Breyer, F., and M. Staub, 1993, “Welfare Effects of Unfunded Pension System when Labor Supply is Endogenous”, Journal of Public Economics, 50.
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 Economia y Hacienda, Madrid.
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Prepared by J. Levy.
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 CDP). 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 15.6 percent of GDP.
Other resources (e.g., capital income) correspond to less than 2 percent of total social security revenues. The 1995 budget also projects a deficit of 0.6 percent of GDP, to be financed by a loan from the central government.
As the economy recovers, it is probable that contributions will in fact grow faster than these expenditures; in this case, they would generate a small surplus to the pension system.
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.
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.
In 1994, the maximum and minimum bases for contributions by engineers were Ptas 0.35 million a month and 0.11 million a month, respectively. 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.
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.
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. Early retirement resulting from collective layoffs are regulated by special legislation.
In the 1986–90 period, minimum pensions increased 15 percent more than standard pensions.
Following 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).
During the previous economic slowdown, fraudulent bankruptcies, involving the default of past social security payments, became a fairly widespread practice for firms facing financial difficulties. The practice, however, has been combatted and was significantly reduced in recent years, and the problem of fraud is not discussed here, except in the context of lax enforcement of eligibility criteria for disability pensions.
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 nor-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 matadores 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 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 two scenarios are useful to compare the sensitivity of results to projected changes in employment, given the difficulty of estimating the participation of women in the labor force and the ability of the labor market to absorb the supply of labor. How much of the increase in the labor force will be translated into a higher worker to working age population ratio will depend inter alia on the future flexibility of the labor market. Employment figures after the year 2000 do not consider economic cycles.
This growth reflects the assumption that, not only the number of women working will increase, but the trend of delayed pregnancies and of re-entrance into the labor force a few years after childbearing will be strengthened in the future.
The average value of new retirement pension in the first quarter of 1994 was 25 higher than the average retirement pension.
The projections show only the average contribution to labor income ratio. As contribution rates increase, it may be necessary to increase the ceiling of contributions (the “bases”) above the current 3 minimum wages. This increase in progressivity may be important if wage dispersion continues to augment.
In addition to pre-funding the pension system, a change in parameters such as the number of years of contribution and the maximum contribution would have to be considered soon.
The regions are Andalucia, Cacaloniz, Valencia, Basque country, Galicia, Navarra and Canaries. 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.
Personnel costs correspond to about 75 percent of current expenditure of hospitals and about half of that of the INSALUD.
Fees correspond to only Ptas 40 billion.
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.
Rowlett 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 at al., 1994 (Secretaria de Estado de Economia (1994) and Melia (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 (an non-profit institutions) amounted to 103 percent of GDP in 1993.