Social Security Contributions, wages and employment

The government's announcement of a change in Social Security Contributions raised a lot of fuss about a transfer from employers to employees. To recall, the government has announced an increase in employee's social security contributions of 7 pp from 11 to 18% and a decrease in employer's SSC of 5.75 pp from 23.75 to 18%. Almost everyone in the country seems to take it for granted that this will lead nominal net (of SSC) wages to decrease by 7 pp. A usual textbook argument about perfectly competitive markets would simply state that the legal incidence of the tax does not matter, and hence we should only worry about the overall increase in 1.25 pp. However, labor markets are far from being competitive and do not behave as in the simple textbook argument. A quick literature review suggests the following.

1. The effects of SSC are very much context specific because they are not, strictly speaking, taxes (they entitle the workers to future income) and the precise way in which contributions are tied to benefits matters a lot for the behavioral responses.
2. The overall tax increase is likely to be borne mostly by employees (i.e., net wages are expected to decrease by around half of the total SSC increase). Here is a reference on this.   Importantly, the shifting of the tax burden towards employees seems to be stronger when the perceived link between SSC and pension benefits is stronger.
3. Estimating the impact of the nominal (or legal) sharing of the tax burden between employers and employees is difficult because of identification issues which are common to all the empirical literature on labor supply responses to tax changes. It is hard to disentangle changes in marginal and/or average tax rates on reported income from other non-tax factors such as unmeasured effort on the job, career choices, tax avoidance, and tax evasion. Exploiting a reform on SSC implemented in Greece in 92, which in a nutshell amounted to an increase in SSC of both employers and employees for high-wage earners, Emmanuel Saez and co-authors conclude the following. Firstly, labor supply is inelastic with respect to social security contributions. Secondly, the legal incidence of the SSC does matter, in the sense that the workers' net wage decreases following the increase in the employee SSC and the employers pay a higher gross wage following the increase in their own part of the SSC. While the authors themselves ask for caution in the generalization of their results to other contexts, this is still the best contribution that I know for the current debate.

 I do not resist to end with a citation of the paper cited above: "our results imply that employer vs. employee pay-roll tax cuts are likely to be sticky at least in the medium term. Under such nonstandard stickiness, reducing employer payroll taxes would increase profits while not affecting net wages, a desirable outcome when businesses face liquidity constraints to grow but an undesirable outcome when businesses are hoarding cash and reluctant to invest. In contrast, reducing employee payroll taxes would increase net wages without increasing profits, a desirable outcome to make
work more attractive or to stimulate aggregate consumption."






All in all, it seems that we will observe a transfer from workers to employers after all. This will contribute further to the decrease in the families' disposable income and to the number of private insolvencies in the country. Several questions remain. Will the positive effect of the decrease in SSC for employers outweigh the negative impact of the decrease in domestic demand? If they do, what will the firms do with increased profits? One has to be extremely careful about the non-tradables sector. So far, I haven't seen any policy announcement in this regard. The capacity of the government to regulate the firms in order to make them shift their eventual savings into more employment creation or price decreases is a fundamental political test which will shed light on whether this government is really catering for the special interests of a few firm share holders or the general interest. Let's wait and see.

Source | The Portuguese Economy | http://theportugueseeconomy.blogspot.com/2012/09/social-security-contributions-wages-and.html

The TSU (Social Security Contributions) measure: a political post-mortem

The Portuguese government backed down from the proposed measure to increase employee's social security contributions and decrease employers' contributions. A measure that manages to elicit the opposition of the Portuguese left-wing parties, the unions, employers' associations,  the American Enterprise Institute, and the Wall Street Journal is certainly unusual. Let me speculate a bit - and let me stress speculate - on causes and consequences.

1. Part of it was probably just a series of mistakes, either unforced or, most likely, forced by the context of the Troika evaluation, inter-coalition relations, and government coordination problems. The measure was announced without any background studies legitimating it or documents explaining it in detail, leading the media to engage for days in wild and contradictory guesses about its consequences (the only study of the impact of this specific measure I know of was made by a group of economists of Minho and Coimbra). The government even failed to ensure that, in the immediate aftermath of the announcement, at least a few voices would come in its defense, either from within the PSD or (especially) from the coalition party, the CDS-PP. Instead, what it got was a barrage of criticism not only from the opposition but also from notable figures of the PSD and from its coalition partner. It is difficult to recall a single respected political figure, scholar, or expert that came in the measure's defense. In reaction to this, the government kept introducing nuances to the measure that seemed to be made up as it went along.  From the political marketing/communication point of view, the whole thing was abysmally managed. Voters may have difficulties in understanding the implications of these sorts of measures beyond the very evident fact that their paycheck will be smaller, but they have no difficulty in looking around for cues from reliable sources in order to form their opinions. And so they did: a week later, 78% of respondents in a public opinion poll disagreed with the notion that the reduction of companies' social security contributions would help fighting unemployment, while 81% disagreed with the notion this would have an impact on consumer prices. Game over.

2. There was probably also some amount of hubris involved. It may be the case that some people in the government or in the group of government advisers are persuaded that the 2011 election and the PSD's victory meant some sort of vindication of a "liberal," "market-friendly," or "business-friendly" agenda. If that's the case, I'm afraid they are likely to be sorely mistaken. The data from the 2011 post-election study shows that voters' positions in these issues have remain unchanged since at least the early 2000s, and that such positions were furthermore completely irrelevant in their vote choices. This means that the PS's effort to turn the election into an ideological "fight for the survival of the welfare state" was a failure, but also that the election did not mean in any way a legitimation of the PSD's ideological agenda either. Furthermore, anyone who has ever looked at surveys measuring Portuguese voters' views about social inequality and work relations would easily guess that any measure that could be construed as "shifting money from workers to employers" would have close to zero chances of eliciting any sort of relevant support.

3. We should not forget that the government's problems did not start in September 7th. The government had a horrible summer, most notably a media barrage against minister Miguel Relvas and his alleged ethical and legal problems. Then, the plan for privatization of public television - led precisely by Relvas - managed to mobilize an influential sector of opinion - cultural and media agents - that are not exactly known for their love of the Right. A lot of badly needed political capital was wasted on these side issues.

4. There's also an element of the government's discourse since the very beginning that is probably counterproductive. The vaguely populist message entailed in the "smallest government ever" thing and on the emphasis on "fighting waste" and "trimming the fat" in the state apparatus, together with regular and ill-advised promises that economic recovery is coming "next year", probably did not help making voters quite prepared for real magnitude of the problems faced, for the failures in meeting the deficit targets, and for the many additional austerity measures that will be necessary in order to meet them. Correct management of expectations is much more important that giving false "glimmers of hope" or pretending that "trimming fat" is what this whole thing is about. We're in this for the long haul, and everybody hates realizing they may have been deceived.

5. The future holds dangers. I leave the economic dimension to my colleagues here, but it seems clear that the marriage between the PSD and and CDS-PP is becoming more and more a marriage of convenience, plagued by mutual distrust. Minister Relvas has been mortally wounded for a few months now, but it is unclear who is supposed to perform his political coordination role when (we're way past the "if" question) he ends up being replaced. It is also a bit of a mystery how Mota Soares, the CDS-PP social security minister, who supported the TSU measure only to face his own party's leader disagreement a few days later, finds it appropriate to remain in the cabinet. Some of these problems can be solved with a cabinet reshuffle after the approval of the 2013 budget, but the legacy of mistrust between the parties and the way the "governability" image of Portugal was tarnished will be difficult to reverse.

6. But not all is bad news. There's no obvious alternative political solution to the current coalition. Most voters seem to agree with that. The somewhat unpopular President, Cavaco Silva, played nonetheless a crucial role in defusing the crisis brought about by the TSU measure. The fact that the government was able and willing to back down from the TSU measure is a very positive sign. Demonstrations have been large and reveal anger and disappointment, but they have been peaceful, and so have the relations with police forces. The Minister of Finance's comments about the demonstrations, praising their moderation and dignity, were impeccable. The contrast with Spain, not to mention Greece, is quite instructive. Robert Fishman, a political sociologist, has a wonderful article in which, among other things, he shows stark and unexpected contrasts between Portugal and Spain in what concerns the relationship between protesters and institutional power holders and the role and acceptance of mass mobilization in Portugal. The recent events are a nice confirmation of Robert's ideas.

Source | The Portuguese Economy | http://theportugueseeconomy.blogspot.com/2012/09/the-tsu-social-security-contributions.html

Why Social Security Is Still Falling Apart...??

Why Social Security Is Still Falling Apart...??

Social Security is in dire financial straits, but that's nothing new for this long-troubled program.

Social Security spent billion more in 2010 than it took in as tax collections. By the time 2011 ends, it expects to outspend collections by another billion. At this rate, the program's much-touted "Trust Fund" is expected to be depleted by 2036; without that fund, benefits are expected to fall to about three-quarters of current promised levels.

As bad as that may sound, it's actually business as usual. To cover the massive obligations of the plan, tax rates have risen repeatedly over its history. What started as 2% of the first ,000 of income (half paid by you, half by your employer) is now scheduled to be 12.4% of the first 0,100 of income in 2012. On top of that, the "full retirement age" is creeping up from 65 to 67, which effectively means younger workers will be paying more for a longer time to get their full benefits.

Even with repeated efforts to shore up the program by raising taxes and cutting benefits, Social Security's collapse seems virtually inevitable.

The Perils of Aging

A huge part of the problem is driven by demographics.

• People are living longer and having fewer children. Those who were born in and before the 1930s -- the era when Social Security got started -- simply weren't expected to live all that far into their 60s, much less past the retirement age of 65.
• The American birthrate has fallen steadily, too -- from 18.7 live births per 1,000 population in 1935 to 13.8 per 1,000 in 2009.
• To top it off, the economy has of course been less than stellar for the past few years, resulting in a smaller percentage of the working age population actually working. The civilian labor-force participation rate is down to 63.9% as of November 2011 -- down from 66.6% a decade earlier.

These demographic trends have been a long-term challenge for Social Security, the solvency of which depends heavily on having a large workforce supporting a small number of retirees. The economic weakness only makes it worse.

About That "Trust Fund"...

Now that Social Security is paying out more than it collects in taxes, another problem with its funding mechanism is becoming apparent.

The Trust Fund is something of an accounting fiction, stuffed with U.S. Treasury debt. The taxes collected have long ago been spent, with any Social Security-specific surplus collections going to fund other programs.

As Social Security no longer provides surplus funds to the Treasury, its deficit is something of a double whammy. First, the Treasury loses that source of revenue, and second, it needs to make up the IOUs being redeemed. That results in an even deeper general revenue deficit, higher taxes, and/or the need to lower spending on other government programs.

Put it all together, and the one thing becomes abundantly clear: Social Security won't last forever in its current form. The key questions are "What will change?" and "When will it happen?"

The Risks to Your Retirement

While nothing is certain until the laws actually change, those who are currently receiving Social Security will likely be spared the brunt of the changes. About the biggest risk facing current recipients is the potential that the "Cost of Living Adjustment" may be altered in a way that lowers the rate at which benefits are adjusted upward for inflation. Nobody is seriously talking about cuts to current recipients' benefits, just slowing the rate of growth for those payments.

It's those who are more than 10 years from retirement that have the most to worry about. If nothing changes, benefits will be forcibly reduced (in nominal terms, not just inflation-adjusted ones) when the Trust Fund's accounting value vanishes about 15 years after that point. People more than 10 years from retirement have a real chance of still being around to feel the pain of those reductions and/or of still working as taxes are raised to try to cover the shortfall.

If you are in the age group staring down likely substantial cuts in your future benefits, the sooner you get started saving to cover that gap, the better your own retirement can be. Start with these three steps you can take to improve your chances of winding up financially comfortable, even if Social Security does eventually fall apart completely.

Motley Fool contributor Chuck Saletta welcomes your comments.

Source | Gold and Forex News | http://gold-forex-news.blogspot.com/2011/12/why-social-security-is-still-falling_17.html

Why Social Security Is Still Falling Apart...??

Why Social Security Is Still Falling Apart...??

Social Security is in dire financial straits, but that's nothing new for this long-troubled program.

Social Security spent billion more in 2010 than it took in as tax collections. By the time 2011 ends, it expects to outspend collections by another billion. At this rate, the program's much-touted "Trust Fund" is expected to be depleted by 2036; without that fund, benefits are expected to fall to about three-quarters of current promised levels.

As bad as that may sound, it's actually business as usual. To cover the massive obligations of the plan, tax rates have risen repeatedly over its history. What started as 2% of the first ,000 of income (half paid by you, half by your employer) is now scheduled to be 12.4% of the first 0,100 of income in 2012. On top of that, the "full retirement age" is creeping up from 65 to 67, which effectively means younger workers will be paying more for a longer time to get their full benefits.

Even with repeated efforts to shore up the program by raising taxes and cutting benefits, Social Security's collapse seems virtually inevitable.

The Perils of Aging

A huge part of the problem is driven by demographics.

• People are living longer and having fewer children. Those who were born in and before the 1930s -- the era when Social Security got started -- simply weren't expected to live all that far into their 60s, much less past the retirement age of 65.
• The American birthrate has fallen steadily, too -- from 18.7 live births per 1,000 population in 1935 to 13.8 per 1,000 in 2009.
• To top it off, the economy has of course been less than stellar for the past few years, resulting in a smaller percentage of the working age population actually working. The civilian labor-force participation rate is down to 63.9% as of November 2011 -- down from 66.6% a decade earlier.

These demographic trends have been a long-term challenge for Social Security, the solvency of which depends heavily on having a large workforce supporting a small number of retirees. The economic weakness only makes it worse.

About That "Trust Fund"...

Now that Social Security is paying out more than it collects in taxes, another problem with its funding mechanism is becoming apparent.

The Trust Fund is something of an accounting fiction, stuffed with U.S. Treasury debt. The taxes collected have long ago been spent, with any Social Security-specific surplus collections going to fund other programs.

As Social Security no longer provides surplus funds to the Treasury, its deficit is something of a double whammy. First, the Treasury loses that source of revenue, and second, it needs to make up the IOUs being redeemed. That results in an even deeper general revenue deficit, higher taxes, and/or the need to lower spending on other government programs.

Put it all together, and the one thing becomes abundantly clear: Social Security won't last forever in its current form. The key questions are "What will change?" and "When will it happen?"

The Risks to Your Retirement

While nothing is certain until the laws actually change, those who are currently receiving Social Security will likely be spared the brunt of the changes. About the biggest risk facing current recipients is the potential that the "Cost of Living Adjustment" may be altered in a way that lowers the rate at which benefits are adjusted upward for inflation. Nobody is seriously talking about cuts to current recipients' benefits, just slowing the rate of growth for those payments.

It's those who are more than 10 years from retirement that have the most to worry about. If nothing changes, benefits will be forcibly reduced (in nominal terms, not just inflation-adjusted ones) when the Trust Fund's accounting value vanishes about 15 years after that point. People more than 10 years from retirement have a real chance of still being around to feel the pain of those reductions and/or of still working as taxes are raised to try to cover the shortfall.

If you are in the age group staring down likely substantial cuts in your future benefits, the sooner you get started saving to cover that gap, the better your own retirement can be. Start with these three steps you can take to improve your chances of winding up financially comfortable, even if Social Security does eventually fall apart completely.

Motley Fool contributor Chuck Saletta welcomes your comments.

Source | Gold and Forex News | http://gold-forex-news.blogspot.com/2011/12/why-social-security-is-still-falling.html