Ethics and economics for European intergeneration equity: the Youth Guarantee and the Generation...

LUCIANO MONTI Ethics and economics for European intergeneration equity: the Youth Guarantee and the

Generation Gap Tax

1

Ethics and economics for European intergeneration equity:

the Youth Guarantee and the Generation Gap Tax1

Contents

1- Out of the crisis of the economic growth model. 2- Effects of unsustainable growth on current and future young generations: gap and divide intensity

and causal link. 3- Facing younger generations divide. 4- European tools: the Youth Guarantee and the Generation Gap Tax.

Summary

The affirmation of sustainable and inclusive growth model and the increasing awareness that well-being cannot be measured in GDP terms only led economists to rethink reasonable scenarios for the near future, as well as social and economic policies to achieve it. However, it is the current serious and systemic crisis effecting all sectors of society that makes this process such an urgent matter. The former has two main consequences. On the one hand, all the limits of economic models used so far have clearly surfaced; on the other hand, the large generational gap between those who profited from income and consumption growth and the high standards of social security (the so called Baby Boomers) and those who are facing now the labor market and the civil society. This divide risks leaving an indelible scar on the current younger generations determining a potential unsustainability of growth for them and future generations. In this paper I will attempt, firstly, to focus on the origin of the generational divide, namely, the unsustainability of policies adopted to ensure development of Western economies until the early years of the new millennium (section 1) and the consequent causality link between development and lack of growth in wealth (section 2, first part). Furthermore, I will focus on the very high unemployment rates affecting young people today in many European countries (section 2, second part). Moreover, I will follow to analyze the ethical system that could justify a redistribution of wealth for the benefit of the younger generations and the economic impact (section 3). In conclusion, I will examine a possible European instrument (the Youth Guarantee) and a first hypothesis of financial coverage through a new fiscal toll I will define here “Generation Gap Tax” (from now GGT), to be paid as a one-off fee by who most benefited from the previous welfare model (section 4). This last section does not intended to be an exhaustive analysis but rather an indicative one, in order to enhance debate on these considerations.

1 My first work on this matter was published in June 2013. See MONTI 2013. For further reflections see MONTI 2014 and

MARCHETTI - MONTI 2013.


Generation Gap Tax

2

1- Out of the crisis of the economic growth model

With the beginning of the current crisis, deeper considerations were made at various levels in the attempt to identify different wealth indices. However, these considerations had originated much earlier2. Leaving out the genesis and hypothesis of anti-development theories and growth models as an alternative to strictly economic ones (LATOUCHE S. 2007, CAILLE’ A. 1998), here I will only mention the main institutional steps of this path. In 2007, the Global Project on measuring the progress of Societies began within OECD, which adopted it along with the European Commission, the Organization of Islamic Conference, the United Nations, the UNDP and the World Bank. Afterwards, the Istanbul Declaration was adopted. The latter included a commitment to measuring and fostering the progress of societies in all its dimensions3. In early 2008, the President of the French Republic, Nicholas Sarkozy, commissioned a group of distinguished economists to develop a survey to find an alternative economic index to GDP, in order to measure economic and social progress and wealth. The resulting report (STIGLITZ J. E. - SEN A. - FITOUSSI J. P. 2009), has primarily demonstrated the inadequacy of the current economic index to predict future scenarios (and above all, the inequalities created therein), but it has also highlighted the difficulty in finding other universally recognized markers that take into consideration the subjective judgments of citizens and the sustainability index4. During the same year, the Government of Canada identified a new set of well-being indices, known as Canadian Index of Well-being5 launched almost ten years before in line with the so called Deliberative Paradigm (MESSINA G. 2012)6 and, within G20, the Framework for Strong, Sustainable and Balanced Growth (PITTSBURGH, September 25th 2009)7.

2 For a summary of the development of this awareness, see Survey on the identification of indicators for measuring the welfare

beyond GDP - Hearing of the President of ISTAT, Enrico Giovannini, Budget, Treasury and Planning Commission V, Rome, 22 of November 2012. An alternative indicator to GDP, GNH, the Gross National Happiness is a unique approach to development that has evolved over the centuries in Bhutan and officially launched in 1972 as an economic alternative by at that time King Jigme Singye Wangchuck. While conventional development emphasizes economic growth as the ultimate goal, GNH is based on the premise that true development takes place only when material and spiritual development proceed side by side. 3 The aim of the joint statement is to encourage each society to reflect on what constitutes "progress" in the twenty-first century;

to share the best approaches to the measurement of progress; to help society to develop a broader and shared understanding of its evolution; to promote the importance of adequate investment in statistical systems. 4 The Commission recommended specifically considering eight dimensions: material well-being, health, education, personal

activities and job, political participation and governance, social relationships, environment, economic and physical security. At Italian level, an orientation committee on measuring progress of Italian societies formed by CNEL and ISTAT identified, in 2011, twelve domains: environment, health, economic well-being, education and training, job and training, job and lifetime conciliation, social relationship, personal security, subjective well-being, landscape and cultural heritage, research and innovation, services quality, politics and institutions. A scientific committee at ISTAT then declined 134 indicators presented in February 2013 and collected in the document (BES 2013). 5 The initiative named Asking Citizens What Matters for Quality of Life began in 2000 with the consultation of 346 between

economic and social operators and experts. In 2002 followed the roundtable Leading indicator experts and practitioners. In 2004, the Canadian Research Advisory Group (CRAG) was created; in 2006, the first consultations were launched. They comprised 19 focus groups in 14 communities (250 participants) including government, companies, media and NGOs in addition to 14 face to face interviews to test the structure of the CIW; the following year the second consultation: 13 meetings (185 participants) and in 2008 the third consultation in Toronto (experts and community leaders) to interpret the results. Finally, in 2009, the launch of the Canadian Index of Wellbeing (CIW), "How are Canadians Really Doing?" took place. 6 In G. MESSINA’s interpretation, that is to say a process related to “to the reticular and polycentric idea of public institutions and of

relationships between them and civil society”. 7 (…) reform the global architecture to meet the needs of the 21st century. After this crisis, critical players need to be at the table

and fully vested in our institutions to allow us to cooperate to lay the foundation for strong, sustainable and balanced growth; (…) maintain our openness and move toward greener, more sustainable growth.; (…) Today we are launching a Framework for Strong, Sustainable, and Balanced Growth. To put in place this framework, we commit to develop a process whereby we set out our objectives, put forward policies to achieve these objectives, and together assess our progress. ; (…) promote balanced and sustainable economic development in order to narrow development imbalances and reduce poverty.; (…) G20 members will set out their medium-term policy frameworks and will work together to assess the collective implications of our national policy frameworks for the level and pattern of global growth, and to identify potential risks to financial stability.


Generation Gap Tax

3

In May 2010, the European Council launched the so called “Europe 2020” strategy, which, albeit timidly, considers some indicators close to the concept of well-being. Some examples are: the employment rate, (work, if it’s appropriate and doesn’t absorb all the everyday life, is a source of satisfaction and, in some cases, as in some Constitutions, a fundamental element of social life); and the reduction of early school leaving rate (knowledge is also a source of well-being, as Bhutan researchers have well established, CENTRE FOR BUTHAN STUDIES 2012). In the following September the Memorandum Measuring progress, well-being and sustainable development was signed in Sofia; in June 2011 the European Parliament adopted the resolution “on GDP and beyond – Measuring progress in a changing world”8. Simultaneously some of the major economists developed a specific shadow prices and comprehensive investments model (ARROW K. J. - DASGUPTA P. - GOULDER L. H. - MUMFORD K. J. - OLESON K. 2011)9 to ensure the maintenance of the current and future wealth basis, namely human capital, natural capital, reproducible capital (tangible and intangible infrastructure) and health. Sustainability would not be detected in the environment field only (natural capital), but also in other dimensions and in particular those relating to human capital, and its individual and social sphere. Following these models, it is clear how the responsibility for development falls not only on current well-being, but also on future generations. In a very recent Italian report, i.e. (ISTAT - CNEL 2013), researchers observe that it is necessary, for the future, to extend sustainability concept also to economic and social components, so to measure sustainability as a whole. The multidimensional approach for the identification of well-being indicators already counts some empirical experimentations, both in the economic, social and environmental fields, following the main taxonomy identified by OECD. Moreover, the affirmation of sustainability growth models, has also introduced new economic aspects (i.e. the hidden and shadow prices mentioned above) that before were not even taken into consideration. These early attempts, however, still present two weak elements, one theoretical and the other empirical. The theoretical one is that the surveys aggregation level does not take into account different categories of population, neither in terms of age nor in terms of status. Territorial perspective alone is not capable of highlighting what is called inclusive growth, since it does not comprise social exclusion enclaves and generational divide, which can be generated where standards of living are higher and where the labor market is very selective. On the other hand, in terms of empirical survey, the weakness of current experiments is given by the extreme complexity of creating a set of indicators and by the costs of ongoing data collection, especially if you want to rely on an updated overview (FITOUSSI J. P. 2013). Moreover, as already pointed out, a multidimensional approach, if excessively amplified, has a negative impact on data readability for researchers, policy makers and citizens.

8 This resolution underlines the importance of agreeing on a systemic approach to define a coherent “not only GDP” system that

contributes to improve analysis and policy debates and that GDP is an index of market economic activities become a standard benchmark used by policy-makers throughout the world; in particular it underlines that GDP is a measure of production and doesn’t measure environmental sustainability, resource efficiency, social inclusion or social progress in general; it also underlines that GDP can be misleading, meaning that the remedial measures following events such as accidents and natural disasters are considered benefit instead of a cost. 9 The authors focused especially on four assets: human capital (and knowledge) held by all individuals, even those who are not

currently employed; natural capital (oil and natural gas, metals and raw materials, forests, protected areas, areas designated to sheep farming , cultivated areas); reproducible capital (buildings, roads, manufactured goods, machinery for the production of goods and services), health (life expectancy).


Generation Gap Tax

4

In conclusion, not only did GDP, supported by aggregate demand, not generate a proportional level of wealth, but also it actually deprived following generations of well-being, damaged natural capital and created an intergenerational gap and generation divide, the latter causing strong depletion of human capital, as I will remark in the next section.

2- Effects of unsustainable growth on the current and future young generations: gap and divide intensity and causal link.

It is not easy to estimate the impact and calculate the intensity of unsustainable growth on future generations, since the current recession is the product of many contributing factors, many of which are certainly exogenous to the European economic system. Certainly, the gravity center displacement of the big flows of global economy to other geographic areas, (such as China and other Asian countries), is one of the main causes for the geopolitical decline of Europe. another cause which also led to the current imbalances, is the incompleteness of the European project, which started with the creation of the single market, first, and the European monetary union, after. These factors have demonstrated the inability of the major member States to face the crisis with timely and effective action, especially in common monetary and foreign policy. For example, if we consider the sectors with the highest presence of young workers (see table below), we find that these are mostly affected by the economic downturn, namely construction industry, manufacturing and retail trade. Therefore, it is not possible to connect this crunch to a given industrial policy. Even if it would be possible to ascribe this crisis to the wrong sector or macroeconomic policy, the same could not be attributed to the sphere of common responsibility.

Percentage variation of youth employment by sector from 2008 to 2011

(EUROSTAT data, July 2012)


Generation Gap Tax

5

Nevertheless, various indicators can lead to some reflections on the intergenerational gap intensity. Elements to take into consideration to assess the intensity are linked to three areas: i) economic security, ii) number of NEETs (young people Not in Employment, Education or Training); iii) youth unemployment rate. Regarding the first point, researchers of the Canadian Centre for the Study of Living Standard (OSBERG L. - SHARPE A. 2011) provided a good starting point, measuring various indicators that would contribute together to determine the economic security of a generation. These include the economic equality index, which takes into account the Gini coefficient for 25% and the poverty rate for 75%. This index shows how, over a period of thirty years, from 1980 to 2009, most European countries, apart from France and Sweden, recorded declining equality rates. Italy is in strong regression and last in absolute value compared with the other surveyed countries. What is more, the poverty risk generally increases for single parents. In contrast, the safety index of poverty risk in old age fell, albeit slightly, in European countries including Italy, while the economic security index10 underwent an overall decline. I suggest comparing the relationship between GDP and family savings in order to estimate the safety index. In this manner, it is possible to see how in Italy, in about half a century, savings have declined from 30% of GDP to almost 15% of GDP. This is the signal of a slow but inexorable erosion of wealth generated during the immediate post-war period. This is proof that there were generations that maintained a standard of living higher than what the production system in which they operated could allow. What would be interesting to understand is if while doing this, they not only eroded their savings, but also, thanks to hyperinflation in the Seventies, if they used savings accumulated by the previous generation.

My elaboration on OECD data. Highlighted in yellow trend line % savings in Italy

As previously mentioned, the safety rate is not the only index to decrease, but also the overall wealth rate follows this trend. In fact, during the observed period in all the surveyed countries both the GDP per capita growth rate and the IEWB growth rate11, i.e. did not always proceed at the same pace. The latter was always lower than the first, by almost one percentage point for the Italian case (see table below).

10

Which takes into account four indicators: unemployment risk, financial risks for disease and medical costs, the risk of poverty of single parent families and the risk of poverty in old age. 11

See OSBERG - SHARPE 2011.


Generation Gap Tax

6

Consumption and Index of well-being (Germany vs Italy)

My elaboration on the Canadian study center on lifestyle Data

Regarding the second point, a report by Eurofound12 (EUROFOUND 2012a), which analyzes Eurostat data (see table below), highlight the increase of NEETs in Europe since the crisis began: in 2008, indeed, NEETs between 15 and 24 years old were 11%, while those between 25 and 29 years old were 17%. These percentages increased in 2011 respectively to 13% and 20%, for 14 million individuals. The highest growth rate was registered in Spain, Italy, Ireland and Bulgaria.

Share of persons aged 18-24 neither in employment nor in education, by working status, 2009 (%)

Source: Eurostat

12

The Foundation was established by Council Regulation (EEC) No. 1365/75 of the Council of May 26 1975, to contribute to plan and implement better conditions of life and work.

0,300

0,350

0,400

0,450

0,500

0,550

0,600

0,650

0,700

0,7501

99

4

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

consumpt. Italy

IWEB Italy

consumpt. Germany

IEWB Germany


Generation Gap Tax

7

Finally, regarding the third aspect (youth looking for employment), it is clear how the current crisis damaged the younger workers much more than the other age groups. Alas, these data are well known, including among the statistics even the portion of youth that has graduated. This is this the matter of the generation divide.

According to ISTAT data, in Italy, by 31st December 2012, there were 1.426.000 individuals under 34 looking for work; 611.000 of those were under 24. Moreover, there were also 2.071.000 young people between 18 and 29 years old in the condition of NEETs. If we consider only the latter and unemployed young people under 24, 2.682.000 people are without employment, rising to 3.497.000 if we add unemployed between 25 and 34 years old. Moreover, that means 20.280.00013 people were inactive by 31st December 2012, in addition to 2.744.000 unemployed and 605.000 of underemployed. This unprecedented data alone may well quantify the depth of the wound inflicted on a generation.

3- Facing the younger generations divide When analyzing the generational gap and divide, it seems clear that there is a necessity for some kind of remedy since the former generation, after decades of economic well-being, endangers the generations of current younger people. Furthermore, this issue deserves consideration from an ethic and economic point of view. From an ethical point of view, the question is whether it is appropriate or not to attribute responsibility to former generations, whom have profited from the pre-existing high levels of wealth. Consequentially, this question implies the declination of a second, namely if it is justifiable to create a redistributive policy at the expense of the latter. However, in my opinion the idea of direct responsibility, which would lead to justify an action in redistributive logic as “who is wrong must pay”, is not acceptable. To attribute responsibility to generations that enjoyed welfare during last decades of the past century would indemnify new generations and generates at least two critical aspects. First, it is not possible to establish a univocal causal link between policies implemented during the last three decades of the Twentieth Century and the beneficial effects on generations who have profited from previous growth (and continue to do so thanks to earlier retirements compared to the current standards or to generous pension arrangements). I have already mentioned the exogenous factor that influenced the actual recession. The second weak point is that, even where it is possible to link this current generational gap to an "unfair" enrichment by previous generations, one should avoid taking the slippery path that leads to making them feel responsible and implies using a strict liability concept. By doing this, one would penalize those generations by assuming that they have violated some principle or rule. Consequentially, it would be necessary to establish an authority able to formulate such a judgment, nonetheless ensuring the "presumed" guilty a right of reply. In addition, while in the case, for example, of compensation for war damages, responsibility is attributed to the entire Country, which has the duty to provide for related compensations, in our case we would identify certain categories of people only, based on age and status parameters (early-retired, baby retired and “gold retired”). This mechanism is, in my opinion, paradoxical and presents an uncertain outcome and no ethical support. Therefore, I sustain that such a system cannot be feasible. Thus, it should be excluded a priori.

13

For the analysis of disaggregated data see ISTAT, Statistiche Report: Anno 2012- Disoccupati, inattivi, sottooccupati, 11 April 2013.


Generation Gap Tax

8

However, another possible way concerns the solidarity concept. This system presents a strong and a weak point. The strong one is that new generations are the neediest ones in this situation, because they represent the most affected by the negative effects of a country’s recession and because they are already weakened by the previous waste of resources. Whereas, the weak point is to connect this solidarity effort to a specific population group (who is no longer in working age) rather than to the entire population that collects an income (from work or from pension system). This point is weak because it leaves itself open to the possible drift of blame. A third possible solution is the sharing of future benefits. According to this approach, it is necessary to verify the costs and benefits of an economic intervention in aid of the weakest categories and calculate the impact of this intervention also on people now retired from work and whom, according to the current life expectations, will spend a long period in such a condition. In substance, if one is able to prove that a temporary reallocation of resources towards the younger categories of population could ensure a higher wellbeing to who is currently retired from work, we could speak of “generational loan”. That is to say, a loan given by those who have accumulated a certain income who partially “invest” in younger people, who, through their future and greater contribution, will give it back later. Moreover, it’s widely acknowledged that the current pension system in Europe is no longer sustainable, as reported by the European Commission (WHITE PAPER 2012), which states: The progressively aging population is one of the main problem of pension systems in all Member States. If men and women, who live longer, do not even remain longer in active employment and don’t save for retirement to a greater extent, the adequacy of pensions cannot be guaranteed: the expected increase of expenses will be, in fact, unsustainable. By 2060, life expectancy at birth is expected to increase, compared to 2010, of 7.9 years for males and 6.5 years for females. And it isn’t a distant problem: and it’s impending because the baby boomers retire and the European working population begins to decrease. This means that people aged over 60 years are increasing of about 2 million every year, almost double if compared to the end of the 90s and to the beginning of the following decade. In contrast, the number of people in prime working age (20-59) will decline every year in the coming decades. In other words, what we have to concentrate on is not the generation gap but mainly the generation divide. Although this path does not present any ethical weaknesses, its economic conditions must be verified. Thus, it would seem sensible to pursue it only if the examination of immediate costs of youth employment policies and resulting benefits were to reflect a positive balance (in terms of future social security and in terms of lower cost of inactivity). Moreover, this balance could reverse or at least mitigate the general trend that the Commission's White Paper documented. A first estimate of the costs of young people inactivity was reported in 2012 (EUROFOUND 2012b) on 2008 data and then updated in October 2012 (EUROFOUND 2012a). Thus, various computation models are applicable. The simplest one is to compare the average cost of a young unemployed person within a support program with the average contribution of the young employed. The difference between the latter and the former represents the financial public cost. However, if you want to consider also that young NEETs, when they will be employed, will accede to a lower average remuneration system than their employed peers with the same level of education, you must take into account a more accurate calculation system based on probabilistic possibilities, which identify a number of variables. The latter method, used by Eurofound, is called propensity score14.

14

The propensity score is defined as the conditional probability of receiving the treatment (being a NEET) given a set of observed variables. The propensity score has the property that given any value of the propensity score, the subgroups of young people who fall within groups have the same joint distribution of the observed variables (See ROSENBAUM – RUBIN 1983).


Generation Gap Tax

9

According to this analysis, the cost of NEETs inactivity in Europe in 2008 was 119.2 billion euro, that is 1% of that year aggregate GDP (EU27). This calculation takes into account direct costs, in other words all public transfers and subsidies transferred to such individuals, amounting at 8.8 billion euro, to which you have to add their missed contribution to the social security and taxation system, for a total of 111.3 billion euro. This amount, according to Eurofound data, rose in 2012 to 153 billion euro, an increase of 28% in just three years and therefore an impact on the European GDP of 1,21%. Analysts reported that Italy is the European country that sustains the highest cost: in 2012, it registered direct costs and missed income for 32.6 billion euro (more than 2.5% of GDP15). Moreover, one has to add shadow prices linked to the human capital decline, which refers to loss of employability, risks of deviance and health costs generated by lack of prevention and by the reduction of safety indices (poverty risk, unemployment risk and missed reemployment). A report by Finnish authorities has estimated that the cost of a single NEET’s inactivity over a period of 40 years amounts to around 750.000 euro, which is 18.750 euro per year (FINNISH MINISTRY OF EMPLOYMENT AND THE ECONOMY 2013). The same study, reported by the Swedish National Board for Youth Affairs in 2011, estimated a cost of about 70.000 euro over 5 years for a young unemployed person under 30 (so 14.000 euro per year). This cost takes into account not only consumption that the young person would realize if he had an income, but also the taxes and contributions he would pay, the support contribution to the social security system and finally the cost of the missed preventive health care.

4- European tools: the youth guarantee and the generation gap tax The emergency generated by rising levels of youth unemployment, especially in Mediterranean countries, led the European Union to analyze this trend and to take actions to contain it. This process ended at the beginning of 2013 when, on 14 and 15 of March 2013, the European Council said that – it’s necessary to give particular priority to the support of youth employment and to the promotion of growth and competitiveness – and decided that - the Youth Guarantee will help to ensure that all young people aged less than 25 years will receive an offer of employment, continuation of studies, apprenticeship or internship of good quality within a period of unemployment four months long or soon after the exit from the formal education system. This agreement should be quickly implemented, thanks to the support for the youth employment initiative16. Thus, an additional 6 billion euro were allocated to support these policies, assured by EU Structural Funds through a reserve of 3 billion euro under the European Social Fund and other 3 billion euro under a new budget line specifically created to finance measures in support of young people, including precisely the new youth guarantee. Intervention on the situation of the young and unemployed is necessary, not only to reduce the generational gap, as mentioned in the previous paragraph, but also to ensure the sustainability of the current pension system, which has been put on the ropes by an aging population and a low employment rate (WHITE PAPER 201217), and by a growing generation divide.

15

This analysis was done considering for Italy, in 2008, 1,916,025 individuals in the state of NEET for at least six months, based on a unit cost of 13.116 euro for a total, always in 2008, of 25,19 billion euro, the higher cost of the whole Europe. The method used is the propensity score, however, applied individually for each country. 16

See conclusions EUCO 14-15 of March cit. 17

About this, the White Paper states, “many countries will have to work hard to improve the future adequacy and sustainability of their pension systems and to increase employment rates, not only in the older age groups but also in the groups with lower activity rates (women, immigrants, and young people). Achieve the goal set by the EU for employment or join the best-performing countries will almost neutralize the effect of aging population on the relative weight of pensions on GDP.”


Generation Gap Tax

10

What is the youth guarantee? Let us summarize the content and schedule of this guarantee, as it has been formulated by the European Commission, considering: a) guarantee structure and lifetime; b) instruments; c) beneficiaries; d) costs. Guarantee structure and lifetime. Following to the first assumption, intensity and duration of the guarantee are variable elements according to the nature and condition of possible beneficiaries. Therefore, if the overall goal is to ensure all young unemployed or never previously employed people a soft support (for example a simple orientation), the specific target is to intervene in support of those young people in greatest need. The latter, due to a low level of education or a disadvantage (immigrant, physical or psychological handicapped), will benefit from more significant interventions in quality (training support), by gender (women in Italy, Greece, Poland, Bulgaria, Czech Republic and Malta) and duration18. This structure should allow a greater concentration of resources in aid of the people most in need and those who require more time to enter or re-enter the work force, and, furthermore, to avoid the so-called moral hazard. The guarantee period depends on the foreseeable insurgency of difficulties however, it cannot be extended, in order to order to avoid that it be used with the prospect of enjoying its benefits more than once. For this purpose, the compulsory registration at job centers is also planned for NEETs, in order to ensure a kind of mutual co-obligation, with the State that does its best to ensure a warranty for the young person who strives to apply every effort to get an occupation. The right to access the guarantee would take effect four months after the end of studies or the last job19. Instruments. The guarantee offers instruments that can be attributed, in order of increasing intensity, to: i) orientation, CV formulation, career planning and search support for job opportunities, ii) internship and / or training; iii) apprenticeship, iv) an offer of quality employment, v) funding for self-employment. About these instruments, the Finnish model is particularly interesting. It provides support to activities of self-employment, creation of cooperatives, working groups, through both training and micro-credit and risk capital for start-up20. Beneficiaries. The beneficiaries are young unemployed and never previously employed people. Regarding the age, the European Commission proposes the threshold of 24 years old, but it is a mere reference, leaving the decision to the member States, consistent with their needs. For example, Finland, which at the beginning of 2013 started this project, predisposed a threshold of 25 years old, while allowing also young people between 26 and 30 years the possibility to access the guarantee, if graduated (FINNISH MINISTRY OF EMPLOYMENT AND THE ECONOMY 2013). By contrast, in Austria, a similar scheme was already tested in 2008, limiting the intervention to under 18 years old, although, in this case, the guarantee covered only training periods. Costs. In 2012, the International Labour Organization (ILO) estimated the cost of the youth guarantee in the Eurozone to amount to roughly 21 billion euro, equal to 0.45% of the cumulated GDP21. The evaluation is

18

Eurofound identified eight different factors determining the entry and stay of young people in the NEET category, namely: i) a disability ii) coming from an immigrant family or being an immigrant, iii) low education, iv) residence in a suburban area v) coming from a low-income family, vi) unemployed parents or who have been unemployed vii) parents with low education viii) divorced parents. The Finnish government, for example, provides for the allocation of one million euro to support employment of young immigrants. 19

Initially one talked about, for the support policies to youth unemployment, six months (employment policy guidelines 2005-2008), but in 2008 the Council reduced this period to four months. 20

On this measure the Finnish government proposes to invest 5 million euro, for about 1.300 young people, with a per capita outcome of 3.846 euro for accompanying activities of six months or capital for start-ups. 21

International Labour Organization (2012), Eurozone and Job crises: trends and policy responses, Studies on growth with Equity, July 2012.


Generation Gap Tax

11

based on the Swedish model special job-search support that is estimated to have an annual cost of 6.000 euro for each unemployed person and more than 600 euro per participant to individual initiatives. The Finnish model, mentioned above, however, provided training interventions up to 33.800 euro for each individual and for a limited number of subjects, particularly needy, up to 50.000 euro. The average annual cost of the work guarantee tested in the United Kingdom (6 months of work at 25 hours per week plus 10 hours per week of training), was around 5.000 euro. Any guarantee instrument has to include also an up-front fee, i.e. the cost of preparing the system and the employees involved in orientation and related facilities. Of course, it is not possible to establish a general policy, because the total cost of the intervention depends not only on the number of potential beneficiaries, but also on the activation of individual instruments, provided by the modular and flexible structure of the guarantee. Using the Eurofound formula, the cost of youth guarantee for a country like Italy, for example, limited to NEETs, should be around 7 billion euro per year (i.e. 0.45% of GDP), followed by a net saving of over 32 billion euro per year (assuming the overall cost of inactivity and missed contribution equal to 2.5% of GDP). However, the prolonged crisis and years of inactivity, in particular for NEETs, let assume that the interventions average should be greater than the standard of 7.000 euro and should amount to a sum equal to or greater than 10.000 per individual, for a one year intervention period. This would increase the cost to more than 10 billion euro. This sum could provide support to approximately one million individuals, who are less than 50% of NEETs, without considering the six hundred thousand young people registered at job centers. To ensure effective intervention to face the NEET phenomenon in Italy, it would be necessary to find 15/20 billion euro, a sum necessary to cover a period of 24-30 months and that would almost double (up to 40 billion euro) if one wants to extend the guarantee to all the unemployed and job seekers under 34. These sums are obviously much higher than the budget made available by the European Union for the new 2014-2020 financial framework. The youth guarantee could therefore find coverage from the member states within two important mechanisms. First, a reserve of Structural Funds planned for the 2014-2020 MFF and second, the unspent remains of the 2007-2013 MFF (as also demanded by the European Council on March 2013). This sum, to extrapolate from about 30 billion euro reserved to Italy i.e. for the new 2014-2020 MFF, would not be less than 500 million euro and could be the driving force to support an initial pilot action, which opens the door to the intervention itself. Co-financing, instead of this pilot program and the support for actions in the next two years, should find financial coverage in generational solidarity actions. This analysis showed that the biggest beneficiaries of the excess of consumption over the past decades (and the most interested in maintaining the current pension system) are those who have benefited from early retirement during this period or reached the retirement age just before the current crisis. There are no doubts that the levy for providing guarantees should be searched within that group. It is also necessary to remember that the current spending for Italian pensions weight on GDP for a percentage more than double than the OECD countries average (in 2011, 7% of GDP compared to 14.1 recorded in Italy). Thus, a one-time levy at an average of 4% annually for two years could secure a full coverage of the youth guarantee. Obviously, it is not possible to imagine a levy that affects the entire population over a certain age indiscriminately, because it is necessary to protect the weakest groups like young people, who are affected by the crisis. Moreover, a generalized intervention could generate a new contraction in consumption and therefore reduce those benefits that the youth guarantee wants to achieve. Consequentially, even if on a


Generation Gap Tax

12

one-time basis, taxes on pensioners who collect a pension at the limit of poverty line and above this threshold, will be excluded. The Generation Gap Tax will have to be progressive and proportional to the excess of the minimum predetermined threshold. An hypothesis would be to define a minimum free cap, and above this cap, to provide a progressive tax as a function not only of the pensions regime but also of the starting year of retirement and years of effective enjoyment already established. By doing so, the one-time tax rate could be greater for those who got early retirement compared with the current threshold and who enjoyed a pension treatment above a certain parameter (for example, the income per capita average of Italian citizens observed in the past three years). In other words, a formula that intensified the levy depending on the retirement age, so as the baby-pensions will be the most affected on the one hand and higher income recipients on the other. In other words, the higher contribution will be ensured by those who receive a richer pension and since a younger age. However, in view of the particular constraints imposed by various legal orders (for example, the Italian Constitutional Court recently declared all levies on so-called “gold pensions” contrary to article 53 of Constitution22) for each member State the Generation Gap Tax will be different, involving distinctively pension, annuity or income recipients. As mentioned above, this tax should have a one-time nature and the income of the transactions should be reserved exclusively for the Youth Guarantee, as outlined by the European Commission and the European Council. For all the discussion above, this tax should not have a relief nature for a suffered damage (the wound generated by the current prolonged period of youth unemployment), or be a mechanism of wealth redistribution (from the leisure class to the poorest). Rather, it should have the form of a generational loan, thanks to which a new generation, forcedly unemployed, transforms this money into business (salaried or self-employed) that will ensure the sustainability of the pension system, achievement on which the old continental economies do not want to give up. The communication of such a fiscal policy is critical for each Member State. In fact, it is necessary to explain adequately how this levy is not a simple redistribution between the "weak" (young people and pensioners) but is rather the necessary condition to ensure the sustainability of the pensions system, firstly for the medium-term interest of who already benefits from it. In addition, the consequences of a failed activation of the guarantee should be clear: refusing to "share" this loan is like ignoring the state of things and condemning the current system to a rapid and very painful decline, not only for current retirees, but also for those who will retire in the decades to come. Bibliography mentioned in this paper

ARROW K. J. - DASGUPTA P. - GOULDER L. H. - MUMFORD K. J. - OLESON K. (2011), Sustainability and the measurement of Wealth, Washington: World Bank. CAILLE’ A. (1998), Anthropologie phisolophique du don. Le tiers paradigme, Paris: La Découverte. CENTRE FOR BUTHAN STUDIES (2012), ed. by Ura K. – Alkire S. – Zangmo T. – Wangdi K., An extensive Analysis of GNH Index, Buthan.

22

See Constitutional Court Judgment 116/2013 filed on June 5th

, in which it was stressed that the pension should be considered a deferred income and as already accrued at the time of working and therefore cannot be hit by solidarity contributions.


Generation Gap Tax

13

EUROFOUND (2012a), NEETs - Young people not in employment, education or training: Characteristics, costs and policy responses in Europe, Luxembourg: Publications Office of the European Union. EUROFOUND (2012b), Young people and NEETs in Europe; First Findings, Luxembourg. FINNISH MINISTRY OF EMPLOYMENT AND THE ECONOMY (2013), Youth Guarantee. FITOUSSI J. P. (2013), Le Théorème du lampadaire, Paris: Les liens qui libèrent. INTERNATIONAL LABOUR ORGANIZATION (2012), Eurozone and Job crises: trends and policy responses, Studies on growth with Equity, July 2012. ISTAT - CNEL (2013), BES 2013. Il benessere equo e sostenibile in Italia, Roma. ISTAT (2013), Statistiche Report: Anno 2012- Disoccupati, inattivi, sottooccupati, 11 April 2013. LATOUCHE S. (2007), Petit Traité de la décroissance sereine, Paris: Mille et une Nuits. MARCHETTI F., MONTI L. (2013), “Primi fondamenti e strumenti di politica economica intergenerazionale”, Roma: Amministrazione In Cammino. MESSINA G. (2012), Diritto liquido? La governance come nuovo paradigma della politica e del diritto, Milano: Franco Angeli. MONTI L. (2013), Teoria e principi di politica economica intergenerazionale, Roma: Luiss University Press. MONTI L. (2014), Ladri di Futuro, La rivoluzione dei giovani contro i modelli economici ingiusti, Roma: Luiss University Press. OSBERG L. - SHARPE A. (2011), Moving from a GDP-based to a Well-being based metric of economic performance and social progress: results from the index of economic well-being for OECD countries, 1980-2009, Centre for the Study of Living Standard Research Report 2011, Ottawa: CSLS.

ROSENBAUM P. R. – RUBIN D. B. (1983), The central role of the propensity score in observational studies for causal effects, Biometrika, Vol. 70, Issue 1, pp. 41-55. STIGLITZ J. E. - SEN A. - FITOUSSI J. P. (2009), Report by the commission on the measurement of economic performance on social progress, Paris. UE COMMISSION (2012), White Paper: An Agenda for Adequate, Safe and Sustainable Pensions, COM(2012) 55 final, Brussels, 16th February 2012.

Ethics and economics for European intergeneration equity: the Youth Guarantee and the Generation...

Documents

Transcript of Ethics and economics for European intergeneration equity: the Youth Guarantee and the Generation...