Банкеръ Weekly

Briefs

POLITICIANS PLAY WITH SOCIAL INSURANCE

Mr. Hristoskov, there are currently two proposals for the way to increase pensions in 2009... Which of them do you support?
- Yes, one of them is to give more weight to one year of insurance length of service - each year will weigh 1.1% instead of the current 1 per cent. The other option is as of July 1, 2009 all pensions released by December 31, 2008, to be updated according to the so-called Golden Swiss Rule.
For several reasons I support the first proposal for raising the weight as of January 1. In the first place, people will have the advantage to use that 10% rise earlier. In that way they will compensate the constant increase of the cost of life. In the second place, that is more fair because the increase will directly depend on the insurance length of service. My third argument is that this increase will concern not just the pensions that have been released till now. In the future, the income of each retiree at equal other conditions will be 10% higher. Thus, the ratio between the pension and the income one gets while working will be 10% higher.
Thus, pensions could be raised as of the beginning of 2009 and not as of July 1 and the highest pension will go up to BGN700. The lowest pension will also increase by 10 per cent.
If the second option is chosen, pensions will go up by 18-18.5% with a view to the expected inflation. As a percentage it is higher than in the first case, but it comes six months later. Therefore, the money needed for it is about BGN100MN less. In other words, retirees will have BGN100MN more with an increase as of January. Therefore, the deficit of the National Social Security Institute is BGN1.070BN in the first case, and BGN970MN in the second case.
As of next year it is planned that the state is included as an independent side in the social insurance process. Won't that change the insurance model adopted in this country?
- If the state participates by subsidies and the size of these subsidies goes up as a result of the decrease of social insurance instalments, then the model and the public relations as a whole are distorted. But if the state participates as an insurer and concurrently with an instalment, which the employee and the employer make, and the state contributes the respective part, the model then remains unchanged. In many countries there is such a state participation. In neighbouring Greece, for instance, and in Luxembourg the instalments of the three sides participating in the social insurance have been evenly distributed in three. Such a practice existed in the past in Bulgaria as well.
What is the difference between the two? The subsidy covers a certain deficit. But it can be supplemented or cannot be. When the state participates as an insurer the size of its instalment depends on how much the employer and the employee pay. My first proposal even was that the employer would pay the entire instalment and the state to reimburse afterwards the part it undertakes. Thus it will be guaranteed that businesses honour their commitments and do not only count on the state to pay instalments. But that idea has been dropped off at the present stage because there was an opinion that this financial operation is quite difficult and there would be nobody to exercise control.
One of the tripartite coalition's arguments for including the state as an insurer is that in that way employers' instalments drop by 2%, which would stimulate businesses and will help the struggle with the grey sector of the economy. Aren't those too many functions to the social system which anyway has sufficient problems?
- I completely agree that social insurance is a kind of insurance and should not be burdened with additional functions. Any burdening of the kind - to fulfil regulatory functions, to fight grey economy, to encourage employment, to stimulate agriculture, to solve demographic problems, etc, distort it. Regretfully, politicians do not realize that in that way they divert social insurance from its essence. They play with other financial instruments as well, without looking on them as a complexity.
I have made some calculations if the reduction of insurance instalments results in the grey sector of the economy coming to the light. It should be that way, but practically, the effects are minimum. As an indicator for comparison, for instance I take the ratio between incomes from insurance instalments and the gross domestic product (GDP) since 2000. It's obvious that when the total output goes up, the mass of labour incomes increases too, and instalments are calculated on that basis. Therefore, financial flows to social insurance go up. But when we compare them to the GDP, interesting results become obvious. The highest percentage of incomes from insurance instalments compared to GDP was in 2003 - 8.4 per cent. Minimum insurance thresholds were introduced then as well as mandatory registration of labour contracts. Those are purely administrative measures which I don't approve of as an economist. But as a person knowing the Bulgarian environment I'll have to accept.
With the reduction of insurance instalments that followed, incomes began falling down as a percentage of the GDP. We expect that ration to be 6.4% for 2008. At the same time we spend almost 9% of GDP for pensions alone. Of course, the difference is covered by subsidies. But they are not godsent. This is not Norway to get oil from the sea, or Russia with its rich gas deposits. The resource in our country comes from taxes and more specifically, from indirect taxes which are also paid by retirees.
In the European Union some 10.5 -11% of the GDP is spent on pensions on average. We expect this year the payments to old people in Bulgaria to be around 8.8 per cent. But only 6% are at the expense of employees and employers. At the same time, in Greece, Austria and even in some of the new EU members some 14-15% of the GDP go for pensions to retirees. Does that hamper the competitiveness of their economies? And has the competitiveness of Bulgaria's economy increased after we cut down the instalments? Or have the payment balance and the trade balance improved?
The problems of Bulgarian economy are elsewhere - they are in the management, marketing, technologies, priorities' policy, etc. We should look for results there. In fact, labour has been driven to the wall, profits are made at its expense, remuneration is being delayed and social insurance instalments are not paid.
In the public medium more often comes out the opinion that the social insurance system should entirely pass to capital schemes because people do not have any stimuli to make instalments...
- Everything except the 1.5% spent on management, administration of activities for collection of instalments, payment of compensations, etc., goes back to the people in the form of pensions, compensations for periods of illness, maternity and so on. Aren't these stimuli? If everything goes to a personal account as some propose, what will one do if still in the first year some unfavourable events, limiting his ability to work happen, such as disability, maternity, illness for instance?
It's been talked over and over that the commitment to retirees now should be undertaken by the state and that the moment was appropriate for that because of the budget surplus.But the expenses for just a year amount to BGN6BN. And the debt to all present pensioners and all those who will retire afterwards and who have not had the possibility to accumulate money in individual accounts, comes to hundreds of billions of levs. So I'll repeat that our country has no gas or oil deposits to make money from their sale and double the payments with that profit. The only thing we could do is to set up the so-called Silver Fund, but it will be just a buffer against more unfavourable years with demographic deviations.
The draft bill on the Silver Fund has been already passed on first reading in the parliamentary Budget and Finance Committee. Do you approve of the way proposed to manage the money accumulated in it? In its draft the Council of Ministers projects to invest it quite aggressively...
- I think that a good balance has been found regarding investments. My objections rather concern the role of the National Social Security Institute which has been disparaged in the Government's present draft. We do not claim to take an active part in investing the money, but in preparing the calculations for spending it. An actuary model is necessary as a whole which on the basis of demographic and statistical indicators would show the expenses for pensions each year and respectively the deficits that should be covered and what part of them could come from that fund. That is necessary to those who will invest in order to calculate the term and horizon of investments, the exact moment when the money will be needed, and the maturity of securities that would be purchased. If these two things are separated - the forecasts for the expenditure side, when the money will be needed and when the biggest sums wil be necessary, there is a risk of serious liquidity problems to arise and come to a situation when portfolios would be broken. At the present stage such an actuary unit is projected to be set up with the Finance Ministry, but I believe that its proper place is within the National Social Security Institute.

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