The Incidence of Pension Contributions: What Matters: Marginal or Average Rates?

This paper investigates the incidence of pension contributions using a unique longitudinal administrative dataset covering individual employees at different pension funds in the Netherlands for the period 2006-2012. With a panel-based difference-indifference approach, we estimate the response of wages, labor cost and hours worked to both marginal and average contribution rates, which provides us insight into the mechanisms underlying incidence. In contrast to the standard demand and supply model of labor we find that average contribution rates matter more for incidence than marginal rates. Moreover, we find that a substantial part of the burden (some 70%) is borne by employers. This is in line with the statutory contribution rates (on average 70-30 for employers and employees) but could also be explained by other factors such as non-salience or bargaining. Together our findings indicate that incidence is best explained by a bargaining model of wages, at least in the short and medium term considered in our analysis.