SUMMARY AND CONCLUSIONS
taxes on capital can also be attractive for various reasons (Banks and Diamond, 2008). First, taxes on savings usually affect people with middle and high incomes more than lower incomes. Therefore, they contribute to the redistribution of income from rich to poor. Second, a tax on capital may encourage investment in human capital. Intuitively, human capital and financial capital are two alternative ways to invest and generate future income. A different tax treatment of these investment may distort the portfolio of human and financial capital. Indeed, if the government taxes labour income but not capital income, people are encouraged to work too much when young and invest too little time for investment in human capital. Instead, they accumulate financial wealth that enables them to retire early. Jacobs (2009) emphasises this interaction of human capital investment and retirement: lower skills lead to earlier retirement and early retirement leads to underinvestment in skills. To mitigate these distortions in human capital and financial capital, it is attractive to impose a tax on capital income.
Disability insurance
Disability Insurance in the Netherlands has been rigorously reformed. Crucial elements of the reforms were stronger incentives for employers and employees to prevent sickness and disability, obligations regarding reintegration, and a strong financial incentive for benefit recipients to continue working when possible. The reform had its effect: chapter 3 of this study argues that disability insurance is no longer used as an early exit route into retirement. This is a reflection of lower moral hazard, which is an important benefit of the reform. Yet, the reforms also reduced insurance. Indeed, people who are partially disabled receive lower benefits than before. For high-skilled older workers, this lower insurance is less costly as they usually have accumulated more wealth and face smaller disability risk due to relatively good work conditions. For low-skilled older workers, however, lower insurance may be harsh. It seems that the Netherlands has shifted along the trade-off from generous insurance towards good incentives and efficiency.
Unemployment insurance
Dutch unemployment benefits are based on final pay up to a maximum of approximately 50 thousand euro. Benefit entitlement increases with tenure up to a maximum of 38 months. Hence, unemployment insurance is relatively generous for older workers. This can be justified if, for instance, risk aversion increases with age. Moreover, unemployment at old age leaves less future periods to even out the shock, which increases the insurance gain.3 However, older workers usually also have accumulated more financial wealth, although not all of this may be liquid, e.g. pension wealth. To the extent that they have access to other income during unemployment, this reduces the marginal insurance gain from a given level of unemployment benefits, leading to a lower optimal benefit level for older workers. 3
One other argument for better insurance seems less compelling. Older workers have a lower job-finding probability than
younger unemployed so that they face a larger labour-market risk. However, this risk is partly endogenous and depends on benefit duration. Only the exogenous part of the increasing risk could justify more insurance. 25