The problems in the National Social Security Institute and their effects on the labor market

In the middle of last week, it became clear that, as almost every year, unions and employers had reached an agreement to increase the amount of social security contributions. It will affect 39 industries, employing 956 thousand people. Social Minister Ivailo Kalfin indicated that the remaining industries have until September 10 to agree on their increase, and if there is no agreement between unions and employers after that date, the social security contributions will be increased administratively.

How does social security affect employment?

For many, at first glance, such a move seems sensible – when workers pay higher social security contributions, the state will be able to guarantee a more dignified old age for pensioners, peaceful motherhood for mothers, and livelihood for the unemployed and accident victims. [1] As some might have noted, in this way, with a little more sacrifice on the part of workers, everyone will live a little better.

However, the supposed positive effects of such a move cannot but be overshadowed by the negative ones, which, however, are much more difficult to notice. First of all, as we have already written, the increase in social security leads to less employment. Its decline can take two forms: either as an actual dismissal of already employed employees, [2] or as a refraining from hiring new employees. In the second case, we compare the situation in which social security is increased with the conditions in which their level either does not change, or they do not exist at all in their current form, and the insurance (in its various types) is carried out voluntarily by individuals.

These phenomena are observed absolutely always, regardless of the wishes and goals of the authors of the changes (regardless of whether they are the unions and employers, or the Minister of Social Affairs, who single-handedly determines the specific amount of the increase in social security contributions). The reason for this is very simple. In order for an employee to be hired, his added value for the employer must be greater than the costs of hiring him, because if it were equal or less, the manager would simply keep the money instead of spending it on hiring employees. At the same time, what is often overlooked is that the company's costs of hiring a worker are not limited to his salary. They include all payments that the company in question must make for hiring him, including the costs of health and social security contributions. Therefore , by increasing social security contributions, the cost of labor is actually increased, which is an obstacle to hiring new workers.

If the increase in social security contributions agreed a few days ago were a single precedent, this would still be a harmful practice in itself. But the situation on the labor market is further worsened by the fact that social security contributions are increased in a quasi-administrative way every year. The dynamics of this increase over the past few years is:

Table 1: Average increase in insurance premiums over the last few years

Thus, if we take the insurance thresholds paid in 2012 as the base (i.e. 2012 = 100), then in just the last 4 years the average insurance burden has increased to 118.48, which represents a growth of 18.48%.

Why are insurance premiums increasing?

In order for our analysis of the increase in social security contributions to be comprehensive, we should also consider the context in which this is happening; i.e. we should also pay attention to the social security system itself.

The state part of the pension system is the so-called "first pillar", into which all employees contribute funds. It is organized on the cost-covering principle, in which employees today contribute funds to the Pensions Fund of the National Social Security Institute (NSSI), and these funds are paid to pensioners today. In return for their funds, payers receive the promise that when they retire, the state will have funds with which to pay their pension. [8] ^{, [9]}

To see how sustainable this model is, we can turn to the law on the budget of the National Social Security Institute from the last few years. It includes a deficit of 3,938.5 million leva for this year, which does not seem too large. But this picture alone hides the reality in the National Social Security Institute. If we look at the budget of the Pension Fund, which is the largest unit in the National Social Security Institute, the situation looks radically different. According to the decrees adopted in the law, the fund’s expenses amount to just over 8 billion leva, while the expected revenues in the fund are 6,191,503.2 million leva; i.e. the deficit is already almost 2 billion leva. [10] But even that is not all, because of these 6,191,503.2 million leva, only 3,483,022.7 million leva are insurance contributions paid by employers and employees, and the remaining 2,707,830.4 million leva. are paid from the budget as transfers in the amount of 12 percent on the sum of the social security income of all insured persons for the calendar year. Thus, if we subtract the contributions from the budget from the equation, the deficit in the National Social Security Fund for this year reaches more than 4.5 billion leva.

If only this year the budget of the National Social Security Institute had such a high deficit, that would be bad enough. But the budget deficit in the Pension Fund in particular is an annual phenomenon. In other words, the deficit is chronic.

Table 2: Income and expenses for pensions in the Pensions Fund of the National Social Insurance Fund

Source: State Social Security Budget Laws, 2012-2015

If the National Social Security Institute and the Pension Fund in particular were a private company, they would have gone bankrupt by now. Of course, the ever-growing deficit cannot be filled with the annual increase in the amount of social security contributions. Economist Desislava Nikolova from the Institute for Market Economics calculated that for this to happen, it would be necessary to increase the contribution from the employer and employee by 26 percentage points; i.e., social security contributions would have to amount to 43.8% of the wage. Since increasing them to this value would kill a large part of the business, it seems that according to the ruling party, the deficit in the National Social Security Institute should simply be passed from government to government, without taking measures to resolve it, with the exception of the harmful measure of increasing social security contributions. However, the trend indicates that the deficit will continue to grow; respectively, increasingly large transfers from other budget items will be needed to fill it.

Interestingly, as a counterpoint to the Pension Fund to the National Social Security Institute, private pension funds do not experience such problems. They operate on the principle of actual savings, in which each individual client has his own account, which is accumulated over the period of his professional career. Moreover, in ideal conditions, each client would have the opportunity to choose what kind of yield his monthly contributions would bring, i.e. by what percentage his pension would increase. No one in the Pension Fund can take advantage of such services, and even the only guarantee to pensioners that they will receive any funds is simply the state's promise that it will manage to find money. Based on the chronic problems in the National Social Security Institute and the negative side effects that follow from them, perhaps it is time to take steps towards the privatization of pension insurance and the services that the insurance institute offers today.

Increasing social security contributions cannot be seen as a promise of a more dignified old age or as a mechanism for increasing the well-being of mothers or people with reduced working capacity. This is because in the social security system, people do not save; instead, the funds they pay today are transferred to today's pensioners. Since the number of the latter is too high, the Pension Fund realizes annual deficits that must be covered by other revenues in the republican budget. And these deficits create the need to increase the revenues in the system, paid in as social security contributions. Thus, the attempt to improve the performance of a technically bankrupt structure generates negative effects on the labor market.

[1] The following funds exist in the state social security system (SSS): "General Sickness and Maternity", "Pensions", "Accidents at Work and Occupational Diseases", "Unemployment". They make payments to beneficiaries in cases of temporary incapacity for work, temporary reduced working capacity, disability, maternity, unemployment, old age and death.

[2] Unfortunately, the breakdown of data on the number of employed persons compiled by the National Statistical Institute (NSI) is too comprehensive and does not allow for tracking the dynamics of employment in the specific sectors in which social security contributions are increasing. For example, unions and employers have agreed on an increase in social security contributions in the production of milling and starch products, the production of wood and furniture, etc., but these activities fall into the rather broad groups of “extractive industry”, “manufacturing industry”, etc.

[3] Here, “year” refers to the year in which the increase in insurance payments was agreed.

[4] It should be borne in mind that the average increase in income over the years hides the real picture by industry. For example, from next year the average increase in social security contributions will be 7.8%. At the same time, in some industries it is significantly higher. For example, in postal and courier activities, social security contributions will increase by 17.6%.

[5] In some of the years listed, there has also been an increase in the minimum insurance threshold. It represents the minimum amount below which employers cannot insure their employees. From an economic point of view, the minimum insurance threshold has similar effects to the minimum wage, as it de facto prohibits the conclusion of contracts below a certain amount. Thus, the minimum insurance thresholds play the role of another mechanism for regulating and restricting the labor market. For the effects of the introduction and increase of the minimum wage (a move that politicians have often resorted to in recent years), see: Administrative obstacles to the labor market, The minimum wage and its effects on the labor market, Direct economic effects of the minimum wage, Indirect economic effects of the minimum wage.

[6] Another move was made in 2012. Then, in addition to increasing social security contributions, the government also increased the maximum amount of monthly social security income from 2,000 to 2,200 leva.

[7] This percentage does not include industries for which no increase in social security contributions has yet been agreed.

[8] The formula for calculating the amount of pensions is: pension for insurance service and age = the income from which the pension is calculated, multiplied by the amount formed by: at a rate of 1.1 percent, and from 01.01.2017 - 1.2 percent for each year of insurance service and the corresponding proportional part of the percentage for the remaining months of insurance service.

[9] In economics, a payment model in a certain structure, which is based on the principle of depositing funds, in return for which the depositor receives the promise of income from other people's contributions in the future, is called a "Ponzi scheme" or "pyramid" and is subject to prosecution by prosecutors in some countries.

[10] This deficit is covered by other revenues in the republican budget.

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