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European Commission calls for tax reform to encourage active ageing

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  • European Commission calls for tax reform to encourage active ageing

EUROPE – Changes in European pension systems need to be underpinned by policies that promote active ageing, as a modern tax and benefit system will create incentives for active participation in the labour market, according to László Andor.

Addressing a conference on tax issues for pensions in Brussels today, the commissioner for employment, social affairs and inclusion referred to the Pensions Adequacy Report published last year, which stressed that increasing working life would be key to pension adequacy in future.

"This requires active ageing strategies, investments in life-long learning of all age groups, the adaption of workplaces to the needs of older workers and new forms of labour-force participation," he said.

Andor said the tax system could incentivise longer working lives, as taxes on labour have an impact on labour supply and employment rates, particularly the employment rates for older workers.

According to him, a modern tax and benefit system should create incentives for active participation in the labour market until the statutory retirement age is reached, or even beyond that stage.

"In order to offset the reductions in labour taxation, it may be necessary to increase taxation in other areas, such as value-added taxes, green taxes and property taxes," Andor added.

The commissioner conceded that tax increases, if not properly designed, could have "unfavourable distributional effects" and hinder the goal of reducing poverty, and that shifting taxation from labour to other sources might have an impact on the financing of social protection.

"This is a risk particularly in countries where social protection is primarily based on social insurance contributions," he said.

"However, the financing of social protection could be preserved by earmarking a portion of revenues for this purpose, as done for instance by Germany for VAT."

Andor also stressed that, as part of the EU's plans to cut costs, member states will have no choice but to look at the cost of promoting funded second and third-pillar pensions through tax exemptions and other subsidies.

"They will have to examine whether fiscal incentives offered to pension savers and to pension funds yield enough value in terms of pension provision," he said.

"They will also have to consider whether similar or better results can be achieved through other or complementary means."

The key argument for subsidies through tax exemptions, according to Andor, is that second and third-pillar schemes are voluntary.

Therefore, economic incentives are necessary to motivate employers and individuals to defer consumption into the future and build extra entitlements through complementary savings, he said.

"Yet, even with high subsidies, it has been impossible in some member states to raise coverage above 50%," he added, noting that some authorities were now trying the regulatory approach of auto-enrolment instead.

Andor also suggested that public authorities might need to look at the idea of mandatory private pensions.

"Making it mandatory need not mean we abolish or even reduce fiscal incentives," he said.

"But it would mean we have more room to consider how much we subsidise and with which distributional profile."

Lastly, Andor called on all stakeholders to take part in a debate with the Commission to establish best practices to promote complementary retirement savings while limiting the cost to public budgets.

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