What removing the 10% tax break for retirees would cost

The president of Medef called for the 10% tax reduction on retirement pensions to be removed. A measure considered more “fair” than the freezing of pensions for six months defended by the former Barnier government. It would in fact save the lowest 15% of retirees and would make the wealthiest contribute more, according to the OFCE.

“For a retiree to benefit from a tax break for professional expenses, it’s unnatural, it’s aberrant.” In a context of degraded public finances, the president of Medef, Patrick Martin, pleaded Thursday on BFMTV for the removal of the 10% tax reduction from which retirees benefit.

This reduction is now automatically applied by the tax administration to the declared income of active workers and retirees. By mechanically reducing the amount of income tax payable, it is supposed to cover expenses incurred for professional expenses. According to Bercy, the shortfall would be of the order of 4.5 billion euros for the reduction applied to retirement pensions alone. Which makes it the second most expensive tax niche intended for households, after the tax credit linked to the employment of an employee at home (5.9 billion).

Small pensions spared by the removal of the 10% reduction

The boss of Medef is not the first to propose eliminating the 10% tax reduction for retirees. A few days earlier, it was the president of the Retirement Orientation Council, Gilbert Cet, who was in favor of it, describing this measure as “fair since the most modest pensions would not be affected”.

This is what the OFCE confirms in a study published Thursday January 9. Its author, the economist Pierre Madec, attempted to compare the loss of income induced by the elimination of the tax reduction on retirement pensions and that which would have resulted from the six-month postponement (from January to July) of the revaluation pensions on inflation, as initially planned by the former Barnier government. However, it turns out that if the two measures generate overall the same level of savings for public finances, the first puts more of the contribution on well-off retirees, while sparing the more modest.

“Contrary to the planned delay in the revaluation of pensions, the elimination of the 10% tax reduction would not affect the most modest retirees, who are generally less likely to be taxable,” specifies the OFCE.

In detail, the lowest 5% of retirees (9,000 euros annual income on average in 2022) would have lost 90 euros with the postponement of the indexation of pensions to inflation. On the other hand, the removal of the tax reduction would have no impact for them. Which, more broadly, would be the case for the poorest 15%.

860 euros loss for the 5% of wealthiest retirees

Generally speaking, the lowest 50% of retirees “would see their disposable income less affected by the end of the tax reduction than by a freeze on the increase in pensions”, underlines Pierre Madec. Conversely, the standard of living of the wealthiest retirees “would be affected more in euros by the removal of the tax allowance even if it should be emphasized that the benefits linked to the tax allowance are currently capped at around 4,300 euros per tax share”.

The end of the tax reduction would reduce the income of the richest 15% by an amount of between 780 and 860 euros, while freezing pensions for six months would cause them to lose between 440 and 510 euros.