Economic Policy Review ISSN 1313 - 0544

Liars… according to the letter of the law

Author: Peter Ganev / 09.10.2008
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This week the minimal levels for social security payments for 2009 have been agreed; where the average minimal income for social security payments would reach 370 levs, while during 2008 it was 292 levs. This news is extremely important for many of the employers (and the employees as well) in the country, who again would find the necessary "reference point". What does it mean actually?

In Bulgaria, with respect to tax and social security payments almost everybody is cheating! This is a fact that no one would be brave enough to challenge. The number of people who are paying social security is approximately 2.5 million, while according to the Kapital newspaper among the people with a labor contracts, over one million make payments at the minimum level! It is apparent that most of these people get higher wages, which simply remain hidden for the state. Why is this taking place and how is the size of the "lie" determined?

We have stated many times that the main reason is hidden in the high social security burden and the unwillingness of the people to part with such large part of their income. Needless to say that once the decision not to pay the proper social security payments is made - in other word to cheat a little, it follows that the size of the lie must be defined. There are people who resolve the problem in general - in other words they are not working officially and do not pay any social security. Let us, however concentrate on the remaining (the larger part), which do not cheat in general (they work officially), however they cheat only about the real values. Let us take one example (where we assume that there are no minimal levels of social security payments):

The manager of a small company (for example 10-15 employees) decides not to make the full social security payments. It is a serious company which would not hire illegally (unofficially, with the wages paid entirely "under the table", i.e. totally outside official channels) the manager would simply like to cheat a little with the size of the wages and thus save some money.  Simply stated, the manager is not a full cheat, he simply pretends to be absent minded and is cheating just a little bit. We assume that the employees are taking into account the reality in the country and are not starting to look for their rights, but are happy with that situation. The question is however, how the manager could define what is the level at which to pay the social security payments, i.e. he has to define the size of the lie?

The answer is relatively simple - the manager would lie to a degree, where he would not get into trouble (personally and the company). This is the reason not to employ illegally - is such case the probability of trouble is relatively high and it is bad for the image of the company.  For example, if he is paying his employees 1000 levs per month, the manager must decide how much of that amount could be hidden. Is he going to decide to declare the wages of his employees at 5 levs per month? Not very likely - this could be clearly seen as a brazen lie, it would be better not to declare them at all.  In other words he is looking for the "acceptable level of brazenness" (or the level of "acceptability") - when the employees and the partners/competitors, the mass media and the state would react in one or another form. 

Than, how much is the level of brazenness? By how much do they try to cheat you (it happens sometimes) in the shops and the restaurants? If your actual bill is 20 levs, has anybody given you a bill for 100 levs and on top that happens every day? The lies we are talking about are between 10 and 20% - naturally this is not based on any calculations, and is entirely supposition and if you like it - personal experience. People very rarely lie in multiples! Which means that if the real salary of an employee is 1000 levs, the manager is not likely to decide to declare and make social security payments for less than 500 levs (probably significantly more), if he is not looking for trouble. Particularly with respect to the state, the manager has no way of knowing where exactly is its "level of acceptability" before the taxman is on him. To lie in multiples sounds very serious and he could expect some level of "unacceptability" by the various bodies. 

What would happen, however if the manager knows exactly what is "the level of acceptability"? What would happen when the state makes a public announcement that for certain profession there is a minimal level - i.e. for the state bodies it is normal that a person at that position receives that salary?  "Yes, this is the minimum, but we assume that this is normal". And that is what happens with everybody (who is inclined to cheat a little) starts paying social security at exactly that level - regardless whether they are cheating with one lev or with thousands of levs. That is what is happening in Bulgaria - over one million persons who are employed are paying social security exactly on the minimum levels.  

In reality there are two types of "acceptable levels" - the state level and the personal level. When there is a state defined level - 1) if the personal level is higher, than those who are inclined to cheat, pay social security at the state level; 2) if the personal level is lower than the state, it is very likely that the little bit of cheating would tern into great fraud and unofficial employment. All defects of the system are hidden by the existence of "official acceptable level" and not in its value.

Exactly the presence of "minimal social security levels" provides the bearing to those who are hiding their income. The managers know that the state would accept such income as normal, which automatically makes their task easier. If the acceptable level is lower than it is better for them.  In reality most of the employees receive much greater salaries. On the other hand, if the minimal levels are increased to the level of the actual salaries this would have catastrophic consequences - definitely higher unemployment and many people on the gray labor market. The only solution is not to define such levels - than the managers would be put under pressure, since they would not know where the "level of acceptability" is. What would happen than is not very likely to find out very soon, but it would be very disturbing for some economists if the result is social security payments at higher levels.