Competitiveness Agreement and the distribution of social security

Abstract

The central labour market organisations reached an agreement on the competitiveness pact on 29 February 2016. Regarding social security contributions, the agreement included an increase in employees’ earnings-related pension contributions and unemployment insurance contributions, and a corresponding reduction in employers’ contributions. In addition, according to the agreement, the employer’s social security contribution would be reduced by at least 0.58 percentage points starting in 2020. In early 2023, public discussion has addressed whether the contribution shares changed in connection with the competitiveness pact should be restored to their pre-agreement levels.

The aim of this report is to provide an analysis of the effects of the transfer in social security contribution shares, and more generally the use of social security contributions as an instrument of economic policy. The report also presents a comparison of the distribution of social security contributions between employers and employees in Finland and in key peer countries: Sweden, Denmark, Norway, and Germany.

According to the report’s calculations, restoring insured social security contributions from the 2022 level to the 2016 level would reduce total insured contributions by 1.7 percentage points. This would increase employees’ income by EUR 1,644 million. Taxation would increase by slightly less than one billion euros, resulting in a net effect of just under EUR 700 million. Restoring social security contributions from the 2021 level would raise employers’ average contributions by a total of 2.4 percentage points. Based on the 2021 wage bill, this would increase public sector revenue by EUR 1,487 million. After accounting for the corporate tax rate, the effect would decline to EUR 1,189 million. Restoring social security contributions to the 2016 level and aligning them with the funding base would strengthen public finances by EUR 723 million. This figure is reduced, among other factors, because health insurance contributions had already risen from the low estimates of 2017–2019 during 2020 and 2021.

If social security contributions were to be restored, the report identifies several arguments supporting a moderate increase in labour costs (approximately two percent). Labour costs have steadily declined relative to competitor countries, creating room for such an adjustment. In the current relatively favourable labour market situation, increasing employer contributions would unlikely reduce wages correspondingly, at least not rapidly. Moreover, increasing employment is no longer primarily dependent on lowering labour costs as it was in 2016. The emphasis has shifted from stimulating labour demand toward encouraging working-age individuals to participate in the labour market and maintaining their work capacity. Attracting healthcare personnel and skilled workers from abroad is also important, and competitive wages play a role in this. Restoring contributions would strengthen public finances by nearly one billion euros, which is relevant in a context of public sector deficits.

In the comparison of social security contribution structures, the share of social expenditure financed by statutory social security contributions is highest in Germany (64.2% in 2020). In Finland, Sweden, and Norway, the share financed by social security contributions is at a similar level (44.1%, 46.1%, and 42.1% in 2020). Denmark differs from the other countries in that social expenditure is mainly financed through general tax revenues. There are also clear differences between countries in how statutory contributions are divided between employers and employees. The distribution is most balanced in Germany, where contributions are split equally between employers and employees (2021). The most uneven distribution is in Sweden, where employers account for more than 80 percent of contributions (2021). Finland and Norway fall between these two (employer shares 68.1% and 61.3% in 2021). Among the countries compared, the largest change in contribution distribution has occurred in Finland due to the effects of the competitiveness pact.

However, the administrative incidence of social security contributions—how the law allocates payments between employers and employees—does not determine who ultimately bears the economic burden. The report also briefly reviews previous literature on the economic incidence of such contributions. (AI translation)

• ISSN: 2242-6914
• ISBN: 978-952-209-198-7
• Publication in PDF-format