Банкеръ Weekly

Briefs

BISMARCK IN FULL-BOTTOMED BREECHES

It's absurd to claim that you could turn a car into a plane by adjusting a propeller on it. But that's what insurance experts from the Confederation of Independent Trade Unions in Bulgaria (CITUB) are trying to suggest lately. According to them, the poverty problem in our country could be settled as if by a magic wand, namely - by redistribution instead of reduction of the tax burden on the employed and employers. Currently, the size of social insurance instalments in Bulgaria is 41.5%, which is one of the highest levels for the European Union (EU countries. This presupposes Scandinavian, and not the ridiculously low Bulgarian wages. Trade unionists claim that it is not the percentage of social insurance itself, but its distribution between employees and employers, that blocks the increase of incomes and the development of the domestic economy. According to CITUB data, Bulgaria's gross domestic product (GDP) in 2004 exceeded slightly its 1989 level. At the same timethe average working wage is just 50.3% of that paid fifteen years agoand the average pension - even below 50 per cent. But despite these regrettable 'achievements' of the transition period, the attempts to go out of the vicious circle 'expensive labour force - poor employees', have hit the wall. CITUB's new proposal is to reconsider the contribution to the social insurance payments of the employed (who currently cover 30% of them) and of the employers (at whose expense is the remaining 70%) without changing the instalment itself. The idea is that the instalments of employees who get up to BGN165 a month should be entirely paid by the firms they work for, and the higher the remuneration, the higher goes up the percentage to be paid by the employed. Calculations show that presently, with the BGN150 minimum working wage, the employer pays BGN43.58 and the worker - BGN18.67 for social insurance. If the proposed new scheme is applied the employer will be paying the entire amount of BGN62.25 for the minimum working wage. But if the remuneration is BGN300, he will be paying only BGN11 more. Therefore, the motivation for raising salaries, and respectively - incomes, will increase. At the same time, the budget will be deprived of BGN103MN in proceeds, CITUB experts pre-estimate. For the time being most experts regard this idea as an entirely Bulgarianmodification of the so-called Bismarch model(solidarity type insurance). There are no examples in Europe of differentiated personal insurance instalments and their progressive rising with the increase of incomes. All EU countries have adopted the proportional distribution of the burden between the employed and employees, most frequently at a 1:3 or 1:4 ratio. But although pension systems in the EU are of a solidarity type, they do not allow violation of the so-called actuary justice, and the people get a fair compensation, corresponding to what they contributed to the system. In Bulgaria, however, this principle is incredibly distorted. The most recent example is the legislatively preset healthcare insurance scissors - the monthly instalment for a child up to 18, paid by the budget, is BGN1.10, while those who are insured on the basis of the maximum insurance income of BGN1,300 pay BGN78 each month. The Bulgarian Industrial Association (BIA), however, claims that the attitude designed to relieve the employees somewhat from their social insurance burden is doomed to failure. The representatives of business support quite a different thesis - that the social insurance burden in our country is intolerable. Even taxes are not so heavy for firms as they are paid once a year, while instalments to the National Insurance Institute (NII) are due each month. That is the main hindrance to the opening of new working positions and to the increase of wages, entrepreneurs point out. Their stance is that the social insurance burden needs to be radically reduced - up to 15%i. e. to become equal to the profit tax rate. A settlement by compromise is to reduce the instalment to 27%, of which 18.9% to be paid by employers, and 8.1% - by the workers. That will mean about BGN300-400MN of additional expenditures for the budget. NII experts believe that the settlement of the problem regarding the high instalments lies in turning the State into a 'special insurer'. According to them, the roots of the problem can be traced more than two decades back when the State had to accumulate reserve funds in order to ensure future pensions. As the then State, which called itself 'planned' did not do that, the responsibility should be undertaken by the present State. The proposal is to redistribute the social insurance burden as follows: 40% should be payable by the employers, 20% - by the employees, and 40% - by the State. The budget will spend BGN1.1BN in order to realize that proposal. These funds could be provided by profits from the management of the fiscal reserve, from the budget surplus, or from privatisation. Thus, the business will have BGN750MN additionally at its disposal, the real incomes of the employed will go up by BGN168MN, and that of the self-insured - by BGN80MN. If NII's model is applied, the economy and the incomes will improve without violating the public agreement according which the present generation of employees pays a 'double price'for the reform by providing funds through its instalments for the present pensioners and concurrently making contributions to their future pensions. The activation of such a model will clear off the deficit in the social insurance tax within two or three years and insurance payments could be reduced afterwards, NII's actuary calculations show. The other necessary step is to increase more quickly the share of capital funds. For 2004 and 2005 the instalment for universal pension funds is 3% and it is planned to reach 5% till 2007. In Western Europe the State's participation in the social insurance model is rather a rule than an exception. Three quarters of the proceeds in the Austrian pension system, for instance, come from the instalments of the insured, but the balance is provided by state subsidies. In Denmark there is the so-called national pension, ensuring regular incomes to Danish nationals, and it is entirely financed by the State. In Spain the share of the state subsidy in the social insurance budget is over 17% and the money is mainly distributed for adding up to pensions below the minim set size, for disability pensions, and children allowances. Of course, there is some economic logic in the idea of reducing the payment due by the employer. That reduction is designed to increase entrepreneurs' resources, which will be directed to investments, creation of new working positions, and increase of wages. Lower social insurance instalments mean also more employed people, broadening of the insurance basis, and more instalments, respectively. But the most immediate effect will be the shrinkage of grey economywhich will help fill up the gaps in the social insurance tax's funds.Judging from the calculations of NII's actuaries, more than BGN2BN additionally would be necessary in order to reduce the instalment to the pension fund to 10 per cent, and its reduction to 15% will cost BGN1.6BN. If the proposal for a 20% social insurance instalment is approved, BGN940-950MN will be needed. The problem is that even now the public insurance system suffers from chronic deficits. The deficit in the 2004 budget of the social insurance tax totalled some BGN450MN.The budget injection for 2005 is projected at BGN623MN. It is intended to compensate lower proceeds from social insurance tax as a result of several changes, e. g. the reduction of the insurance instalment for unemployment (accounting for BGN40MN of the deficit), employers' decision not to pay instalments in the Pensions Find for maternity leaves and unemployment (another BGN40MN), the greater number of participants in universal pension funds, for which 3% of the state insurance is set aside (another BGN10-15MN). Whatever arguments are put forward in favour of the proposals for new reforms, the major question to be replied is if they would result in persistent positive changes of the social insurance model in Bulgaria. And besides, isn't it already high time for the State to undertake its responsibility for the chronic problems in its social insurance system.

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