Economic Policy Review ISSN 1313 - 0544

For those who do not pay social security - jail?

Author: Adriana Mladenova / 29.03.2007
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Do people who don't pay the whole amount of their social security taxes deserve to go to prison? Just as much as they deserve to go to jail for preferring to go to a vacation or buy a home or a car for their kids, rather then give this money to a wealthy unknown firm that promises to build them a house. From an ethical point of view, this is the analogy of the proposal for imprisonment of those who don't pay their social security taxes that was being discussed in public last week. Here is, in brief, what the whole turmoil is about.

A debate, initiated by Minister Emilia Maslarova was held on Monday concerning the "problems and perspectives of the current pension system", in which present and former representatives of the Ministry of Labor and Social Policy, employers, and syndicates took part.

The following are the main topics of discussion released if front of the media:

  • - Lack of payment of social security taxes - more than 40 % of the employers, according to the figures of the Ministry of Labor and Social Policy, do not insure their employees on the full amount of their salary, and therefore they pay less social assurances then required;
  • - The deficit of the Pension Fund to the National Social Security Institute (NSSI) increases every year
  • - The dissatisfaction among pensioners increases equally because of the low pensions they receive. Some of them feel deprived from the introduction of the point system and they are of the opinion that this system is unfair because of the formula of the estimation of the pension rate.

The following are the measures that were discussed at the meeting:

  • - Enforcement of the control and the fines of the employers and the employees which hide income; the introduction of legal ways for searching personal responsibility rather then administratively fining the offenders according to the provisions of the Social Insurance Code
  • - Imprisonment for those who insure themselves on lower then the real income they receive
  • - Increase of the minimum of the social insurance for some of those who insure themselves - like dentists, lawyers, etc.
  • - Leveling of the pension age to 65 years for men and women or eventually - increase in that minimum - to 68 years.
  • - State employees to bare the social insurances made on account of the employees - at present all of the social insurances that are due to the state employees - like judges, policemen, military are being paid by the State budget.

These proposals are inadequate for the reality in Bulgaria though.

First, the sources of all problems must be defined clearly and the counter measures must be pointed out. The grey market along with the mass abuse of social security tax payments are just symptoms of a ‘sick' pension system, which itself is a result of the wrong design of the whole compulsory state insurance scheme. The measures proposed at the meeting will only make the situation worse, they will increase the burden carried by the private sector and the employees, rather than create stimuli for all of them to pay their legally defined taxes and payments.

Why do the business and the employees not pay their social security taxes in full?

It is the answer to this question that we must find first, before starting to suggest counter measures. And the answer is more than obvious: because people have lost confidence in the state pension system, they don't believe that the state is able to provide them security, namely the benefits that they are promised to receive in the future in return for their social security payments now.  They feel these are lower than the alternative price taken from their income. For the working people, having more money now is more valuable then receiving a promise for a pension, which will not be formed on the basis of their personal contribution, but will be required on the basis of enforced solidarity (as absurd as this phrase may sound) of the future generations mixed with the policy of the state. And judging from the present condition of the pensioners - it will be insufficient for leading a normal life.

Under these circumstances it is understandable why people prefer to increase their net income, which they can use for the consumption of different goods, for savings or for investing in more profitable beginnings then putting their money into a doomed to failure system, which shows no symptoms of recovering or reforming. It is the personal interests and motivation who dictate the rational actions of market subjects, and the state machinery, as much as it may try, it may never change this regularity. The people are convinced that the state sectors are being robbed, that corruption is abundant, that the state enterprises are not profitable to a great extent, that the public resources are mismanaged, that the transparency on expenditure of tax received incomes is insufficient, and that the bureaucrats have grown resistant to changing and optimizing of their work, which for them would mean only cutting jobs. Hence, should people who prefer to keep their money, for the education of their children, for taking care of their parents, for investing and so on, be subject to imprisonment? Which of the mentioned above is a crime? It is true that laws are created to be binding to all, but when laws themselves are truly unbearable and do not guarantee security, it is more than ceratin that people will not abide by them. Therefore, the mass tax hiding results not from the spoiled morality of employers and employees, but from a profoundly mistaken social security tax system.

Secondly, it is important to realize that even if social security taxes were paid by the state employees, it would not result in reducing of the Pension Fund deficit, because even at present, the taxes of those employed in the state sector are being covered by the state budget and transferred to the budget of the NSSI and the Pension fund (in fact, it doesn't matter who pays the social security taxes - the deficit of the fund will remain unchanged and present).

On the whole, there will be certain benefits for the state budget if the idea of state employees paying social security taxes on their own is realized (amounting to a couple of million leva) under the condition that their pre-tax salaries remain unchanged. This, in figures, means reduction in their net income with some 30% per month. Such a measure is extremely discouraging for every employee, on the one hand, and on the other - it is extremely unpopular, and it is hard to believe that there are politicians who would be willing to take such a step. Not to mention that the possible fiscal effects form such a measure would not be great. The budget surplus only for January 2007 amouns to some 103 million leva, which shows that there is enough income to the budget to cover the state's common expenditures, but those who are defined as "pensions" are not enough.

The second possible way for transferring such a burden of all employees to the state employed employees is if their pre-tax salaries are increased in order for their net income to remain the same. Since the salaries of the state employed are covered by the taxpayers in the private sector, such a move would only mean re-allocation of resources, which brings along with itself extra administrative and transactional costs, but no benefits. The reform in the state administration that would actually lead to some positive results is one that would lead to its effectiveness and optimization through decreased numbers of state employees. While the only way out for the pension system is its privatization and transformation via the introduction of individual accounts of the insured employees. (More on this topic is available on the internet site of the IME's Tax Bulletin  - " Can the social insurance be lower, and the pensions- higher?" and  the IME's web page on arguments in favor of private pension system).