Банкеръ Weekly

Briefs

DISGUISED BATTLES FOR THE PENSION TAX

POLITICIANS' AND SYNDICATES' ATTITUDE FOR CUTTING DOWN TAX BURDEN DOOMED TO FAILUREBabylonian debates for lower insurance payments in Bulgaria are about to turn into outright bargaining of the everyone against the Government kind. By the end of this Cabinet's mandate the insurance burden will drop by 4-5%, Social Minister Emilia Maslarova declared recently. A little before that the Union of Democratic Forces (UDF) deposited in Parliament a radical proposal for reducing the insurances by a third as of the beginning of 2006. This is the way to bring to the light a part of the grey economy and reduce corruption, the rights claim. Employees also declared themselves against the pension tax some ten days ago. The launched the successive idea for a drastic decrease of instalments in the insurance system, garnished with promises for higher incomes and less grey economy. The scheme of proposals, a kind of an insurance oasisis as follows: employers swore officially to raise wages by 14% if the State cut insurances by 21 per cent. And those who do not keep that promise will continue paying the old insurance rates. The insurance burden in Bulgaria is currently 42.7%, of which the employer pays 70% and the employee - 30 per cent. The accounts of businesses show that the double reduction of the burden won't threaten the payment of pensions because it would be compensated by the grey economy coming into light and the increased turnover of companies. That would also eliminate the evil practice of part-time employment or without a labour contract. At the same time, the lower proceeds into the budget of the National Insurance Institute (NII) could be compensated if instalments are calculated on the salaries of state officials as well, employers claim. Higher instalments have been proposed for militaries and policemen, as the current ones do not cover the pensions they get. The proposed ideas for reformingthe pension system presently meet the formal silence of the executive power. This is fully explainable although prior the elections all three parties of the incumbent ruling coalition were bravely promising a reduction of the pension tax in future. The Finance Ministry announced that three options for reducing the tax burden were being discussed, but its experts were not willing to go into details.In other words, it is still not clear how the fulfilment of the unanimous promise of the rulers to raise the share of pensions to 10% of GDP will begin, or how a silver investment fund for assisting the pension system will be set up. Among the broadly proclaimed social priorities of the Cabinet were also: the introduction of mechanisms for indexation of incomes, a new system for children allowances and social assistance, a family taxation according to incomes, and high salaries. Obviously, money from the budget is necessary in order to fulfil all these promises. And the long-awaited reduction of insurance paymentsis a step in the opposite directionIn the days of the meeting between IMF Mission Leader for Bulgaria Hans Flickenshield and Finance Minister Plamen Oresharski it became clear that no fiscal manoevres in the sphere of taxes and insurance were recommendable. Once more the IMF gave a sign it would be keeping a tight rein on the Government's finances and won't allow revolutionary changes in these spheres. The possibility that the State becomes a direct participant in the payment of insurance contributions has been commented in public for several months now. I.e. That is to say that initially their amount would remain unchanged, but the ratio of payment to become 35% - by the employer, 35% - by the State, and 30% by the employee. Such a model would clear away the deficit in the social insurance tax within two or three years, and the instalments could be cut down afterwards. The insurance system in Bulgaria does not need radical changes,but only technical correctionsNII experts are adamant. It is obvious that the low pensions in the first pillar of pension insurance won't increase as if by a magic wand, but revolutions in the insurance sector could be risky for the entire pension model. Another possible step is to cut by about 1% the instalments for unemployment and accidents and direct the funds to the Pensions Fund. In order to avoid insufficiency, the NII has calculated that the real pension insurance contribution should be 34.5% on average for everybody and not as now (29% for those born before January 1, 1960 and 26% for those born after that date. The idea of launching target issues of government-guaranteed securities in which private pension funds would invest money, could be realized as well. NII's Chief Actuary Hristina Mitreva believes that fresh money will enter the state fund in that way. And when the system is stabilized in some years, the funds will get their money back with an interest. A third option is the establishment of the so-calledsilver fundwhich will gather money from privatisation and granting licences. A similar fund was set uo four years ago with the Belgian Finance Ministry and it already has more than EUR12BN. Proceeds from privatisation and the budget surplus are accumulated in the fund and invested in government securities. In fact, such funds exist also in Great Britain, Eire, France, Norway, Canada, etc. They are something like a cushion against unexpected financial deficits as a result of a demographic pressure on the pension systems of a solidarity type. And they guarantee the maintenance of a high level of incomes of elderly people.Of course, all those ideas and schemes could be realized in Bulgaria, especially if there is sufficient political goodwill for reducing the insurance burden. Currently, NII has a deficit which is filled in each yearby taxpayers' moneyThese funds are redistributed for pensions in order to continue the functioning of the public contract in this country. (According to macroeconomic actuary calculations, the present pension system will break even about the year 2010 if there are no steep changes of the reform until then.) Monthly pensions of BGN60.95 to BGN120 are paid to 47.2% of all the 2,300,000 retirees. Only 11.4% get more than BGN200. Currently, 100 employed provide for 196 unemployed, 96 of them pensioners. On top of all, some of the insured - such as state officials, militaries, and those working in the defence system - do not pay personal instalments. This amounted to BGN74MN for 2004, which is a third of the one-month expenses for all pensions.The demographic forecasts of the National Statistics Institute (NSI) seem more than troublesome on that background. Retirees are presently 23.7% of the population and are expected to double to 46.7% towards the year 2020. That means that the number of elderly people will reach 3,100,000.Ideas The Confederation of Independent Trade Unions in Bulgaria (CITUB) has given new birth to its idea for the establishment of the so-called demographic reserve fund. It is believed to cushion the effect of the aging of population and low birth-rate. The fund, however, won't solve the problem regarding low pensions. The sources for its feeding, according to CITUB, will be proceeds from privatisation, issuance of target financial instruments, money from games, lotteries, sports totalizator, etc. The fund could be filled as well by setting aside a percentage from some shares, and also by an earmarked percentage from the fees for licensing entities in the sphere of additional pension insurance and general and life insurance. RecordsThe tax burden in Bulgaria is among the heaviest in Europe. Eurostat data show that only Greece and the Netherlands are ahead of our country, with 43.1% and 43.0% respectively. Bulgaria rates third, with 42.7% (as of January 1, 2003). In the same time, however, we'll join the EU with the lowest incomes. There are considerable differences as to the size of insurance contributions between various European countries, varying from 12% in Denmark and Great Britain, to the already mentioned 43% in Greece and the Netherlands. Social insurance systems also differ. In Denmark, for instance, insurance payment account for just 5.4% of the tax burden, while their share is 44.4% in Germany, 41.6% in the Czech Republic, 40.2% in France, etc. Table Tax burden for 2005SalaryInsurancesTaxTotal 150 18.7 0.1 18.8 200 24.9 7 31.9 300 37.3 24.8 62.1 400 49.8 44 93.8 500 62.3 63.3 125.6 600 74.7 82.6 157.3 80099.6123.1222.7

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