Introduction to applied methods for life situation calculations

The term “life situation” in the following context describe events in life that affect individuals or households, which entail changes to status and income e.g., childbirth, unemployment or retirement. The effects of these events with respect of changes in income is what applied methods of life situation calculations is all about.

Calculations are country specific and comparable

The calculations used for the life situations are designed to make country specific data as comparable as possible across the Nordic countries.

The calculations reflect the income levels for people receiving benefits in case of a social event, compared with the level of regular labour market income in the Nordic countries. That is, the level of income as compensation due to a social event as a percentage of the level of income prior to the social event.

For example, how much one earns after becoming unemployed, compared to how much one earned while in employment. On this basis, compensation rates are calculated for different life situations and according to varying income levels from work before the social event.

Standardized elements for comparison purposes

To make sure that the calculations are comparable across countries, a few elements within the calculations are standardized. These necessary measured are important to secure comparisons, but also for understanding the results.

In general, all calculations are made according to the most recent rules and regulations. For the same reason calculations are always expressed for a specific year. The rule of thumb is, that rules and regulations used, are those in power by January 1st of the year of calculation.

When calculating disposable income, housing benefits and payments for day-care are included. Both expenditures are dependent on household size and income, which therefore plays a substantial role when calculating the compensation rate following a change in life situation.

In the case of calculating social assistance benefits, the disposable income is calculated following the deduction of rental costs.

Employer costs

To present a clear picture of overall taxation in the Nordic countries in terms of income tax and social contributions, the calculation includes employer costs i.e., gross wages plus statutory social contributions (the assumption is that the individual concerned works in the private sector).

As a result, two accounts of net income (i.e., gross wages minus income tax and social contributions payable by the employee) have been prepared: net income in relation to employer costs; and net income in relation to gross wages.

For Denmark, employers’ statutory social contributions cannot be calculated.

However, it is estimated that for an employee with a salary that corresponds to an AW, the contributions constitute approx. 1.5 per cent of the salary.

Tax payment

The calculation uses average national rates of taxation i.e., average local authority rates of taxation, including average church tax percentages, as well as the state tax.

Gross income

Gross income consists of income from work, and excludes e.g., child allowance and housing benefit.

Disposable income

Disposable income is calculated as gross income plus child allowance and housing benefit, minus income tax, social security contributions payable by employees and charges payable for day-care institutions.

For Denmark, Finland and Sweden, the social security contributions payable by employees include contributions to the voluntary unemployment insurance scheme, in the form of membership fees paid to unemployment funds. The calculations do not, include union contributions.

Disposable incomes are calculated on a yearly basis, both for people in work and for those receiving various social benefits. The calculations assume that those concerned receive social benefits throughout the year, even where this is not the case (e.g., parental benefit). The listed incomes per month are the annual amounts divided by 12.

Equivalent disposable income

To enable comparisons between households of different sizes, a household’s disposable income is usually divided by an equivalent weight. In this publication, the modified OECD scale (also used in EU-SILC) is applied.

On the OECD scale, the first adult in the household is assigned a weight of 1. Any other adults are assigned a weight of 0.5. Children between 0–13 years are weighted at 0.3, whereas older children are weighted at 0.5.

Therefore, for a couple with two young children, the equivalent weight is:

 1+0.5+0.3+0.3 = 2.1.

If the annual disposable income of a household is DKK 500 000, the equivalent disposable will be: 500 000/2.1 ≈ DKK 238 000.

Compensations rate

The compensation rate calculates the remaining income following the change in life situation (e.g., in the event of unemployment, income in the form of unemployment benefits), in relation to the income one would have earned from work had the change not occurred. This gives the equivalent disposable income, and the compensation rate is given in per cent:

Compensation rate = 100 * eqv. disp. income after / eqv. disp. income before.

Children’s age and use of day-care

Child allowances and charges payable for day-care are calculated based on the following households:

  • A single parent with a new-born i.e., childbirth as a life event
  • A single parent with a child attending day-care. The age of the child is five years old.
  • A couple with two children aged five and eight i.e., one child attending day-care and one child attending school but in need of after-school care.

For Denmark and Sweden, charges payable for day-care are calculated based on average charges and the national rules governing payments.

For the Faroe Islands, calculations are based on the rates that apply in Torshavn.

In Finland, it is assumed that other children of preschool age also make use of day-care facilities, albeit on a parttime basis only.

For Iceland, calculations are based on the rates that apply in Reykjavík.

In Norway, it is the rates that apply in Oslo.

In most of the calculations of life situations, except for the new-born child,

it is assumed that the children are attending day-care.

For child allowances, the calculation includes child maintenance to single parents (corresponding to the amount of the contributions payable in advance by the public authorities), in addition to the actual child allowance to single parents and couples with children.

Housing costs and housing benefits

In all calculations, it is assumed that the families live in rented accommodation.

The amount of the housing costs/rent depends solely on household and is independent of the income level. Housing costs include rent payments. For the life situation involving social assistance, heating costs are also included.

It has not been possible to determine the amount of rent for the individual households in a manner that is consistent across all the countries.

In some countries, the rent is based on an estimate of the amount spent on rented accommodation per household, as well as the national average rent per square metre. In others, it is based on survey data of rents for various households in certain local authorities.

Except for the life situation involving social assistance, the rent for the

individual households are merely used to calculate the amount of any housing benefit – the rent itself is not included in the calculation of the disposable income.

The rents in Iceland are based on data that applies only to Reykjavik.

For Norway, the rents are based on the data for Oslo in the first quarter of the relevant year. In this case, the assumption is that the rent depends on the size of the household. Furthermore, housing benefits are estimated by means of Husbanken’s housing benefit calculator. It also uses the Oslo rates.

Comparing different income levels

To measure different levels of income across countries, the standard OECD concept of Average Worker (AW) is used. Definition of AW is the average income for a full-time waged worker in the private sector. Four different percentages of AW are the basis for calculating compensation: 50, 75, 100, and 125 per cent of AW. A table or figure indicating AW 100, means the income prior to the social event was 100 per cent of AW.

In the calculations, it is however 75 per cent of AW that is considered to represent the median income level. The working group consider AW 75 a better representation of the wage income of average wage worker, based on the overall level of income for the Nordic countries.

The level of income around AW 75 seems to be most frequent level of income compared to the entire distribution of income in the Nordic countries.

The purpose of life situation calculations is to examine the dissimilarities among all the similarities, as the Nordic countries are defined by an elaborate social safety net and a universalistic welfare state.

The Nordic social protection systems can as such be seen as variations of the same model, and therefore there is much to be learned from comparing the countries.