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Buchanan, J., 1991, “The Constitutional Economics of Earmarking”, in Charging for Government, ed., Wagner, R., Routledge, London.
Burgos, J., H. Ruiz, and D. Taguas, 1992, “Una evaluación del Impacto Económico de la Modificación de los Tipos de la Imposición Indirecta”, Documento de Trabajo, Ministerio de Hacienda, Madrid.
Fernández, M., J. Ponz and D. Taguas, “Algunas Reflexiones sobre la Fiscalidad del Factor Trabajo y la Sustitución de Cuotas a la Seguridad Social por Imposición Indirecta”, Documento de Trabajo, Ministerio de Economía y Hacienda, Madrid.
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I am grateful to J. Artus, S. Brown, J. Franks, and D. Gleizer for helpful comments; to Ms. Vicente Merino from the INSS for clarifications; and to M. Orosa for valuable research assistance. All remaining errors are mine. The views expressed in this paper are not necessarily those of the International Monetary Fund.
Spain already has a legislation permitting the organization of private pensions funds and, hence, this issue is not discussed here. The 1993 National Financial Accounts indicate that pension plans’ reserves amounted to close to Ptas 4 trillion (7 percent of annual GDP). As an example of the continuous attention to the matter, the Government has recently presented a bill requiring firms to take pension assets out of their balance sheets.
More precisely, 36 percent of the consolidated budget of the Central Administration (the budgets of Territorial Authorities have not been approved yet, but should correspond to about 10 percent of the general government budget) and 15.9 percent of GDP.
Contributions to social security are divided in two classes: basic contributions and contributions to occupational-risk insurance. The occupational-risk insurance is run by the social security and mutual groups (mutuas) formed at the level of firms and industries. Other contributions from labor (payroll taxes) are for the unemployment insurance (7.8 percent), technical training (0.7 percent) and FOGASA, the compensation fund for workers of bankrupted firms (0.4 percent). These programs, however, are not managed by the social security system.
The basic rate stands at 28.3 percent, computed as a share of wages up to three times the professional minimum wage. Employers pay 23.6 percent of wages as contribution (84 percent of total contribution) and the remainder is paid by employees. The rate was reduced by 1 percentage point in January 1995. Rates on overtime work are between 50 percent and 100 percent higher than on normal hours depending on the cause of the overtime. The State contributes to social security on behalf of the unemployed. The contribution rate to social security has fluctuated over time, being lowered in the early 1980s and increased afterwards. Because of the small dispersion of minimum wages across professions and of the ceiling on individual contributions, the top annual contribution (that of engineers and other employed professionals) is less than 5.5 times the lowest contribution--implying that contributions to the social security are similar to a regressive payroll tax. In particular, the maximum and minimum bases for contributions by engineers were Ptas 0.35 million a month and Ptas 0.11 million a month, respectively, in 1994. Reflecting the small dispersion of minimum wages across professions, the lowest bases ranged between Ptas 0.07 million a month and Ptas 0.11 million a month. The rate applied in every case was the same.
Resources transferred or lent by the central government to the social security system amount to 5 percent of GDP (of which lending represent 0.6 percent of GDP). Other resources (e.g., capital income) correspond to less than 2 percent of total social security revenues.
The amount raised by social security contributions is equivalent to the expenditure on contributive benefits, i.e., wage-proportional retirement pensions and family allowances, temporary disability pensions, and occupational-risk insurance, but part of these contributions (amounting to about 1.0 percent of GDP) is used to help finance health-care expenditure. General taxes finance the balance of health care expenditure, as well as supplements for low pensions and benefits to the handicapped and those of age over 65. The share of health-care expenditure financed by transfers from the central government corresponds to 3.7 percent of GDP.
The imbalance on the social security accounts is likely to remain despite the expected increase in tax revenues due to the recovery started in 1994.
The basic regimes are the general regime, the regime for workers in the agriculture, the miners’ regime, the seaworkers’ regime, the household workers’ regime and the self-employed’s regime.
The share of the population more than 65 years of age increased from 11.3 percent in 1980 to 14.8 percent in 1993; the corresponding pensioner per worker ratio increased from 0.30 in 1977 to 0.53 in 1993. Sluggish employment growth in period and the low participation rate of the population of age 16 to 65 also contributed to the increase in this ratio. The participation rate in Spain stands below 50 percent of the population in Spain, contrasting with the rate of, for instance, France, which stands above 55 percent. As a result of the higher participation rate, the dependency ratio there is around 10 percentage points below that in Spain, although in France the social security is well developed and the population over age 65 is nearly as high as in Spain, corresponding to 14.5 percent of the total population.
The last integration was in 1993, and few new integrations are expected in the future.
Early retirement is permitted in special cases, in particular for those who started to contribute before 1967, but in principle implies a reduction of 8 percent of the value of the pension for each year before 65. Entitlement to a pension under the general regime at age 65 requires 15 years of contributions, including two years immediately before retirement. For those retiring after age 65, the pension is normally reduced by about 2 percent for each year short of a full career span. Early retirement resulting from collective layoffs are regulated by special legislation.
The value of the pension is proportional to wage-based contributions in the last 8 years prior to retirement (adjusted by the CPI) and to the number of years of contributions. In 1994, the minimum annual retirement pension was Ptas 0.8 million (around US$6,500) for married pensioners above 65 years of wages, and Ptas 0.7 million for those married below 65 years of age. The latter is approximately the value of the minimum wage, adjusted for taxes. Surviving spouses get 45 percent of normal pensions, if the principal deceased before retirement, and 60 percent if after retirement.
In the 1986-90 period, minimum pensions increased 15 percent more than standard pensions.
Government also finances pensions to the old aged who do not belong to any of the pension regimes and to the handicapped, as envisaged by the 1990 Social Insertion of the Handicapped Act (LISMI). Pensions are gradually falling under the responsibility of INSS, instead of the social service arm of the social security (INSERSO). In 1995, the resources assigned to these pensions amounted to 0.3 percent of GDP.
Until 1995, there were three types of disability pensions: a transient (incapacidad laboral transitoria, ILT), a temporary (invalidez provisional) and a permanent. These pensions cover both occupational and non-occupational disabilities. As explained below, the first two benefits were merged in January 1995. The value of permanent disability pensions is reduced if the worker is handicapped for the former profession, but not for other jobs, but it is increased if the worker is older than 55 years--making a disability pension sometimes more attractive than a retirement pension. Because, before 1985, the minimum period of contributions was 5 years, there were strong incentives to seek a disability pension. In 1985, the minimum period was increased to 8.75 years for those 55 years old and 11.25 years for those 65 years old.
The statistics suggests that a larger fraction of matadors were entitled to old-age pensions (instead of physical disability pensions) than that of average workers, despite the physically dangerous occupation the former had; the proportion of widow’s pensions was similar in both regimes. The bullfighters’ regime was absorbed by the general regime in a later date.
Despite these improvements, the INSS projects that, in 1995, disability pensions will account for 25 percent of all pensions.
Temporary disability pensions were provided during a waiting period before an applicant became entitled to a permanent disability pension. They were perceived as offering more lenient conditions than permanent disability pensions and hence often fully used.
Following this measure the nominal increase in expenditure on sick leaves fell to 5.3 percent in 1993.
The decision of granting a disability pension was shifted from employers and employees to newly created boards under the control of the social security system. The administration of the mutuas (intermediary bodies managing the occupational risk insurance) was also reformed.
If the structural changes fail to be implemented, employment growth may be limited to some 0.6 million new jobs in the next five years.
The INSS is currently performing a comprehensive study to obtain such an estimation, but no deadline to its conclusion has yet been announced.
The average value of new retirement pension in the first quarter of 1994 was 25 higher than the average retirement pension.
This growth reflects the assumption that, not only the number of women working will increase, but the trend of delayed pregnancies and of reentrance into the labor force a few year after childbearing will be strengthened in the future.
This debate has in fact started in early 1995, with the Summit of Toledo, where political parties and social partners agreed that studies towards reforming the pensions should be initiated. Although, no precise proposal has been produced to date, the most pressing change would be the lengthening of the contribution period. A reassessment of the ceiling of contributions (the “bases”) above the current 3 minimum wages could also be considered, but it is somewhat inconvenient. This increase in progressivity would generate more revenues but would either tend to distort the contributive character of the pension system if benefits are not also increased, or significantly increase the future liabilities of the system in the other case.
The regions are Andalucia, Catalonia, Valencia, Basque country, Galicia, Navarra and Canarias. The Basque country and Navarra have special financial arrangements, because, for historical reasons, they raise their own taxes. The Social Security, through INSALUD, finances the health-care services managed by both central and regional authorities.
In addition, patients covered by the public health system often prefer to go to private doctors and clinics to receive non-urgent or non-complex care, in order to avoid the waiting lists required for consultations in public health centers and because they value the amenities provided by private institutions. These services are usually paid by private insurers, who cover about 17 percent of the population. Complex interventions are usually done in public hospitals and are not covered by standard private insurance.
The 1989 Budget Law formalized this principle by establishing a mechanism of transfers from the central government. However, analysis of the funding of contributive and non-contributive expenditures is still complicated by the use of some contributions to finance health care, and of some general budgetary resources to finance some pensions.
Personnel costs correspond to about 75 percent of current expenditure of hospitals and about half of that of the INSALUD. Hospital and primary health-cares costs, including personnel, correspond to about 60 percent and 35 percent of Insalud expenses, respectively.
The conditions for the transfer were also the result of bargaining processes, and because in most cases they reflected the level of expenditure in the regions at the time the transfer took place, they have tended to perpetuate the differences in services between regions. It should also be noted that although regions are responsible for managing their services, most policy and financing decisions are taken at the national level.
These debts have eventually been written off by the central government, despite contention about who should be responsible for accumulated interest charges. Currently, the central government is repaying the Ptas 0.7 trillion (1.1 percent of GDP) debt that had accumulated by 1992 (Table 7).
For the purpose of the plan, an estimate of the expenditure accrued in 1993 was computed and adopted as the base for future expenditure; this implied that the share of (accrued) public health expenditure should stabilize in the coming years at 4.7 percent of GDP. Following the agreement, the 1994 budgeted expenditure was increased by about Ptas 200 billion, the amount yielded by the new methodology as required to break with the old pattern of insufficient transfers. In general, cash expenditure would diverge from this projected path by the additional amount budgeted for debt repayment.
The transfer of services to regional authorities has not always been followed by proportional reductions in the personnel in the central system, especially management, and there has been duplication of activities. Waste also takes place because the majority of doctors in primary care are not rewarded by performance, nor are they penalized for sending patients to specialists when care could be dispensed at the level of general practice; public hospitals do not face credible budget constraints, and are not managed by professionals; and contracts with private hospitals often establish per-day compensation (instead of per-case), hence encouraging long patient stays. Pharmaceutical producer prices are low in comparison to other developed countries, but drugstore margins are large, patients often abuse the privilege of free medicines granted for the elderly, and, until recently, little control was exerted on doctors who over-prescribed medicines.
Fees currently correspond to only Ptas 40 billion.
In addition, the commission suggested procurement reforms (including the creation of internal markets), more autonomy and budgetary responsibility to hospitals, increases in the number of beds for long-term care (including those offered by the private sector) in order to reduce the use of acute-care beds by chronic patients, and the contracting out of private services for interventions requiring long waiting periods.
Savings on pharmaceuticals have been achieved (Table 7) and cases of fraud and inefficient procurement have been investigated, but most other propositions (e.g., user fees and administrative reforms) have either been discarded, or need further specific preparatory work.
Rowlatt and Lloyd (1994) estimate the GDP elasticities of health care expenditure for developed countries to be between 1.4 and 2.3. Gerdtham et al. (1994) find that (in OECD countries) GDP per capita, with a coefficient of elasticity significantly larger than one, appears to be the most important factor in (cross country) health care expenditure variations, being stable in the last 20 years.
This principle does not apply to pensions. Instead, it is widely considered preferable to have pensions funded by labor contributions, because this establishes a link between retirement income and the effort of workers in their productive years.
Earmarking complementary goods and services (e.g., earmarking a fuel tax to finance roads) can also be understood as a way to protect a minority from a majority. If revenues, once collected, can have only specific uses, the incentives for excessive taxation are decreased. In the exchange model, efficiency is not guaranteed if the level of taxation is not jointly set with the destination of the tax.
Contributions in this case are a tax because the benefits in terms of health care are not actually related to the contribution paid.
Evasion from both direct and indirect taxation is widespread. Studies quoted in Fernandez et al., 1994 (Secretaria de Estado de Economia (1994) and Melis (1992)) suggest that VAT evasion is estimated at about 30 percent.
The increase of 2 percentage points in July 1992 explained about 0.7 percentage points in the CPI increase recorded in the following 3 months. The 1 percentage point increase in the VAT in January 1992 explained about 0.6 percentage points of the subsequent increase in the CPI. However, the increase in VAT in January was accompanied by an increase in the taxes on gas and tobacco and the effects of this contemporary increases were not disentangled. The transmission of an increase in the VAT should be less than 100 percent, since food is not taxed.
MOISEES is a Keynesian model that assumes that prices reflect a markup over wages and capital costs; in the simulations, interest and exchange rates are fixed.
Such an approach has been used by the French since 1990, when the Contribution Sociale Généralisée was Introduced. This contribution is in fact a flat-rate income tax based on capital (including rents and financial assets’ returns) and labor revenues (including pensions).
The income of households (a non-profit institutions) amounted to 103 percent of GDP in 1993.
The required rate is greater than 1 percent because of the several exemptions applied to taxable income. This behavior is not unique. The effective average personal income tax rate in 1993 was about 10 percent of total household income, in spite of marginal income tax rates ranging from 20-53 percent.