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San José, Costa Rica || Friday Edition, October 20, 2017 || Vol. 17, No. 207
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OECD says country should decrease Social Security funding
By the A.M. Costa Rica staff

The high cost to employers of paying their workers' social security contributions is one of the factors explaining the high level of informality in Costa Rica's employment, according to the Organisation for Economic Co-operation and Development (OECD).

For this reason, the international organization proposes to reduce taxes on labor and suggests that the costs of the programs they finance be funded by other types of taxes, such as added value tax and income tax.

This is one of the OECD recommendations to Costa Rica after reviewing the state of the labor market and social policies. This is part of the inspection process to which the country is subjected if it wants to join this group of nations.

The report was presented Wednesday by Stefano Scarpetta, Director of Employment, Labor and Social Affairs of the OECD. The representative explained that social charges should be reduced from items that do not provide direct benefits to the worker.

"19 percent of that coverage is for old age, health, maternity, survivors' benefits and disability benefits, which is very good because they are indeed safe, but there are also 25 percent of those resources which finance the operations of public institutions, public banks and anti-poverty programs," said Scarpetta.

"The anti-poverty programs have been extremely successful in Costa Rica, the question is how they are financed. The general message we have in the report is that there should be an effort to finance these programs with the general taxes, both the value added tax and income tax," added the official.

The OECD report notes that the tax rate on the total social security payroll is 36.5%, which is almost nine percentage points above the OECD average, which is 27.2 percent.

According to the Organisation, 26.33 percent of the social charges paid by employers to finance the Instituto Nacional de Aprendizaje, Instituto Mixto de Ayuda Social e Institute and the Fondo de Desarrollo Social and Asignaciones Familiares and Banco Popular, raise the cost of formal employment, which makes it more attractive to hire informally.

The OECD considers that other sources of taxation, such as value added tax and income tax, are underutilized because they have low tax bases and low tax rates, so they could assume the burden of financing non-contributory social programs.

According to Scarpetta, recharging these taxes would not affect lower income households because of income tax exemptions to persons who receive lower wages.

Currently, the Legislative Assembly is negotiating a bill to transform the sales tax into value added tax or VAT.

The Costa Rican Chamber of Commerce and Private Sector Associations (Uccaep) attended the presentation of the OECD report and reported that it will only start analyzing the document and its proposals, while the Social Unity Bloc seemed against the recommendation to reduce social security charges.

"Do you know what it would take to decrease support for the social security entities? This country lives on a series of supports, we are a very vulnerable country in that sense," said Gilberto Cascante, president of Bussco, a unions confederation.

Ana Helena Chacón, Vice President of the Republic, considered that, in order to encourage formal contracting, the Government would allow employers to have a period of two years in which they can pay social charges in a staggered way, until they arrive to 100%.

Chacón said that the proposal was presented by Geannina Dinarte, Minister of Economy, and is currently under study in the Financial Department of Caja Costarricense del Seguro Social.

OECD photo          
Employer's Social Security fees are mandatory
 in every pay
In its report, the OECD also proposes the country reduces the list of minimum wages, which it considers too broad.

The Organization considers that the fact that there are 24 minimum wages in the private sector, which differ by occupation and skill level, and complicate compliance.

The OECD limitation is high, considering that almost a quarter of workers in the private sector (25% in the formal sector and 60% in the informal sector) earn less than the lowest minimum wage.

At the same time, the OECD suggests strengthening the skills of labor inspectors in the Ministry of Labor to better monitor workers' living wages.

"This would be a way to support people who lose their jobs in the formal sector and allow them to look for another in the same sector, instead of going to any job in the market because they do not have enough savings," Scarpetta said.

So far, Costa Rica has obtained approval in areas like trade, health and agriculture policies.

Ana Helena Chacon categorically refuted several of the OECD's observations on shortcomings that the state must improve.

One of them was the Organization's request for Costa Rica to adapt its regulations for migration, to facilitate the regularization and insertion of foreigners in the labor market.

"An open door policy for Costa Rica, with its current fiscal situation, is not possible," she said. Chacón also criticized the OECD for more efforts to reduce child labor.

"We have become one of the countries that have eradicated it the most, we have 10,000 children less on the streets than some years ago. Costa Rica does have a well-established strategy," Chacón said.

Some other OECD recommendations:
-Promote social dialogue and collective agreement to improve wage setting mechanisms.
-To strengthen the insertion and labor intermediation services.
-Establish a one-stop institution of social programs and reduce the fragmentation of those same plans.
-Introduce mechanisms to evaluate the effectiveness of labor market programs.
-Increase funding so that the "Avancemos" scholarship program reaches more young people.
-Consider measures to increase the capacity of the tax system to reduce income inequality.
-Extend coverage of non-contributory pensions for all people at risk of poverty and extreme poverty.
-Improve the long-term sustainability of the pension system by revising the legal retirement age based on changes in life expectancy.
-Increase provision of childcare services paid with public funds.
-To combat gender discrimination in the workplace.
-To combat child poverty.
-Consider an extraordinary regularization of the immigrants present in the country.
-Redefine the cost that migrants must face to regularize their situation.

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