Economic Policy Review ISSN 1313 - 0544

Higher Social Contributions?

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During the past week, there was talking in the public space about an increase of social security taxes. Labor Minister, Totyo Mladenov, and the director of the National Social Security Institute, Hristina Mitreva, prepared the ground for a possible increase of the social security payments despite the government’s promise to go in the opposite direction.

In the pension reform project of the consulting council in the Labor Ministry (look in here), a rise in the pension payments is nowhere to be seen. There is a discussion only about the Second pillar (the private pension funds), where there is a proposal for an increase of premiums, something we, generally, support. However, if we read between the lines, the project determines an increase in the state social security tax.

The document says that the lowering of the social security burden is the main reason for the current Social Security budget difficulties (the low pension levels respectively). Similar conclusion is also reached by the consulting council. Even Hristina Mitreva has told journalists on a number of occasions that “the decrease of social security taxes was a mistake”(look for example here).

On the other hand, the main goal of the reform proposals, made by the consulting council, is the strengthening of the First pillar and the return to Social Security taxes as main source of income. At the moment, they cannot cover even half of state pension expenses. If we blindly follow the “principle” – social security income should cover pension costs – then this would mean a two-fold increase of pension payment to the state. The good news is that such a rule does not exist; the bad one is that we might implement it, nonetheless, if we are to follow the logic of the proposals.

Labor Minister, Totyo Mladenov, on the other hand, promised higher pensions (look in here), which would further motivate an increase of the tax burden. Without a doubt, this is a promise that is definitely not guaranteed. Yet, it creates certain expectations. A mistake, the government has already made several times.

Such a behavior is very disturbing. In conditions of economic crisis, when unemployment is an obvious issue, putting further pressure on labor is unthinkable. This could mean higher unemployment as well as more under-the-counter labor. As a result, there would be more problems for the pension system. Even now, people avoid paying social security. What can we expect, if their taxes double?  

Furthermore, Hristina Mitreva also makes very brave statements about the negative effects of the lower social security burden, which “has not resulted in higher employment, but has been used only for bigger profits”. This is just wrong. The question is higher employment or higher profits? The state taxes both. Also, both tax burdens have not changed in recent years. If Mrs. Mitreva is correct and there is no effect on labor, and everything has gone for profit, then the tax income should be correspondingly higher – lower return on income taxes and higher on profits. Unfortunately, in 2009, despite the crisis returns on income tax went up, while those on profits decreased. The tendency remains unchanged during the first quarter of 2010.

The economic slump has left its mark. However, we should not ignore the good effects of previous reforms. Lower social security payments saved jobs, and this should not be forgotten. Moreover, a research publication (look here) by the National Statistical Institute on the employment position of workers, who lost their jobs because of the crisis, shows that those, who returned to work, have done so, not with the help of governmental programs, but because of new opportunities on the labor market. Those new opportunities depend directly on labor taxes – if we raise the burden, they disappear, if we lower it, new ones appear.

Here is the place to comment on the so-called “principle” – social security tax income should cover pension costs. Nothing suggests that this is correct. Pensions in Bulgaria are just a promise by the government and its fulfillment depends solely on it. The money from the entitlement programs are not saved anywhere. Nonetheless, those covered are promised to receive a pension in the future. The payment is guaranteed by the state, not by the National Social Security Institute or by the Pension fund. The two institutions would pay out the transfers, but only if the state (in the face of the government) keeps to its promise.

In essence, governments are required to gather the necessary funds. This happens, most often, when the state burdens the business and the ordinary people. It does not matter whether this is done with social security, corporate, income or value-added tax. It is not said that state pensions have to be financed only with social security income. Anyway, in Bulgaria this is currently impossible.