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A Short Behavioural Analysis of the Changes to the Social Security Tax in Romania

A Short Behavioural Analysis of the Changes to the Social Security Tax in Romania Economy Near Us (III)

No. 7-8, Sep.-Dec. 2017 » Bridging News

Starting with January 1st 2018, the payment obligation which is automatically withheld regarding the social security contributions (for state pensions, health, and unemployment insurance) will be moved from the employer to the employee. In order to preserve the nominal net wage, the nominal gross wage was increased by an adequate rate. In fact, a combination of nominal gross wage increases and contribution rate decreases was used to this end. I would like to broach some predictable effects of the mentioned normative measure: a) the monetary illusion effect; b) the nominal income effect; c) the consumption and savings effects; d) the effect of social solidarity erosion; e) the efficient wage effect. 

(a) The monetary illusion effect

As it is well known, the individuals (the humans, in Richard Thaler’s terminology, as opposite to the econs) are subject to the monetary illusion, i.e., they take into consideration the nominal value of their incomes (or wealth) rather than the real value (that is, the purchasing power of the nominal value). So, increasing the nominal value of the gross wage appears to individuals as a good thing, although even for 2018 an increase in inflation is predicted both by the Central Bank and the Government. The monetary illusion is a psychological effect already known (not only to behavioural economics, but also to the neoclassical one), and it is based on the difficulty, from the individual’s perspective, to adequately infer the real gross wage increase from the nominal gross wage increase. As a result, the Government measure seems to be salutary, both for the individuals and for the Government itself (seen as the political interest, of course). 

(b) The nominal income effect

Despite the assumed positions of the trade unions, the individuals generally observe only the nominal gross wage increase and, consequently, their behaviour (consuming or saving) could improve according to Engel’s curve, as I examine below. Of course, the measure is politically motivated – an increase in wages was promised during the election campaign, despite the lack of feasible sources – but, from the psychological point of view, as said before, these increases are viewed as positive. Such an evaluation, made by humans, is of the same nature as the other complex examinations the humans must make, which most fail to perform adequately. In this case, the individuals should calculate that, in fact, their nominal net wage is not increased. As a result, few realize whether their nominal net wage (i.e., their disposable nominal income( has increased, decreased or remained the same. The nominal income effect is from the same family as the monetary illusion, because both should require an algorithm to pass from the nominal value of the gross wage to its real value, or to its disposable gross value. The two effects examined by now are, in fact, combined. After calculating the disposable income, this value should be adjusted with inflation, in order to determine its purchasing power. 

(c) The consumption and saving effect

The individuals which are the “victims” of the above effects of the nominal gross wage increase will change their consumption and saving behaviour (including the investing behaviour). Generally, this change will ignore the maintenance of the nominal net (i.e., disposable) wage, as a result of the moving of the social security tax burden from the employer to the employee and, consequently, in short term, an increase in the propensity of saving (and even of investing) could happen. As a result of inertia (or comfort), such propensity could continue a while, even in the long term. Maybe the Government would do well to direct (through nudges rather than affecting freedom of choice) the presumed additional savings to the second pillar of the pension system, administered by private funds. This would be feasible since there is sufficient liquidity in the financial system, because the demand for bank lending is still waiting to take off (except for the interbank lending system, whose volume is more speculative than geared towards the real economy).

opensity could continue a while, even on long term, the employer to the employeebehaviour (including the

(d) The effect of the erosion of social solidarity

The change has transmitted a negative signal to the individuals regarding the social solidarity between employers and employees. As it is well known, in many countries, the charge for social contributions for pensions and health (either public or private) is shared between employer and employee, usually depending proportionally on the employee’s (relative) effort, starting from a minimum of the employee’s contribution and ending to a maximum of the employer’s contribution. It is somewhat curious that a socialist party (which has a parliamentary majority and can choose its project) would transmit such a signal to its citizens. In my opinions, the benefits that could be extracted from the change are lower than the costs generated by the signal of reducing the social solidarity between the employers and employees. Although neither the employer nor the employee loses at the moment from that, the relationship is being redefined in ways that will affect future evolutions. Unfortunately, this measure is justified neither by the need to extend the reach of the market nor to reduce that of the state. In the social security matter, the state must be very careful when and where it decides to reduce its presence. Social justice and rights are phenomena too significant for people to be left to the market. There can be a common field where the state and the market form a structural and functional mix. We can scarcely anticipate the effects on solidarity of the measure, let alone design policies for institutions to counteract them. 

(e) The efficient wage effect

Based on (a) and (b), it is possible the increase of the nominal gross wage acts as an efficient wage. An efficient wage, generally, is not grounded on an increase of the labour productivity (in fact, of the marginal labour productivity). The employers sometimes pay such a wage in order to motivate the employees to increase their productivity just for preserving the increases mentioned. In this case, the putative signal towards the employees could have a positive effect on labour productivity, in medium and long term. However, taking into consideration that the nominal gross wage increase was not an employer decision, but a state one, such an effect could be seriously attenuated.

I strongly believe that a dedicated commission to formulate an implement measures of the so-called libertarian paternalism (with nudges for smart and useful economic behaviour of individuals) should be urgently constituted within the General Secretariat of Government or within the Presidential Administration.

 
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