Economic Policy Review ISSN 1313 - 0544

Social Contributions Debate

Author: Zornitza Manolova / 29.06.2009
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Two members of the cabinet (from the same party) for sometime have been discussing in the media the social security in the country.

First, the Minister of Economy and Energy Mr. Petar Dimitrov began talking about reducing social security by 4-5%, claiming that there is a resource for that and such step would help the companies to handle the crisis. This is absolutely accurate but the catch is that his intention refers to the next mandate without any explanation about that. Next the Social Minister Mrs. Emiliya Maslarova is against this proposal with the following arguments:

  • The decrease of social security will reduce the state's revenues which may even lead to increase of other taxes - if we go back in time we would see that the claims about the reduction of revenues to the budget was the main argument against the introduction of the flat tax. This was refuted during 2008, and the comparison during the first three months of this year with the previous once again confirms it. Actually the state collects record revenues from these taxes and the reduction of social security would multiply the effect. At present social security is the most non paid tax, on one side, due to the high rate and from the other due to the unreformed pension and healthcare systems. Maintaining the current levels of social security tax would reduce employment and is very unwise policy; keeping in mind the crisis and the idea that the government would like to help the creation of new jobs.
  • The pension system would be destabilized - the pension system had been destabilized for a long time. The current PAYGO system is based on high social security payments and low pensions. Its entire intention and design are condemning it to bankrupt, especially if the pensions increase in a time of low production and consumption (as it was happening during the last six-seven months). It is time for a reform and transition to capital accumulating system, which would allow lower payments, higher pensions, higher economic growth and it is proven on top of that.
  • The problem is that many people do not make the payments according to their true income, but on much lower levels - there is no logic - many people do not pay then those who pay should pay more - this is not a policy. The main cause for non payment is the high rates and the existence of a minimal social security threshold and minimum wages, because they actually indicate the smallest amount for social security which one should pay without the State suspecting fraud. The fact that more than 1 million working Bulgarians pay social security exactly on the minimum is significant, in other words exactly the removal of these requirements would have a positive effect on social security payments according to the real income.

Although we have stringent arguments for reduction of the social security burden and implementation of reforms, which IME had presented many times, apparently there is no political will for change during this mandate - most parties are in favor of lower social contributions in the future, but for now just in paper. When the time comes and the good results appear, most probably (like the flat tax) there would be arguments who first proposed the reform. For the time being - everybody is a looser.