Playing dead pool against the contributions system

Abstract

• Life expectancy negatively affects contribution evasion. • Number of children positively affects contribution evasion, while the number of family members has a negative effect. • Factors affecting the individual’s expected pension income influence contribution evasion today. • Long-term financial assets revenues and the intertemporal preference rate are positively related to contributions evasion. This paper examines the rationale behind social contribution evasion. The main idea is that evasion of social security contributions implies loss of future benefits, and in a system in which pensions are proportional to contributions, one would expect that, ceteris paribus , a decrease in the alternative measures of saving towards one’s pension or an increase in subjective life expectancy would lead workers to contribute more towards their own pensions. By using OLS and Tobit estimators, we test whether contribution evasion is part of an intertemporal portfolio allocation and competes with other forms of wealth-accumulating assets. Empirical results on repeated cross-sectional Italian microdata confirm that contribution evasion decreases as life expectancy increases, and increases when the return on other long-term wealth-accumulating assets increases.