A world record in means testing?

Out of each 50.000kr received additionally by pensioners from their pension funds, only about 13.370kr go to the pensioner while 36.600kr go to the state via cuts and taxes, given that the pensioner’s income from the pension fund is somewhere between 100.000 and 600.000kr. About 70-80% of the gains thus go to the state, not to the pensioner.A new report by Stefán Ólafsson and Stefán Andri Stefánsson for Efling-union, Kjör lífeyrisþega – Samspil almannatrygginga og lífeyrissjóða í mótun tekna (The Wages of Pensioners – The Interplay Between National Insurance and Pension Funds in the Sum of Incomes), reveals that reductions in the Icelandic national security system are excessive and nearly amount to a world record. Many cuts stem from the state’s expenditures being unusually low, the fifth lowest among OECD-countries. Another cause is that somewhere between 25 and 50% of Icelandic pensioners are low wage earners, depending on where one draws the low wage limit.The low wage problem is more common among those who mainly worked in the private sector, as their rights are far inferior to those provided by public sector pension funds. The report also argues that the maximum pension sum of national insurance (TR) is too low.With their unusually harsh means-testing, Icelanders are quite dissimilar from the other Nordic countries and the Icelandic welfare system more resembles those of the English-speaking countries than those of the Nordic countries in this respect.A low threshold, especially on pension incomes, causes cuts of national security payments to begin at to low level of pension payouts. This means, among other things, that compulsory savings don’t translate into sufficient wages for pensioners but instead go towards lowering the social security budget of the state. Cuts in social security payouts often amount to over half the pension fund payout, which is the equivalent of nearly all the long term returns on the investments of the pension funds.The state also collects about 20-26% income tax from the pension payments so, in fact, about 70-80% of the added income from pensions goes to the state and a small remainder translates into wages for the pensioners. The tax burden of pensioners with low total earnings has also greatly increased during the past few decades. Because of excessive reductions and taxes on low pension incomes, it’s fair to say that the state is the main beneficiary of the pension funds, albeit indirectly.The report contains various figures regarding the two main pillars of the pension system (national insurance and pension funds) and demonstrates the wages provided to pensioners today by the system, as well as to those whose pension is due in the coming years. Based on the analysis outlined in the report, a proposal is made for the income threshold from pensions to be raised to at least 100.000kr per month and that the maximum pension from TR (the unreduced pension of an individual who lives alone) be raised from 333.258 to 375.000kr per month and to a corresponding amount for people who live together. Also, coordination of disabled and old age pensions is proposed, and that the threshold for cuts on income from work never be set lower than the minimum wage.Sólveig Anna Jónsdóttir, chairman of Efling says that this development is shameful. “The government should be ashamed of themselves for reaching ever further into the pockets of the poorest pensioners at the same time as the tax burden of high wage earners in the labor market and outside is continually lowered,” she says, calling on those in power to redress the injustice of the low wages of pensioners immediately. “The guilt is bipartisan and the responsibility of reversing this development and improving the lot of the elderly and the disabled belongs to all of us.”The report is available here. It will be presented during the wage conference of ÖBÍ on Wednesday, May 26th.