Lecture 1: Extending Social Security to the Informal Economy in the Republic of Moldova

Transcription

1 Training on the compliance and contribution collection of the social security systems 9-11 September 2015 Lecture 1: Extending Social Security to the Informal Economy in the Republic of Moldova Kenichi Hirose Sr. Social Protection Specialist ILO DWT/CO-Budapest

2 Global issues in social security Everyone as a member of a society has the right to social security - Universal Declaration of Human Rights (1948) - International Covenant on Economic Social and Cultural Rights (1966) - European Social Charter (1961, revised 1996). Ensuring adequate social security for all - Social Protection Floors Recommendation No. 202 (2012) Build comprehensive social security systems and extend social security coverage through national social protection floors. - Transition from the Informal to the Formal Economy Recommendation No. 204 (2015) Progressively extend social security, maternity protection, decent working conditions and minimum wages to all workers in the informal economy. 2

3 Informal economy and undeclared work Informal economy ( grey or shadow economy): all economic activities by workers and economic units that are in law or in practice not covered or insufficiently covered by formal arrangements. Undeclared work ( envelop wage ): economic units wilfully avoid taxation, social and labour laws and regulations (Cf.) Undeclared work defined by EC: any paid activities that are lawful as regards their nature but not declared to public authorities 3

4 Informal employment: definition of the National Statistical Bureau of Moldova - Self-employed workers who work in the informal sector enterprises; - Employers who work in informal sector enterprises; - Members of informal production cooperatives; - Family workers employed in formal sector enterprises or informal sector enterprises; - Employees employed by formal sector enterprises, informal sector enterprises or private households of citizens who satisfy at least one of the criteria below: employer does not pay social contributions for them; do not receive paid annual leave (or financial compensation for untaken leave); do not benefit from paid sick leave; - Persons engaged in the production of agricultural products in households, exclusively for own consumption, with the duration of the working week of 20 hours or more. 4

5 Number of the informal employment, Moldova, Year (A) Employed population (B)+(C) 1,173,500 1,146,800 1,172,800 1,184,900 (B) (C) Formal employment 812, , , ,400 Informal employment (D)+(E) 360, , , ,500 (D) - Employees 96,900 78,200 76,200 72,100 (E) - Other workers * (F) % of informal employment in the employed population (C)/(A) 263, , , , % 29.7% 30.9% 32.5% Source: National Bureau of Statistics Note: * Other workers include own-account workers, contributing family members, employers, and members of producers' cooperatives. 5

6 Informal employment in Moldova - The informal employment is increasing since In 2014, a total of 385,500 persons had an informal job as their main job, which represented 32.5 percent of the employed population. - Informal employment is a common practice, in particular in the private sector. In 2013, almost all (99.8 percent) informal employment is found in the private sector. - By industry, the informality is particularly high in the agriculture (73.0 percent in 2014). - Informal employment is high among older persons who earn additional income as pensions are not enough. - Reportedly some employers pay the minimum wages for the part-time workers although they actually work full-time. 6

7 Doing Business Index Ranking: Ease of paying taxes and social security contributions Country Macedonia, FYR 7 38 Croatia Romania Kosovo Moldova Hungary Bulgaria Montenegro Ukraine Albania Bosnia and Herzegovina Serbia Source: Doing Business Index, World Bank Group

8 Undeclared work in Moldova - The Labour Code of the Republic of Moldova (Article 71 (2)) stipulates that undeclared work is any work fulfilled by an individual for and under the authority of an employer without respecting the provisions of the current Code on signing of individual labour agreements. - In 2011, the Moldovan government adopted the National Plan of Action to combat against undeclared work. Subsequently, the Ministry of Labour, Social Protection and Family drafted a public policy proposal on the reduction of the informal economy. A draft amendment to the National Plan is discussed by a tripartite committee. 8

9 Estimates of undeclared income and unpaid social security contributions, Moldova, 2010 Number of workers Estimated undeclared income (million MDL) Estimated unpaid social security contributions (million MDL) Social insurance Health insurance Total Informal employment - Employees 353,500 4,776 1, , ,900 1, Other workers* 252,600 3,001 1, ,804 Underdeclared employment 296,460 4,518 1, , or more workers - 1 to 19 workers Total (million MDL) 166,260 2, ,200 2, ,960 9,294 2, ,719 Total (as a % of GDP) % 4.1% 1.1% 5.2% 9

10 Major forms of non-coverage and noncompliance with social security 1. An employer (e.g. in small and micro enterprises) or a self-employed worker (e.g. a farmer) failing to register as a contributor. 2. An employer under-reporting the number of employees (such as part-time or casual workers). 3. An employer and/or a worker under-declaring the value of wage levels. 4. The non-payment (arrears) of contributions or even wages. 10

11 Effects of the informal work on social security rights Non-registered workers The worker and family members are unprotected against substantial social risks. Under-declaration of income threatens the sustainability of social security systems. threatens the adequacy of social security benefits. Lower amounts of contributions result in a lower level of benefits in future seriously undermines the credibility of social security systems. 11

12 Barriers for social security extension to the informal economy Social security was originally established for employees in the formal sector it does not work if simply applied to the informal work. Weak contributory capacity (low and irregular income). High rates of contribution and tax (self-employed). The benefit design not responsive to priority needs. Weak capacity for law enforcement and contribution collection. There are more (short-term) gains than costs in working informally. But are people rational? 12

13 Republic of Moldova: Challenges Informal employment and undeclared work are widely used and accepted. The incidence of under-declaration of income exceeds the capacity of the control authorities. Low penalty. Lengthy court processes. Problems with the Law on the State control of business activity (Law No. 131 of 8 June 2012). Problems with access to the registry of businesses of the Chamber of Commerce Health insurance: nearly universal coverage ( 82%) thanks to public budget for various groups. But a large part of burden on employees. Pension systems: high contributions and low pension level. Pension systems have deficits and unfavourable dependency rates. Farmers depends on their voluntary compliance. Little incentive of membership. (good practice: linking the contribution payment with various privileges in Bosnia and Herzegovina). Unified collection system: a greater use of IT technology, but shortage of capacity and lesser coordination between tax authority and social security institutions. Lack of strong political will to change the current situation. 13

14 National strategy for a comprehensive social security Extension of the coverage to the informal economy (universal coverage). Improvement in the compliance and contribution collection. Important for the transition from informal to formal economy and the reduction of undeclared work. 14

15 Measures to extend social security coverage Coordination and joint actions by all stakeholders, combined with a use of IT system. Measures strengthening enforcement through inspections, controls and sanctions. Removing disincentives and providing appropriate incentives. Reduce administrative burden (flexible procedures, offices, practices, one-stop shops etc.). Beyond carrots and sticks create a higher tax morale and a social security culture. 15

16 Informal economy is a deep-rooted problem 16

17 Continuous and concerted actions are necessary to combat against informal economy 17

18 Questions for discussion In your opinion, what are the main reasons for working in the informal economy (by employers and workers)? What measures are necessary to change the informal employment into the formal one? Has the collection of contributions improved after the introduction of the unified collection of tax and social security contributions? How effective is the coordination between social security institutions, labour inspectorates and tax authorities? What are the main challenges in extending social security for workers in rural areas? In your opinion, what priority measures could be implemented to extend the social security coverage and to improve the compliance and the efficiency of contributions collection? 18