Raising Social Security Contributions Is Increasing Labour Costs, When Unemployment Is Our Biggest Problem

Spain's Social SecuritySpain's Social Security

Fernando González Urbaneja | Social security contributions are in the news because of the announcement of a six-tenths of a point increase in rates. And it should be pointed out that we are suffering from some confusion of concepts that go back a long way and fail to help us to understand them. There is still a sterile distinction between the so-called worker’s contribution and the company’s contribution, a rhetorical distinction that leads to confusion. The fact that there is a part of the contribution that is reflected in the payroll and another under a business cost heading is irrelevant; because in fact, all contributions are compulsory wage costs for the company, deferred wages to the benefit of the employee, deposited in the social security system managed by the government.

The worker is not aware that the wage cost for the employer is the gross cost reflected in his paycheck (including part of the social security contribution and the withholding for personal income tax) and the contributions charged to the company, which are also wages since their origin is in the employment contract. The so-called gross cost for the company is the sum of all these concepts. And it would be pedagogical for all of them to be reflected in the payroll, since everything is salary. Today, 79% of social security contributions in Spain go to the pension system, 19.5% to unemployment, 2% to vocational training and 0.55% to the wage guarantee fund. In total, the additional cost is 36.25% of wages before deductions, which the government intends to raise by six tenths of a percentage point. The aim of this move is to replenish the reserves of the Social Security system (the piggy bank), in anticipation of the effect of the arrival at retirement age of the generations from the high birth rate phase.

And a prudent precautionary measure at a time of serious and chronic deficit in the ordinary pension system. A deficit that the government intends to cover from the budget, by means of Treasury appropriations and the assumption of expenses hitherto charged to the social security system.

The problem with the increase in contributions is that it implies a hike in effective wage costs, which are a disincentive to employment when unemployment is the main problem for Spaniards. The system’s managers’ dilemmas in order to balance the figures are not easy to solve. If the fixed part of the equation is to maintain the purchasing power of current and future pensions, the variable part is none other than that corresponding to income. Namely, more contributions or more transfers from the Treasury, which is not in good financial health either.

Employers complain that increasing the wage bill is anti-employment, trade unions want more transfers from the state (someone will put up the money) and the government is trying not to lose the elections. Getting out of the labyrinth requires more explanations, more political leadership, more willingness to solve real problems.

In any case, let it be clear that all contributions are wages. They are linked to employment and everything is paid by the employer. And he gives a good part of it to the state to administer with the diligence of the “good trader”, who does not pull a fast one and does not promise what he cannot deliver.

About the Author

Fernando Gonzalez Urbaneja
Over 30 years working in economic journalism. Fernando was founder and chief-editor at El País, general editor at the business daily Cinco Días, and now teaches at Universidad Carlos III. He's been president of the Madrid Press Association and the Spanish Federation of Press Associations. He's also member of the Spanish press complaints commission.