incentives by the degree of existing financial motivation to work.

Reforms at the two extremes of the distributional spectrum, namely an increase in the level of Family Benefits (System 2) and a Child Tax Credit bonus for two-earner couples (System 5), result in very different incentive effects. The former significantly weakens incentives of both first and second earners in couples, while the second, which specifically directs resources at second earners, produces important improvements in incentives to work for second earners. However, these gains focus on the part of the spectrum of the baseline distribution of work incentives where these are already strong. This contrasts with a reform in which a two-earner “bonus” is created as part of Family Benefits (System 3). This system increases the generosity of in-work support for first earners in couples in a similar way to the benchmark reform. At the same time, however, it improves the attractiveness of work for second earners by raising the level of income from which benefits are withdrawn for couples in which both partners are working.

This arrangement balances out the negative influence on second earner incentives of the income effect of making work more financially attractive for first earners, which does not happen under our benchmark scenario (System 1). Moreover, we demonstrate that trying to increase work incentives through higher levels of Child Tax Credit available to families would have a positive effect on the work incentives of a large number of families, in particular on first earners in couples. The flip side of this effect would be some negative incentive effects on second earners, but generally both types of effect would be very low given the assumed cost restriction of the modelled reforms.

Naturally, there is an endless number of ways in which a billion PLN can be spent on families with children. As we argued above, each type of reform will have a complex set of consequences on household incomes and incentives to work for parents. The breakdown of employment pattern in Poland suggests that to increase labour market activity, the family support policy should focus on trying to make work pay for second earners in couples, most of whom are women. As we demonstrated this can be done in such a way as to balance out incentives for first earners and provide strong incentives to those second earners who currently face the weakest incentives to work. At the same time, resources would be directed to families in the lower half of income distribution that could result in direct reduction of child poverty.

References

  • Blundell R., A. Duncan, J. McCrae and C. Meghir (2000) The Labour Market Impact of the Working Families’ Tax Credit, Fiscal Studies, vol. 21(1), pp. 75-104.
  • Brewer M., A. Duncan, A. Shephard and M.-J. Suarez (2006) “Did Working Families’ Tax Credit Work? The Impact of In-Work Support on Labour Supply in Great Britain”, Labour Economics, vol. 13, pp. 699-720.
  • Björklund A. (2006) Does family policy affect fertility? Journal of Population Economics, vol. 19 (1), pp. 3-24.
  • Clark T., A. Dilnot, A. Goodman, and M. Myck (2002) Taxes and Transfers, Oxford Review of Economic Policy, vol.18 (2), pp. 187-201.
  • Immervoll H., H. Sutherland, K. de Vos (2001) Reducing child poverty in the European Union: the role of child benefits, in: Vleminckx K. and Smeeding T.M. (eds) Child well-being, Child poverty and Child Policy in Modern Nations. What do we know? Revised Edition; The Policy Press: Bristol.
  • Kornstad T. and T. O. Thoresen (2007) A Discrete Choice Model for Labor Supply and Child Care, Journal of Population Economics, vol. 20 (4), pp. 781-803.
  • Myck, M., A. Kurowska, and M. Kundera (2013) “Financial Support for Families with Children and its Trade-offs: Balancing Redistribution and Parental Work Incentives”, Baltic Journal of Economics, 13(2), 59-84.
  • Whiteford P. and W. Adema (2007) What Works Best in Reducing Child Poverty: A Benefit of Work strategy? OECD Social, Employment and Migration Woking Papers, nr 51, OECD, Paris.

 

[1]For the couples in the subsample we compute three sets of family-level incomes, conditional on employment either of the first earner (who is the person with higher expected earnings in a couple) or of both partners; Y(1,1) for the scenario where both partners are employed (full-time); Y(1,0) for the scenario where the first earner is employed (full-time); Y(0,0) for the scenario where both partners are not employed. This allows us to compute replacement ratios for the first earner (RR1) and the second earner (RR2) for each of the analysed tax and benefit systems (S): RR1(s,j)=Y(s,j)(0,0)/Y(s,j)(1,0) and RR2(s,j)=Y(s,j)(1,0)/Y(s,j)(1,1).

 

Increasing Resources for Families with Children Through the Tax System: Recent Reform Proposals from Poland

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This brief discusses the consequences of a recent reform proposal that aims to redistribute resources to low-income families with children through the income tax system in Poland. The proposed reform replaces the current child tax credit with additional amounts of the universal tax credit, and by changing the sequence in which tax deductions are accounted for, it increases resources of low-income families with children by about 1.7 billion PLN per year (0.4 billion EUR). The brief examines four possible ways of additional tax system modifications that would make the reform package neutral for the public finances, and presents distributional implications of the reforms.

The level and structure of financial support for families with children has become an important policy focus in Poland; a country that faces high levels of child poverty and one of the lowest fertility rates in Europe (Immervoll et al., 2001; Haan and Wrohlich, 2011; Eurostat, 2013). In this brief, we outline recent tax reform proposals that aim to increase financial support for low-income families with children through the tax system. A range of such potential reforms has been examined in Myck et al. (2013b); a report prepared for the Chancellery of the President of the Republic of Poland. One of the options became the key element of the President’s family support program Better climate for families proposed in May 2013. Below we discuss its main features and various options for financing the proposals.

The proposed modification of financial support for families would replace the current child tax credit with additional amounts of the universal tax credit conditional on the number of children, and increase tax advantages for families by changing the sequence in which tax credits are accounted for in a way that is favorable for families with children (Chancellery of the President of Poland, 2013). The main beneficiaries of this reform would be low-income families with children whose income is too low to take full advantage of the current child-related advantages. The overall cost of the reform would amount to about 1.7 billion PLN (0.4 billion EUR). In the final section of the brief we discuss potential ways of making the reform budget neutral.

The analysis has been conducted using CenEA’s micro-simulation model SIMPL on reweighted and indexed data from the 2010 Household Budget Survey (HBS) collected annually by the Polish Central Statistical Office (see Morawski and Myck, 2010, 2011; Myck, 2009; Domitrz et al., 2013; Creedy, 2004).

Financial Support for Polish Families in 2013

In Poland, financial support for families with children depends on the level of family income and the demographic structure of the household. The system consists of two main elements – family benefits on the one hand, and tax preferences for families with children on the other. Following Myck et al. (2013a), we define financial support for a family j (FSFj) as the sum of family benefits received by the family (FBj), and tax preferences that families with children collect in the PIT system is defined as the difference in the level of tax liabilities and health insurance contributions paid by the family (PITHIjD0 – PITHIjDn) supposing they have no children (D0) and on condition them having n number of dependent children (Dn):

FSFj = FBj + (PITHIjD0 – PITHIjDn)             [1]

Figure 1a presents the current level of the financial support for single-earner married couples and Figure 1b presents the same for single parents with one and three children in relation to the level of gross earnings.

Family benefits

Family benefits, which include family allowance with supplements, childbirth allowance and nursing benefits, are means-tested and related to the number and age of dependent children in the family and specific family circumstances. Family benefits are granted only to low-income families and are subject to point withdrawal once the family crosses the income eligibility threshold (539 PLN of net income per person). For example, the stylized married couples in Figure 1 lose family benefits when their monthly gross income exceeds 2,060 PLN if they have one child and 3,435 PLN if they have three children (for single parents these thresholds equal 785 PLN and 1,825 PLN respectively).

Figure 1. Monthly level of financial support received by families with one and three children dependent on their age and family gross income in 2013 (PLN/month)
(a) Married couple with one spouse working
b) Single parent working
figure1_vertical
Note: FB – family benefits; CTC – child tax credit; joint taxation preferences: UTC – additional amount of universal tax credit; IB – shift of tax income bracket. In case of the single parent alimonies from the absent parent are assumed at the median value from 2010 data, which is 410.50 PLN for 1 child and 724.67 PLN for 3 children. Gross income of the single parent includes income from work only. Alimonies are taken into account for FB income means testing. Source: Myck et al. (2013a).

Tax preferences

Taxpayers with children can deduct a non-refundable child tax credit (CTC) from the accrued tax, with the maximum values of the CTC related to the level of universal tax credit available to all tax payers (UTC is 46.37 PLN per month). For each of the first two children in the family, taxpayers can deduct up to two values of the UTC (92.67 PLN per month), for the third child up to three values (139.00 PLN per month) and for the fourth and following children up to four values of the UTC (185.34 PLN per month). The CTC is not available for high-income parents with one child (whose annual taxable income exceeds 112,000 PLN per year).

Further tax advantages are available for single parents through joint taxation, which translates into substantial gains in particular for high-income parents. As Figure 1 shows, single parents whose gross income exceeds the second tax income bracket (15,745 PLN per month) gain up to 1,044.19 PLN per month if they have one child and 1,368.54 PLN if they have three children. With the same income levels, the system grants nothing to married couples if they have one child and 324.34 PLN if they have three.

In the current system, the CTC can be deducted from the accrued tax only after the full amount of UTC and the tax-deductible part of health insurance (HI) contributions have been exhausted. As a consequence, there is a large group of low-income families whose income is too low to take full advantage of the CTC. As Figure 2 illustrates, the higher the number of children is in a family, the lower is the proportion of families who take full advantage of the credit. Although the percentage of those using the full CTC is 76.1% for families with one child, it decreases to 67.6% for those with two children and is as little as 30.8% for families with three or more kids. Over 40% of the latter use only half of the CTC they are entitled to.

Figure 2. Use of maximum amount of CTC by number of children

figure2

Note: Proportions of families with taxable income satisfying other conditions for CTC. Source: Myck et al. (2013a).

Recent Reform Proposals

In a recent report for the Chancellery of the President of Poland, we have analyzed several options for the reform of the family-related elements of the tax system (Myck et al., 2013b). One of these has become the key element of the presidential reform proposal (Chancellery of the President of Poland, 2013). The reform assumes that the CTC is replaced with the amounts of the Universal Tax Credit conditional on the number of children in the family in such a way as to maintain the current maximum advantages offered to families through the CTC system. The main purpose of the reform is to reverse the tax deduction sequence so that tax advantages related to having children are deducted from the accrued tax before considering credits related to health insurance contributions. Such construction would enable low-income families to make greater use of child-related tax advantages, while leaving the situation of higher-income families unchanged.

Figure 3. Monthly tax advantages from the reform among families with 1-4 children (PLN/month)

 figure3

Source: CenEA – own calculation based on SIMPL model and 2010 HBS data.

Figure 3 presents monthly levels of tax advantages resulting from the proposed reform conditional on the number of children in the family and the level of gross income. We note that families with children gain from the reform if their income exceeds 735 PLN per month. Tax advantages resulting from the proposed modifications are exhausted at different levels of gross income depending on the number of children (from 2,630 PLN for families with one child to 8,010 PLN for those with four children). The higher the number of children is, the greater is also the potential maximum gain – for example, families with four children and income of 4,010 PLN per month would gain up to 311.35 PLN per month.

The results of the analysis show that, overall, 2 million households with children would benefit from this reform (below referred to as System 1). The total annual change in households’ disposable income (equivalent to the total cost for public finances) would amount to 1.69 billion PLN (see Table 1 below).

Table 1. Average annual change in households’ disposable income by number of children in Systems 1-5 (billion PLN)

No children

1 child

2 children

3+ children

Total

System 1

0,00

0,39

0,60

0,70

1,69

System 2

-0,45

-0,20

0,04

0,55

-0,08

System 3

-0,65

-0,09

0,17

0,59

0,02

System 4

-0,66

-0,15

0,23

0,59

0,01

System 5

-0,86

-0,04

0,31

0,63

0,04

 
Note: Total annual change in disposable income includes change in tax liabilities and level of social benefits. Source: Myck et al. (2013b).
 

Table 1 shows that most of the resources would be beneficial for families with three or more children (0.7 billion PLN per year), while families with one or two children would benefit about 0.39 billion PLN and 0.6 billion PLN per year, respectively.

The distribution of total income gains by income deciles is presented in Figure 4. The gains are clearly focused in the lower part of the income distribution. For example, families with children in the second income decile would receive a total of 0.4 billion PLN, while those in the bottom and third decile would recieve approximately 0.25 billion PLN. Only 0.04 billion PLN of the total cost would be distributed to families in the top income decile.

Figure 4. Distribution of total annual gains in households’ disposable income by deciles: Systems 1-5 (billion PLN)

 figure4

Note: Total annual change in disposable income includes change in tax liabilities and level of social benefits. Source: Myck et al. (2013b).

Potential Ways of Financing the Reform

Concerns about the state of public finances naturally imply questions related to the potential ways of financing any additional tax giveaways. Myck et al. (2013b) presents four alternative modifications of the tax system that make the entire package of reforms neutral for the public finances. These are:

  • System 2 – CTC reform + limitations on joint-taxation preferences for married couples (both with or without children) and single parents;
  • System 3 – CTC reform + reduction of tax income threshold from 85,528 to 68,000 PLN per year;
  • System 4 – CTC reform + reduction of tax revenue costs from 1,335 to 475 PLN per year;
  • System 5 – CTC reform + reduction of tax-deductible part of health insurance from 7.75% to 7.45%.

The overall total outcomes of these proposals for household disposable income are illustrated in Table 1 and Figure 4. The implications in terms of the redistribution of the packages – with losses among childless households and gains among those with children – are clear under all of the proposed packages, although all of the reform combinations imply small losses also for families with one child.  Total disposable income of childless households falls by 0.45 PLN per year under System 2 and by as much as 0.86 billion PLN under System 5. By shifting the majority of the costs to households without children, the latter is simultaneously the most generous for families with children since income of those with two children grows on average by 0.31 billion per year, while of those with more children see a growth of 0.63 billion PLN per year.

Figure 4 illustrates that in all of the revenue neutral reform packages, the households from the highest two deciles are the biggest losers. That the financing of the shift of resources to low-income families falls on households from the top income decile is particularly evident in the case of Systems 2 and 3 where total disposal income for these households fall by 1.64 billion PLN and 1.52 billion PLN, respectively. Since changes to revenue costs and deduction of HI contributions apply to almost all taxpayers, Systems 4 and 5 are less favorable for households from the lower deciles and generate losses for the upper part of the income distribution. However, a large part of cost is also born by households from the tenth decile (0.26 and 0.39 billion PLN, respectively).

While the combinations of tax changes presented above would be neutral with respect to the current system of taxes in Poland, it is worth noting that the policy of tax increases through the tax-parameter freezing implemented in 2009 has increased taxes by far more than the cost of the Presidential reform proposal. As we showed in Myck et al. (2013c), this policy increased taxes by 3.71 billions PLN per year, of which 2.21 billions was paid by families with children. The recent proposal could thus be thought of as a way of redistributing these resources back to families with children.

Conclusions

Financial support for families with children is an important element of government policy with implications for child poverty, labor-market participation among parents, as well as fertility (Immervoll et al., 2001; Haan and Wrohlich, 2011). In this brief, we outlined the results of a recent analysis of direct financial consequences of modifications in the Polish system of support for families through the tax system with the focus on a reform proposal presented by the Polish President in the program Better climate for families. The reform would benefit lower-income families with children at the cost of about 1.7 billion PLN. As a result, annual income of the families from the three bottom deciles would grow by 0.93 billion PLN. A high proportion of the gains (0.7 billion PLN) would go to families with three or more children.

We also presented four additional modifications of the tax system that would make the CTC reform revenue neutral. Reform packages that withdraw joint-taxation preferences and decrease the threshold of the income tax to a higher rate would be most effective in ensuring redistribution of support for low-income households. It is worth noting though, that the recent approach of the Polish government to the tax system has implied substantial increases in the level of income taxes through the freezing of income tax parameters, and these alone would be more than sufficient to finance the proposed tax changes.

References

  • Creedy J. (2004). Reweighting Household Surveys for Tax Microsimulation Modelling: An Application to the New Zealand Household Economic Survey. Australian Journal of Labour Economics 7 (1): 71-88. Centre for Labour Market Research.
  • Domitrz A., Morawski L., Myck M., Semeniuk A. (2013). Dystrybucyjny wpływ reform podatkowo-świadczeniowych wprowadzonych w latach 2006-2011 (Distributional effect of tax and benefit reforms introduced from 2006-2011). CenEA MR01/12; Bank i Kredyt 03/2013.
  • Chancellery of the President of Poland (2013). Dobry klimat dla rodziny. Program polityki rodzinnej Prezydenta RP. (Better climate for families. Family support program of the Polish President.)
  • Eurostat online database 2013 – epp.eurostat.ec.europa.eu. Date of access: 28.11.2013.
  • Haan P., Wrohlich K. (2011) Can Child Care Encourage Employment and Fertility? Evidence from a Structural Model. Labour Economics 18 (4), pp. 498-512.
  • Immervoll H., Sutherland H., de Vos K. (2001). Reducing child poverty in the European Union: the role of child benefits. In: Vleminckx K. and Smeeding T.M. (eds.) Child well-being, Child poverty and Child Policy in Modern Nations. What do we know? The Policy Press: Bristol.
  • Morawski L., Myck M. (2010).‘Klin’-ing up: Effects of Polish Tax Reforms on Those In and on Those Out. Labour Economics 17(3): 556-566.
  • Morawski L., Myck M. (2011). Distributional Effects of the Child Tax Credits in Poland and Its Potential Reform. Ekonomista 6: 815-830.
  • Myck M. (2009). Analizy polskiego systemu podatkowo-zasiłkowego z wykorzystaniem modelu mikrosymulacyjnego SIMPL (Analysis of the Polish tax-benefit system using microsimulation model SIMPL). Problemy Polityki Społecznej 11: 86-107.
  • Myck M., Kundera M., Oczkowska M. (2013a). Finansowe wsparcie rodzin z dziećmi w Polsce w 2013 roku (Financial support for families with children in Poland in 2013). CenEA MR01/13.
  • Myck M., Kundera M., Oczkowska M. (2013b). Finansowe wsparcie rodzin z dziećmi w Polsce: przykłady modyfikacji w systemie podatkowym (Financial support for families with children in Poland: examples of modifications in the tax system). CenEA MR02/13.
  • Myck M., Kundera M., Najsztub. M, Oczkowska M. (2013c). Ponowne „mrożenie” PIT w kontekście zmian podatkowych od 2009 roku (PIT freezing in the context of tax reforms since 2009). Komentarze CenEA: 06.11.2013.

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* This brief draws on recent research at the Centre for Economic Analysis in the projects financed by the Chancellery of the President of the Republic of Poland and the Batory Foundation (project no: 22078). The analysis has been conducted using CenEA’s micro-simulation model SIMPL based on the 2010 Household Budget Survey data collected annually by the Polish Central Statistical Office (CSO). The CSO takes no responsibility for the conclusions resulting from the analysis. Any views presented in this brief are of the authors’ and not of the Centre for Economic Analysis, which has no official policy stance.

Old-Age Poverty and Health – How Much Does Income Matter?

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The question concerning the material situation of older people and its consequences for their wellbeing seems to be more important than ever. This is especially true given rapid demographic changes in the Western World and economic pressures on governments to reduce public spending.  We use data from the Survey of Health, Ageing and Retirement in Europe (SHARE) to examine different aspects of old-age poverty and its possible effects on deterioration in health. The data contains information on representative samples from 12 European countries including the Czech Republic and Poland. We use the longitudinal dimension of the data to go beyond cross sectional associations and analyze transitions in health status controlling for health in the initial period and material conditions. We find that poverty matters for health outcomes in later life. Wealth-defined and subjective poverty correlates much more strongly with health outcomes than income-defined measure. Importantly subjective poverty significantly increases mortality by 58.3% for those aged 50–64 (for details see Adena and Myck, 2013a and 2013b). 

Measuring Poverty

When measuring poverty, the standard approach is to define the poverty threshold at 60% of median equalized income. This standardized measure offers some advantages, such as simplicity and comparability with already existing studies. However, there are valid arguments against its use when analyzing old-age poverty. The permanent-income theory provides arguments against current income as a major determinant of quality of life of older people. Moreover, poverty defined with respect to current income while taking account of household size through equalization, ignores other important aspects of living costs such as disability or health expenditures. Additionally, most analysis using income-poverty measures ignore such aspects as housing ownership and housing costs.

Our analysis examines different aspects of poor material conditions of the elderly. The first poverty definition refers to respondents’ wealth as an alternative to income-defined poverty. Poor households, defined with reference to wealth (“wealth poverty” – WEALTH), are those that belong to the bottom third of the wealth distribution of the sample in each country. For this purpose, household wealth is the sum of household real assets (net of any debts) and household gross financial assets. Secondly, we compare the above poverty measures to a subjective measure of material well-being. This measure is based on subjective declarations by respondents, in which case (“subjective poverty” – SUB) individuals are identified as poor on the basis of a question of how easily they can make ends meet. If the answer is “with some” or “with great” difficulty, individuals in the household are classified as “poor”.

One reflection of potential problems with the standard income poverty measure becomes visible when it is compared with the subjective measure. The graph below shows the differences in country rankings when using one or the other poverty measure.  The country with the greatest disproportion is Czech Republic. While being ranked as second according to the income measure, it is ninth according to the subjective measure.

Figure 1. Country Ranks in Old-Age Poverty According to an Income versus a Subjective Measure

Slide1

Source: Authors’ calculations using SHARE data (Wave 2, release 2.5.0).

Even more striking is the fact that the differences between ranks are not because of over or under classification of individuals as poor, but rather because of misclassification. Figure 2 shows that there is little overlap between different poverty measures. The share of individuals classified as poor according to all three measures is only 7.95%, whereas it is 60% according to at least one of the measures.

Figure 2. Poverty Measure Overlap

Slide1

Notes: Data weighted using Wave 2 sample weights. Source: Authors’ calculations using SHARE data (Wave 2, release 2.5.0).
 

Measuring Well-Being

We examine three binary outcomes measuring the well-being of the respondents – two reflecting physical health, and one measuring individuals’ subjective health. The two measures of physical health are generated with reference to the list of twelve symptoms of bad health and the list of twenty-three limitations in activities of daily living (ADLs). In both cases, we define someone to be in a bad state if they have three or more symptoms or limitations. The two definitions are labelled as: “3+SMT” (three or more symptoms) and “3+ADL” (three or more limitations in ADLs). Subjective health “SUBJ” is defined to be bad if the subjective health assessment is “fair” or “poor”. Finally, we also analyze mortality as an “objective” health outcome.

Poverty and Transitions in Well-Being and Health

There is some established evidence in the literature that poverty negatively affects health and other outcomes at different stages of life.[1] At the same time, there is little evidence on how the choice of the poverty measure might result in under- or over-estimation of the effects of poverty. We address this question by examining different poverty measures as potential determinants of transitions from good to bad states of health.

The results confirm that living in poverty increases an individual’s probability of deterioration of health. In a compact form, Figure 3 presents our results from 12 separate regressions (4 outcomes, three poverty measures). Here we report the odds ratios related to the respective estimated poverty dummies. Individuals classified as poor according to the income measure are 37.7% more likely to report bad subjective health in a later wave of the survey than their richer counterparts; they are 4.5% more likely to suffer from 3 or more symptoms; 18.7% more likely to suffer from 3 or more limitations; and 5% more likely to die. The last three effects, however, are not statistically significant.

In contrast, the effects of wealth-defined poverty and subjectively assessed poverty are 2-8 times stronger than those of income poverty, and they are also significant for all outcomes but death. Overall, wealth-defined poverty and subjective assessment of material well-being strongly correlate with deterioration in physical health (exactly the same goes for improvements in health, see Adena and Myck 2013b).

Figure 3. Poverty and Transitions from Good to Bad States Overlap

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Notes: Data weighted using Wave 2 sample weights. Source: Authors’ calculations using SHARE data (Wave 2, release 2.5.0, Wave 3, release 1, Wave 4, release 1).
 

Poverty and Mortality in the Age Group 50-64

Our analysis reveals differences between age groups and confirms the decreasing importance of income (and thus income defined poverty) with age. As compared to the average effects presented in Figure 3, for the younger age group 50–64 income poverty proves more important as a determinant of bad outcomes, with transition probabilities between 20 and 40% for all outcomes (see Figure 4). The magnitudes are closer to those of other poverty measures, but still lower in all cases. Importantly, we find that wealth-defined and subjective poverty is an important determinant of death in the age group 50–64.

Figure 4. Poverty and Transitions from Good to Bad States 50-64 Slide3
Notes: Data weighted using Wave 2 sample weights. Source: Authors’ calculations using SHARE data (Wave 2, release 2.5.0, Wave 3, release 1, Wave 4, release 1).
 

Conclusions

The role of financial conditions for the development of health of older people significantly depends on the measure of material well-being used. In this policy brief, we defined poverty with respect to income, subjective assessment, and relative wealth. Of these three, wealth-defined poverty and subjective assessment of material well-being strongly and consistently correlate with deterioration and improvements in physical and subjective health. We found little evidence that relative income poverty plays a role in changes in physical health of older people. This suggests that the traditional income measure of household material situation may not be appropriate as a proxy for the welfare of older populations, and may perform badly as a measure of improvements in their quality of life or as a target for old-age policies. To be valid, such measures should cover broader aspects of financial well-being than income poverty. They could incorporate aspects of wealth and the subjective assessment of material situations as well as indicators more specifically focused on the consumption baskets of the older population.

References

  • Adena, Maja and Michal Myck (2013a): “Poverty and transitions in key areas of quality of life”, in: Börsch-Supan, Axel,  Brandt, Martina , Litwin, Howard and Guglielmo Weber (eds.) “Active Ageing and Solidarity between Generations in Europe – First Results from SHARE after the Economic Crisis.”
  • Adena, Maja and Michal Myck (2013b) Poverty and Transitions in Health, IZA Discussion Paper 7532, IZA-Bonn.

 


[1] For a literature review, see our publications.

For Some Mothers More Than Others: How Children Matter for Labor Market Outcomes When Both Fertility and Female Employment Are Low

20190114 How Are Gender-role Attitudes Image 01

Authors: Krzysztof Karbownik and Michal Myck, CenEA.

Wide spread entry of women into the labor force has been one of the most pronounced socio-economic developments in the 20th century, and high levels of female employment are crucial from the point of view of continued economic growth and financial stability of many welfare systems (Galor and Weil, 1996). At the same time, demographic changes determined by the current and future fertility levels will play a vital role in shaping these developments and will affect the costs of social programs. Given the potentially strong link between female employment and family size, it seems that understanding the relationship between the two ought to be at the heart of policy discussions, especially in countries that are characterized by both low fertility and low female employment. In particular, in light of rising unemployment in low-fertility countries, which have been most severely affected by the economic crisis such as Greece, Spain and Latvia, our findings may serve as a guide with respect to the relationship between fertility and labor supply in an environment, which will be more common in Europe in the near future.