EKIP– Expert Club for Economics and Politics A Different Opinion
This weekend, the negotiations for a government between "We Continue the Change", "There Is Such a People", "Democratic Bulgaria" and the "Bulgarian Socialist Party" ended. Or at least their public part ended - the one that was broadcast live on the Internet. From what we saw, the negotiations generally went in relative harmony between the positions of the individual parties. However, some serious disagreements emerged during the discussion of tax and social security policy. The bone of contention turned out to be the maximum social security income. The PP and the BSP firmly insist on raising it by at least 450 leva in 2022 - a proposal that was sharply and rightly criticized by the representatives of "Democratic Bulgaria".
The key problem with increasing the maximum social security income was explained very precisely by Georgi Ganev from the DB during the negotiations. The way in which pension insurance and the social system as a whole work is such that such an increase will only strengthen the incentives for workers not to insure themselves on their real income. The pension system places too little weight on individual financial contributions to it through paid social security contributions. In other words, the pension that you will receive as a pensioner is not directly proportional to how much money you have contributed to the state pension fund. And when you contribute more after raising social security contributions, this does not mean that your future pension income will also be increased proportionally.
This does not solve the problems of the pension system
There are many reasons for this. The first and most important is that the state (first) pillar of the pension system suffers from a huge chronic deficit. Income from insurance contributions to the Pension Fund of the National Social Security Institute is enough to cover only 40% of pension costs. The main factor causing this deficit is the aging population. Since the mechanism of the state pillar is cost-effective, that is, the pensions of current pensioners come from the salaries of current workers, given current demographic trends, the deficit in the pension system cannot help but grow. One way to partially compensate for this deficit is to raise the retirement age, another is to raise the insurance burden. It is the latter that is proposed by "Continuing the Change" and the Bulgarian Socialist Party.
But trying to compensate for the deficit in the National Social Security Institute by increasing the insurance burden is like patching a hole in a ship with duct tape. The only long-term solution is a fundamental pension reform, as I described back in 2018, when we initiated a campaign in this direction from the EKIP. Some of our proposals for reform appeared in the programs of some parties. For example, there were proposals to raise contributions to the second, private pillar of the pension system, at the expense of those to the state one. This would definitely be a step in the right direction. Due to the demographic situation, if we want to save the pension system and for the current young generation to have pensions, we must move towards a system based entirely on individual accounts, replenished by savings that are invested, not redistributed.
The increase in the maximum social security income is unfair
When it comes to the maximum social security income, it is very important to take into account that the function of the pension system is not to make someone rich. Its function is to provide a sanitary minimum for retirement - a minimum pension income, which guarantees only that the respective pensioner will not directly burden others. If you pay social security contributions on a 5,000 leva salary, will you receive a pension 5 times higher than those who pay social security contributions on a 1,000 leva? Of course not. It should also be taken into account that social security contributions are not paid only for pensions. Social security contributions are also paid for unemployment and for general illness and maternity and other social benefits. When a programmer with a 3,000 leva salary pays the same percentage of his income as someone with a 1,000 leva salary, does this mean that the programmer will use 3 times more social services than the one who pays social security contributions on a lower amount? Of course not.
Yes, the system works this way precisely because it is social, that is, redistributive from those with higher incomes to those with lower (or none). Yes, clearly the goal is to guarantee some minimal “safety net” for people at risk of poverty. But we must not forget that what is social is very often also unfair, as the simplified example above eloquently illustrates. And the more “social” we try to be in terms of the maximum social security income, the more unfair the system will be. That is why it is absolutely mandatory to have an upper income threshold on which social security contributions are paid. Otherwise, the disproportions between what is contributed to and what is extracted from the social system for people with high incomes would be absolutely absurd. That is why the BSP’s proposal to completely eliminate this maximum is insane.
The insurance burden should fall as income rises.
The PP's proposal to link the maximum social security income to the growth of the average wage is also inadequate. In a certain sense, this is even worse than the current situation of ad-hoc political decisions. If the maximum social security income is defined in relation to the average wage, this practically punishes the growth of incomes in Bulgaria. Because, as it became clear, there is no proportional relationship between how much you contribute to the social system and how much you extract from it. It is in this regard that MP Martin Dimitrov from the DB correctly noted that raising the maximum social security income threatens economic growth, punishing the professions with the highest added value.
The real reform that the social security system needs is a regressive differentiation of rates. Since the higher the income, the smaller the relationship between what is contributed and what is withdrawn from the system, it is most logical for the social security burden to fall as income increases. Let me illustrate with a simple example. The total social security burden in our country in 2021 is on average 28% of the gross salary, and the maximum social security income is 3,000 leva. Imagine a person who receives a 3,000 leva salary. A differentiation can be introduced, in which the full burden of 28% is paid on the first 1,000 leva of salary, 18% is paid on the next 1,000 (up to 2,000) and the burden on the last 1,000 leva is 8%.
Such a differentiation of the insurance burden according to the level of income would compensate (at least to some extent) for the unfair aspects of the insurance system, while preserving its social essence. Another problem that is solved in this way is the negative incentive against income growth. Such a system would not penalize businesses that pay high wages.
Where did the reformist spirit of "Continuing Change" go?
Alas, the leading figures of "Continuing the Change" have so far stubbornly refused to listen to common sense. Kiril Petkov hinted, neither in a sneer nor in a sneer, that we should not worry about increasing the maximum social security income, because "the money will no longer be stolen." First, the idea that there can be "zero corruption" is very wishful thinking, and second, this is not relevant to the specific dispute that is being waged regarding the lifting of the social security burden. Whether or not social security money is being stolen is a completely separate topic.
"We Continue the Change" won the elections with promises of deep structural reforms. Alas, raising the maximum social security income gives a signal that things will rather go in the opposite direction. If they are really serious reformists who want to significantly improve the standard of living in Bulgaria in the long term, a deep reform of the pension system should be one of the first priorities of the new hopes of Bulgarian politics. Raising the maximum social security income is simply a continuation of the policy led by GERB. In its last mandate, GERB raised the maximum social security income several times from 2,600 leva to 3,000 leva, although it promised in its election program not to increase the tax and social security burden. The same thing that "We Continue the Change" is doing now.
