Opinion on the Social Insurance Act Amendment

Opinion on the Social Insurance Act Amendment
In line with the Fiscal Responsibility Act, the CBR draws up and publishes its opinions on various legislative proposals submitted to the parliament, either on its own initiative or if invited to do so by a parliamentary caucus. In August 2012, the CBR received a letter in which the SDKÚ-DS caucus requested CBR opinion on an amendment to Act No. 461/2003 on Social Insurance. Despite having only been in existence for several months and still in the process of creating its databases and models, the CBR agreed to draw up its opinion by the end of November 2012. The opinion reflects the final wording of the amendment as adopted by the parliament on 10 August 2012, and its main text does not take into account other laws enacted in the meantime. 

The CBR assessed the legislative change from three perspectives: short-term impact on households and businesses, short- and medium-term consequences for macroeconomic development, and implications for public finances.

The legislative change will reduce the net income of insured persons, both in the short and medium run. This is mainly due to higher social security contributions payable by employees and, more significantly, by self-employed persons and casual workers. Those affected by the increased contributions are likely to change their behaviour so as to minimise their impact on their income.

In the long run, the amendment will mainly affect pensioners. The first key change links the age of retirement to the average life expectancy for senior citizens.  Secondly, the amendment links the indexation of pensions solely to inflation; for the purpose of indexation, inflation represents the average price growth in the pensioners’ households reported by the Statistical Office. Thirdly, the amendment reinforces solidarity in the pension system by adjusting the existing correction coefficients. 

The changes in the system of taxes and social contributions affect economic growth primarily by incentivising individual groups of taxpayers towards working, saving or investing. In the short-term, these impacts will be primarily felt through changes in demand and, in the long-term, through the supply of labour and of capital. 

From the perspective of the long-term sustainability of public finances, the amendment improves the position of Slovakia. The reduction of contributions to the fully-funded pillar does not have a positive effect per se, but the increased retirement age, reduced average replacement rates, and changes in the assessment bases clearly improve the long-term balance of public finances.