# **4 Methodologies for allocating taxes and transfers**

### **This section describes in detail the allocation methodologies used to model each tax and transfer included in the analysis.**

## **4.1 Pensions**

**A CEQ Assessment has two scenarios for treating pensions.** The first scenario treats pensions as saved private income (in the form of contributions) spent later in the form of Pensions as Deferred Income (PDI). The second scenario treats Pensions as Government Transfer (PGT), a tool for redistribution from one segment of society to another by taxing individuals through pension contributions and transferring benefits through pension income.<sup>35</sup> Both scenarios present extremes and reality is always some combination of the two (see Annex A for comparison).

**This analysis uses the (PGT) as the main scenario.** The reason is that pension expenditures are high and unsustainable in the West Bank and Gaza, with pension contributions funding roughly 45 percent of pension payouts, meaning that the Palestinian pension system redistributes from tax-paying individuals to pension recipients. Nonetheless, treating pensions solely as a government transfer means that those earning a comfortable pension will appear to have zero Market Income, thus overestimating the proportion of the poor (Lustig, 2022).

**The pensions model has two components: (i) pension contributions from the current working population, and (ii) pension income received by the retired population.** For this study, the PECS survey directly identifies pension income recipients and amounts. The survey also directly identifies individuals that make pension contributions, and the amounts are inferred based on the region, public sector status and age. A key assumption of the CEQ Assessment is that employer contributions to pensions are borne by the employee in the form of lower wages—that is, the analysis allocates the total pension rate to employees, including both employee and employer’s contributions. The survey identifies roughly 140,000 pension contributors tax resident in the West Bank and Gaza - close to the numbers reported in the latest administrative data of 155,000 contributors.<sup>36</sup>

**There are three major pension schemes in the West Bank and Gaza, and one in Israel.** In the West Bank and Gaza the unified pension scheme applies to individuals below the age of 55 as of 2016, while the Gaza civil servant pension scheme and the West Bank civil servant pension scheme variously apply to pension contributors that were above age 55 in 2016 (the former in Gaza and the latter in the West Bank). All pension contributors in the survey were below age 55 and so the unified pension scheme was applied to all directly identified pension contributors working in the West Bank and Gaza in the PECS 2015/16.<sup>37</sup> There are three components: (i) a defined benefit component (9 percent paid by employer and 7 percent

> 35 Pensions can result in different types of redistribution. They can redistribute within the contributing population, for example by placing a floor and a cap on pension income, they can generate inter-distributional redistribution based on demographics and economic growth, they redistribute from workers who contribute but not enough to receive the benefits, and when the social security system is in a deficit, as is the case in the Palestinian Territories, they redistribute from tax-paying individuals to pension recipients.

> 36 World Bank (2016). Public Expenditure Review of the Palestinian Authority: Towards Enhanced Public Finance Management and Improved Fiscal Sustainability. World Bank Report No: ACS18454. [http://hdl.handle.net/10986/25100]. Administrative data of pension contributors from the Public Expenditure Review (PER) for 2014 (the closest year available).

> 37 According to the program rules, the scheme applies to anyone working in the public sector, a local authority, an International Organization (IO), the United Nations Relief and Works Agency (UNRWA), or a non-Governmental Organization (NGO).

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