Hideki Konishi ( Waseda University ) and Naomi Miyazato (Nihon University)

1. Distributive Impacts of Social Protection Systems in OECD Countries: Public-Private Mix and the Hidden Welfare States Hideki Konishi (Waseda University) and Naomi Miyazato (Nihon University)

2. Introduction 1 • The purposes of this paper • Measuring the size of distributive impact of a social protection system for each OECD country • The social protection system referred here is unconventional. It incorporates crawling back of benefits by direct and indirect taxes, tax expenditures, and private social expenditures into the conventional concept of social expenditure. • Private arrangements of social protection • Modern welfare states more or less rely on private provision of social support • Mandating or encouraging employment-based provision or individual purchase of health insurance, old-age pension, sickness pay, child care, maternity leave, etc. • Tax breaks for social purposes • Modern welfare states often give tax advantages to private arrangements of social protection • Income tax allowances for children and elderlies • Tax exemption for employer-paid insurance premiums

3. Introduction 2 • The hidden welfare state (Howard, 1993) • The size of such private provision is quite large for some advanced nations. • The U.S. is conventionally known as one of the smallest welfare state among the advanced nations. This view is concerned only on public provision of social support. • The U.S. extensively use tax expenditures to encourage private provision. • The U.S. is the hidden welfare state . • Private social expenditure (Adema and Einerhand, 1998) • Private social expenditure is the notion capturing the size of privately-provided social support. • If private provision and tax expenditures are combined, the U.S. is almost as large a welfare state as France and Finland.

4. Introduction 3 • Distributive impact of private arrangements • Provision of sufficient social support is the one thing and equal income distribution is another, especially when the former relies more on the private sector. • More private provision may be an inevitable choice for countries such as Japan because of rising cost of public provision. • No quantitative studies have been conducted on this issue, except for two rudimentary regression analyses. • Mainly, perhaps, because of the lack of data. • But now, OECD SOCX data have accumulated them to such extent that could endure rigorous quantitative analysis.

5. Empirical analysis in this paper • OECD SOCX data base • 25 countries, 5 periods from 1990 to 2014. • Regress an income inequality index (Gini, Ineq8020, Ineq9010) over three key regressors: • Nettotal= Net total social expenditure • PrivPubRatio= Net Private SE / Net Public SE • Interaction terms of Nettotal and PrivPubRatio • Nettotal, Net Private SE, and Net Public SE are measured as percentage of GDP at factor costs. • Consideration on endogeneity • Measurement biases in income inequality indices • Reverse causality related to policy formation • Estimation • Fixed effect model • Dynamic Panel model (estimated by System GMM)

6. Results and implications • We will regress the following fixed-effect model: or a dynamic panel model with added on the RHS. • Income distribution becomes more equal as • Nettotal is larger (); • Its interaction term with PrivPubRatio is smaller () . • Given total social support, relying more on private provision aggravate income inequality. • The total distributive impact does not differ statistically from zero for some hidden welfare states. • The role of a social protection system is questionable in redistributing income. • We should rely more on taxes and public cash transfers.

7. Private social expenditure • What is social expenditure? • Aggregate benefitsprovided by public and private institutions that address social purposes. In-kind transfers are included, too. • An expenditure program is social if participation is compulsoryor if entitlements involve interpersonal redistribution. • An insurance program designed to be actuarially fairat individual levels is not considered social. • Mandatory vs. voluntary • The Affordable Care Act changed employment-based provision of health insurance from being voluntary to mandatory. • Australian pension system • Aged pension : It is financed by tax and requires the income and asset test. It is categorized in public social expenditure. • Superannuation: It is basically funded pension and compulsory for employers to make their contributions. It is categorized in private social expenditure.

8. Gross vs. net social expenditures • It is necessary to adjust the effects of taxes and subsidies on the gross benefits to accurately measure the net size of social expenditures. • Taxes paid out of benefit incomes should be subtracted • In some countries social benefits are combined with other incomes and taxed (with some exemptions). • Beneficiaries have to pay indirect taxes out of their benefit incomes. • Tax expenditures for social purposes should be added • Tax exemptions for employer contributions to occupational health care insurance • Tax deductions for dependents

10. Hidden Welfare States • Taking account of tax effects and private provision drastically changes the conventional picture about the size of the welfare state. • Scandinavian countries are no longer so large welfare states as they are traditionally perceived, owing to the crawling-back effect of tax system. • Rather surprisingly, the U.S. is the second largest welfare state in Net Total, owing to private provision of social support. • Australia’s position dose not change in both gross and net social expenditure at this time. • Australia will be considered as the large hidden welfare state if the size of superannuation increase. • Countries with Gross Pub less than average are likely to have higher PrivPubRatio. • Consequently, the variation in Net Total across nations is smaller than in Gross Pub.

11. Measuring Distributive impact of Social Protection System • As objectives of the welfare state, providing ample social protection is one thing and achieving equal income distribution is the other. • No previous studies but two estimated the distributive impacts of social protection systems, taking account of tax effects and private provision. • Unfortunately, these two studies conducted quite rudimentary cross-sectional regression analyses, regressing income inequality indices over net public SE and net private SE without controlling anything else. • Besides the lack of control variables, there are a few important things we cannot miss for consistent estimation.

12. Estimation Issues 1: measurement biases • A social protection system affects both the distribution of marketincome and that of disposableincome. • Biases in the measurement of income inequality indices (Adema and Whiteford, 2010) • Asymmetric treatment of household contributions to insurance programs • Contributions to public programs are taxes and those to private pension plans are savings • Private provision makes income distribution look less equal • Effects of shifting of employer contributions • Contribution split ratios between employers and employees differ a lot across nations • No a priori direction of the bias can be imagined.

13. Estimation Issues 2: reverse causality • Political interplay between the design features of a social protection system and its distributive impacts • Paradox of redistribution (Korpi and Palme, 1991) • A program targeted more to the poor can redistribute less overall because of limited political support. • Choice between Bismarckian vs Beveridgean pension schemes (Conde-Ruiz and Profeta, 2007) • The more unequal society chooses the more Beveridgean pensions. • In our context, more unequal distribution in the past leads to choosing a smaller public program (and hence a larger private social expenditure) today, resulting in more unequal distribution today.

14. Estimation Issues 3: model specification • Following past studies, we regressed two different fixed-effect models on our data set as follows: • As in the previous studies, NetPub enhances equality of income distribution, and NetPriv aggravates it. • With the interaction term, the results drastically change, which suggests • The impacts of Pub SE and Priv SE are not separable • The marginal impact of Pub SE decreases as Priv SE increases. • But, the economic interpretation of this interaction term does not seem straightforward.

15. Preliminary Regression

16. Empirical Strategy and Hypothesis 1 • We will first estimate the following fixed-effect model: • NetTotal captures the aggregate welfare effort without making distinction between public and private SE with . • The interaction term captures the idea that the income-equalizing effect of NetTotal decreases as it consists more of private SE with . • PrivPubRatio captures the effect of measurement biases in income inequality indices with ’ sign being ambiguous.

17. Empirical Strategy and Hypothesis 2: • We will second estimate the following model with a lagged dependent variable: captures the effect of reverse causality, which produces persistency of income inequality with 1 • To estimate this model, we will use the system GMM approach.

18. Estimation Results with Gini index 1

19. Estimation Results with Gini index • In the fixed effect estimation, NetTotal has a negative and significant coefficient as we have hypothesis. • Its interaction term with PrivPubRatio is insignificant, contrary our hypothesis. • This seems to be due to the influence caused by reverse causality . • In the DP estimation, the coefficient of is positive, stationary, significant. • A persistence occurs as a result of reverse causality related to its repercussion from policy choice. • The key variables, NetTotal, PrivPubRation, and their interaction term, are all significant, showing signs consistent with our hypothesis. • The positive coefficient for the interaction term means that given the total expenditure, switching public provision of social protection toward private one exacerbates income equality. • The DP estimation barely passed the post estimation tests in case(ⅲ). • should be confirmed to have correlation with but not with or with any further ones.

20. Total distributive impact of Social Protection System • We will predict the total distributive impact of a social protection system for each country by calculating , where we regard just as a term capturing the measurement bias. • We will use the data in 2015 and estimation result (ⅲ) for comparison between the fixed-effect and system GMM estimations. • How different are the impacts across nations? • Whether are the impacts significantly different from zero?

21. Prediction results • Countries with similar Pub SE achieve rather different impacts. • The difference are driven by those in the effect of tax system and the size of private provision across countries. • Countries with higher PrivPubRatio achieve less equalizing impacts. • The predicted total impacts in Gini index are not statistically different from zero for countries with Priv SE greater than 12%. • U.S., Switzerland, Denmark, Japan, Canada, U.K., Korea, Netherland, and Iceland. • When Ineq8020 is used, Denmark and Japan no longer belong to the group of countries for which we cannot reject the null hypothesis that the social protection system has no impact on income inequality.

22. Distributive Impacts on Gini index 1

23. Distributive Impacts on Gini index 2

25. Implications • The provision of sufficient social protection and the equalization of income distribution will not square as consistent social objectives if the private sector is to play a major role in the former. • If a society needs to rely more on the private provision, reinforcing redistribution through the tax system will become a more integral part of a public policy geared toward equal distribution of income.

26. Concluding Remarks • Considering the effects of tax system and private social expenditures changes the conventional picture about the sizes of the welfare states across the world. • At the same time, the larger welfare state no longer means a state with the more equal income distribution. • Given a net total social expenditure, relying more on private provision worsens distributive inequality. • In countries deserving the name, a hidden welfare state, the social protection systems there contribute only negligibility to reducing income inequality. • From normative perspective, the distributive function of such countries should weigh more on taxes and public transfer than social protection policy. • The impact of in-kind transfer is not measured. • The issues for further research include investigations on the changing total impacts over time and the political choice of the size of private provision.

27. Supplements • Country id code: 1. Australia, 2.Austria, 3.Belgium, 4.Canada, 6.Czech Republic, 7.Denmark, 9.Finland, 10.France, 11.Germany, 14.Iceland, 15.Ireland, 17.Italy, 18.Japan, 19.Korea, 20.Luxemburg, 22.Netherlands, 23.New Zealand, 24.Norway, 25.Poland, 26.Portugal, 27.Slovak Republic, 29.Spain, 30.Sweden, 31.Switherland, 33. United Kingdom, 34.United States.