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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM AND ITS TREATMENT IN GREECE Dr John Aznaouridis

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Η Ακαδημία Στρατηγικών Αναλύσεων (ΑΣΑ), είναι ανεξάρτητος επιστημονικός - ερευνητικός φορέας, μια «δεξαμενή σκέψης», με νομική μορφή αστικού σωματείου μη κερδοσκοπικού χαρακτήρα, που ιδρύθηκε το 2014 με έδρα την Αθήνα. Τα ιδρυτικά μέλη και τη βάση των μελών της ΑΣΑ αποτελούν επιστήμονες που προέρχονται από τις Ένοπλες Δυνάμεις και τα Σώματα Ασφαλείας, που είναι διδάκτορες ελληνικών και ξένων πανεπιστημίων ή κάτοχοι άλλων υψηλού επιπέδου τίτλων σπουδών, με πλούσιο επιστημονικό, ερευνητικό και συγγραφικό έργο και συνεργασία με ελληνικά και ξένα πανεπιστήμια, κέντρα μελετών και ινστιτούτα, σε διάφορα επιστημονικά πεδία. Επίσης, μέλη της ΑΣΑ είναι προσωπικότητες του διπλωματικού και ακαδημαϊκού χώρου και άλλοι επιστήμονες υψηλού κύρους με επιστημονική δραστηριότητα σε γνωστικά αντικείμενα τα οποία συνάδουν προς τους σκοπούς της. Σκοπός της ΑΣΑ είναι η ανάπτυξη επιστημονικού έργου και δράσεων στα πεδία των Στρατηγικών Σπουδών, της Άμυνας, της Ασφάλειας και της Εξωτερικής Πολιτικής, η εκπόνηση επιστημονικών αναλύσεων, ερευνών και μελετών καθώς και η παροχή εξειδικευμένων συμβουλευτικών και εκπαιδευτικών υπηρεσιών στα παραπάνω πεδία, σε φορείς του δημοσίου και του ιδιωτικού τομέα και σε φυσικά πρόσωπα, σε εθνικό, ευρωπαϊκό και διεθνές επίπεδο. Για την υλοποίηση των στόχων της η ΑΣΑ έχει οργανώσει τέσσερεις Επιστημονικούς Τομείς: (1) Ανάλυσης Στρατηγικού Περιβάλλοντος, (2) Ανάλυσης Αμυντικής Πολιτικής και Ασφάλειας (3) Ανάλυσης Συστημάτων, Τεχνολογίας και Οικονομίας, (4) Επιχειρησιακής Έρευνας, Διοικήσεως και Ελέγχου. Μεταξύ των στόχων της ΑΣΑ περιλαμβάνεται η ανάπτυξη συνεργασιών με διεθνείς οργανισμούς, με ακαδημαϊκούς - επιστημονικούς φορείς και άλλα κέντρα επιστημονικής έρευνας με συναφές αντικείμενο, καθώς και με έγκυρους επιστήμονες, στρατιωτικούς, διπλωμάτες, κ.ά., στο εσωτερικό και το εξωτερικό, ιδίως στο ευρω-ατλαντικό και το ευρύτερο μεσογειακό περιβάλλον.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM AND ITS TREATMENT IN GREECE Dr John Aznaouridis

WORKING PAPER 18 May 2015

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WORKING PAPER – Νο18 / May 2015 Τίτλος: THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM AND ITS TREATMENT IN GREECE Συγγραφέας: Dr John Aznaouridis

Εκδότης: Academy for Strategic Analyses (ASA) Σχεδιασμός – ηλεκτρονική επεξεργασία: ΑSA Copyright © Ακαδημία Στρατηγικών Αναλύσεων info@acastran.org http://www.acastran.org, https://www.facebook.com/AcademyStrategicAnalyses ISSN: 2407-9863

Απαγορεύεται η αναδημοσίευση, η αναπαραγωγή, ολική, μερική ή περιληπτική, ή η απόδοση κατά παράφραση ή διασκευή του περιεχομένου του βιβλίου με οποιονδήποτε τρόπο, μηχανικό, ηλεκτρονικό, φωτοτυπικό, ηχογράφησης ή άλλο, χωρίς προηγούμενη γραπτή άδεια του εκδότη. Νόμος 2121/1993 και κανόνες του Διεθνούς Δικαίου που ισχύουν στην Ελλάδα.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

About the author Dr Ioannis Aznaouridis is Brigadier General in the Hellenic Army. He was rated Second Lieutenant in 1983, after his graduation from Military Academy of Thessalonica. During the period 1979-1983, he studied Economics in Aristotle University of Thessalonica (BSc). He also holds a BSc in Public Administration from Panteion University (Athens), a postgraduate degree (MSc) in “International Economics and Finance” from the University of the Aegean and a Diploma in “Marketing Management” from the Institution of Marketing Management (UK). He received a PhD in Economics from the University of the Aegean.

He is a Member of the Academy for Strategic Analyses (ASA)

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

ABSTRACT The contribution evasion is one of the endogenous pathogenesis of the Greek social security system. This article explores the extent, the causes and the consequences of this evasion in Greece and proposes measures to tackle it. The article demonstrates, the existence of a significant proportion of contribution evasion closely linked to the informal economy, lack of social security consciousness, nonproportional reciprocity of pensions, complexity of the social security law, weakness of monitoring mechanisms, continuous indebtedness favorable regulations, high corruption and lack of political will.

While exploring potential positive effects of contribution evasion on labor cost and employment we do not note the existence of causal relationships between the rate of evasion and the employment rate or the percentage change in nominal labor cost. The decrease in labor cost per unit does not appear to cause an increase in employment by improving competitiveness.

The issue of anti-evasion is of considerable importance for the viability of the social security system, after the 30% reduction in revenue from contributions, due to the decline in employment and wage cuts.

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1. INTRODUCTION The study is developed in five parts. At first we attempt to identify the conceptual definition and to investigate the causes of contribution evasion, through the exploration of moral tax and fiscal mechanisms of sanctions and incentives. In the second part, we estimate the existence of contribution evasion by comparing the ratios of employed and insured people to active population we calculate the Consistency’s Index of the system and finally we calculate the annual rate of evasion.

The third part examines the relationship between the contribution rate and the level of Pension Funds’ revenue. The fourth part explores possible positive effects on employment, due to a reduction in labor costs. Finally in the fifth part, policy measures are developed to curb contribution evasion.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

2. CONCEPTUAL DEFINITION, CAUSES AND CONSEQUENCES OF THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM 2.1 Contribution Evasion The contribution evasion in social security system consists in total or partial, avoidance or delay of payment of contributions; this fact endangers the sustainability in each country’s pension system, causing inefficiencies in its inputs. The contribution evasion, which is closely linked to the development of the gray economy, that is to say the part of non recording in national accounts activity, is manifested either by non-payment of contributions, or by undeclared work, either through insurance for lower salaries, or finally by insurance for fewer work days.

The contribution evasion in Greece is caused in the following cases: • Entire businesses that either do not census, or do not fulfill their social obligations.

• Employees who are not registered at all on any insurance organization (immigrants or other foreigners, members of small family businesses).

• Employees insured for fewer days or hours than those which work (workers insured for the minimum time required to obtain health insurance coverage).

• Employees who pay less for insurance than they actually receive (to avoid paying contributions on benefits or sections of the salary).

• Non-payment of contributions to pension funds. Although owed contributions are confirmed, they are withheld from companies and used as a cheap source of capital by them. The Greek State contributes to this direction with its frequent and favorable adjustments of debts.

• People insured in Pension Funds with smaller contributions. Many times, some policyholders may prefer to belong to Pension Funds such as TEBE in order to pay lower contributions. Then, through sequential insurance, they can switch to insurance with IKA (social insurance institute) gaining the potential for a higher pension.

• Many employers collaborate with their employees through "Service Bulletins" and thereby force them to insure themselves in the Insurance Agency for Self-Employed (OAEE).

• Insurance of employees with different specialty than that for which they were actually hired.

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• Laws of the past that enable employees or employers to pay reduced contributions (employees in border areas). • The Greek state’s delay or non-payment of owed contributions. Adjunct of contribution evasion in Greek Social Security System is the existence of a secondary market for insurance stamps in which employees can buy their social security stamps to supplement their retirement requirements.

2.2 Causes of evasion.

For many years, the so-called "black or shadow economy" is an important part of economic activity in the economies of Western Europe and North America (Pyle, 1989). The existence of underground economy-and thus tax and contribution evasion-requires incentives and opportunities (Pavlopoulos 1987, Tanzi 1982 and Lolos, 1989) which are defined as follows: 1. Incentives. a) Taxes and contributions payment avoidance for our own economic benefit. b) Override of rules and regulations related to labor market, forex market, environmental regulations and bans on the production and trade. c) Inadequacy of Public Administration at the organizational and supervisory level.

2. Possibilities. a) Technological changes that cause decentralization of production resulting in controlling difficulties. b) The failure of the state to determine the size of the informal economy and the inability to identify and control those who do not pay their contributions to their pension funds.

In the private sector the contribution evasion may be due to reasons such as the concealment of income and the existence of extensive underground economy and tax evasion that stimulate the creation of a particular way of thinking and an attitude that promotes evasion of obligatory payments. In Greece, the insurance of public servants is mandatory and fully controlled by the state, so, there is no discussion about contribution evasion.

Involuntary contribution evasion occurs when the employee is not insured, not by will, but under pressure from his employer in order to reduce labor costs, particularly in times of recession. This case occurs in specific categories such as foreign workers, employees in second job, people that keep working after their retirement etc. There is also the case in which insurance is calculated at lower wages than the actual (after common consent between employer and employee) or the employee 10

THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

does not wish to be insured in the public system because of its low return. The weak link between contributions and benefits creates a disincentive for the insured people, making them uninterested in missing any insurance days. In this case refers to a voluntary contribution evasion.

With the incentives, we should incorporate the continuous favorable (freely given) regulations of the state, that reward some employers’ inconsistency, which combined with the lack of strong political will for substantial action, aggravates the problem. As far as the control and contribution-collection process are concerned, the dominant perception has been built on the logic of distinction, between detection of dept and contributions collection; a fact that has a negative effect on the collectibility of the social security system.

The recent economic downturn and adverse labor market conditions (increase in unemployment, underemployment, immigrants etc) are an incentive for contribution evasion. Furthermore, for those receiving low pensions as a result of low salaries, the insurance for a longer period than the minimum required constitutes a disincentive. It also acts negatively for those who are working a second gob from which there is no expectation for pension, due to failure to achieve the time requirements.

An important factor that enhances the contribution evasion is what we call lack of social insurance awareness. The problem, that means absence of social stigma or psychic cost of contribution evasion and weak social cohesion, arises through the processes of rewarding illegality with the frequent adjustments of debts, the complex, poorly understood and controversial security legislation and the abundance of inactive provisions. The lack of resources is often viewed as an exclusive matter of the Greek state, invoking the assistance of the community through grants and social resources. The identification of those who do not pay their contributions and the collection of contributions has become a police operation. If the contribution evasion is widespread, there is a dominating view that renders tax evasion fair enough for other employees too. In cases of foreign workers (expatriates who return home, illegal immigrants, etc), low salaries make the percentage of contributions an unbearable burden. Illegal work leads inevitably to the avoidance of payment of contributions.

In addition, an important problem of the Social Security System in Greece is the systematic underfunding by the state. As a result, Social Security’s reserve fund is reduced and the long-term financial stability of the social security system is reversed. The state does not pay its debts to the Social Security Funds; in this way it keeps them in «insurance hostage». The Social Security Funds offer to the majority of population low level benefits. A typical and recent example of this strategy of the state towards social insurance is the state budget in 2008, in which the amount

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of state grant entered for IKA is 1,900 billion instead of 3,386 billion EUR, according to the legislated requirement for 1% of GDP (Article 4 paragraph 1 of N3029/2002).

High contribution rates, low possibility of arresting and relatively small penalties are generally considered as incentives that lead to contribution avoidance.

The contribution evasion is closely related to undeclared work that is the primary or secondary gainful work (G. Vavouras, N Petrinioti, 1989) which was not reported to the appropriate government agencies, in order to avoid payment of contributions. Neither illegal activities nor informal occupation (domestic, voluntary) are included in undeclared employment.

Those who are involved in undeclared employment are: 1. Employers. (Because of the competition, companies with low technological and organizational infrastructure, small firms, firms that aim to functional, numerical and financial flexibility).

2. Employees with high or low specialization (e.g. hidden occupation).

3. People who act outside the framework of the formal market.

As determinants of undeclared work can consider the size and structure of the workforce, the level of unemployment and underemployment, the tax burden, the labor costs, the government regulations pertaining to work, the context of labor relations, the conditions and the structure of the product market, the overall role of the state, the acceptability of state power and the character of the economy.

We can summarize the reasons why the contribution evasion in Greece is increasing almost every year as follows: 

The lack of social security consciousness.



The actual financial inability of an employer.



The very large amount of contributions.



The limited application of the principle of proportional return on pensions combined with thresholds and EKAS (social solidarity allowance). Under the current pension system, an insured with 4,500 days of insurance, gets a larger amount of pension than an employee who is insured for 10 years more, as long as they are not entitled EKAS. The first one will get 700 euros for pensions -including the allowance- while the other will get 615 euros per month (prices January 2010).



The complexity of the legislation.



The lack of legislative cover for non-typical forms of employment.



Continued favorable regulations.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis



The lack of co-insurance funds with the tax office and chambers.



Inadequate or non-existing computerization of social security organizations.



Lack of political will and political timidity that postpone the solution of the problem, leading society to “grab” from the future.

2.3 Consequences of evasion.

The contribution evasion is a serious crime against the viability and effectiveness of the social security system of each country, as it creates and reinforces the vicious circle of inadequate insurance. The beginning of the cycle starts from low revenues, which on the one hand reduce the benefit levels of the system and on the other hand the potential to reduce levy rates. This leads to further negative attitude of employees regarding the payment of contributions to them. The unfair distribution of the insurance burden disappoints consistent and sincere contributors and is an easy excuse for offending behavior.

The loss of revenue due to non-payment of contributions, leads to further financial burden of the society in which the debt is spread as the state is forced to subsidize the deficiency insurers with large amounts of money. Alongside the healthy competition is distorted and enterprises which do not pay their contributions in social security funds are gaining advantage. The contribution evasion, through the swelling of deficits that causes and low pensions to which it leads, exacerbates the imbalance in the balance of social and insurance needs and creates an unsafe working environment for employees, employers and pensioners who will have to bear the weight of the consolidation measures of the system.

The Public Pension Funds and the Greek state are subjected to a high economic and administrative cost in order to maintain strong control mechanisms aiming to combat contribution evasion.

Contribution evasion and tax fraud in general, cause harmful effects that stretch across various sectors of the economy, including: • Reduction in revenue of Social Security Organizations (SSO) and increase of public debt.

• Negative impact on the allocation of resources in the society and equitable redistribution of income and finally disruption of social cohesion.

• Effect on some macroeconomic indicators and make them potentially misleading.

• Charge of social resources and state funding.

• Increase of burdensome debt of SSO.

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3. ASSESSMENT OF CONTRIBUTION EVASION. 3.1 Methodology - Evaluation.

The existence of contribution evasion can be seen when comparing the ratio of insured (for main pension, Social Budgets) to the active population (ages 15 - 64 years, AMECO) with the ratio of employees (National Statistical Service of GreeceNSSG) to the active population. For the period 1960-2011, it was found that: a) From 1960 to 1974 and from 1998 until 2011.

Insured Employees  P1564 P1564

b) During the period 1975-1997 we observe the opposite.

Insured Employees  P1564 P1564 The result for the period 1975-1997 should not surprise us as the above calculation ignores the fact that many people are insured for two or more primary or supplementary pensions. When we receive the number of insured people, using as source the Social Budgets, in fact we get the number of insurances. The exact number of insured is not known and therefore it is double estimated.

In order to calculate the rate of contribution evasion, we will check the ability of the system to collect its revenues. For this reason, we use the ratio of actual revenues to the "potential revenues", that is the index of consistency.

If the Consistency Index = Actual revenue / Potential revenue equals the unit, that is if CI = Ea * w * ε / E* w * ε = 1 Where Ea = number of policyholders, E = number of workers, w = average wage and ε = contributions rate.

Then, there is no contribution evasion, as all appropriate revenues are collected and then: Ea * w * ε = E * w * ε. Οn the contrary, if there is contribution evasion, the index is less than one.

In the case of Greece, considering the period 1960-2011, we find that sistency Index = Ea * w * ε / E * w * ε <1.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

To assess this indicator we take into account: a) The average wage calculated using the Transfer Index (TI), which shows the generosity of the pension system as follows:

TI 

 W Y

*

Y



2

Y TI   * W  2

W 

Y TI



where TI = the transfer index.

Y

the average income given by the ratio GDP / Insured. σ = the average pension, that is pension expenditure / number of pensioners. b) For the calculation of "potential revenue" we multiply the number of workers ”E” (employees and self-employed) with the contribution rate "ε" and the average salary “w”. In the number of workers, farmers and civil servants are not counted.

The first have not been paying pension contributions until 1996, and the second receive pensions directly from State Budget, while from 1993 onwards, the contributions of newly appointed public servants are not included in the revenues of Social Security Organizations (SSO), but are credited to another account. As a percentage of contributions for employees we take the average rate of contribution of Social Insurance Institution (IKA), while for self-employed the "2/3 of the average rate of Social Insurance Institution” which approximates the average rate of self-employed. c) For the calculation of actual revenues of SSO we aggregate salaried and selfemployed, without regard to the agricultural workers and the public servants.

Based on the above methodology, the divergence of the Consequence Index from the unit shows the percentage of contribution evasion, which for the period 19802000 amounted to an average of 18.2%, while sometimes reached 35%. In the period 2001-2011 ranged between 21.9% and 25.9%.

According to the Ministry of Labor, revenues from insurance contributions in 2011 could be increased from 23.80 to 33.06 billion euros. The difference of 9.26 billion (28%) shows statutory resources lost, roughly equal with the annual state contribution for the strengthening of the Insurance Funds, amounting to 9.9 billion euros.

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3.2 Statistics.

The contribution evasion is a serious problem for social security organizations, as the most important revenues of them come from contributions of employers and workers, the growth of which constitutes the internal efficiency of the public insurance system.

Considering the internal efficiency i, as the interest rate that equates the discounted requirement for pension σ, with the contribution C, we have:

Ct   t 1 *

  Ct  1  Ct  Ct * it 1   t 1  it 1  t 1  it 1  t 1  1 1  it 1 Ct Ct

(1)

In the PAYGO system the revenues of the period t +1 from contributions C (employers and employees) for E employees cover benefits σ for retired P. So we have:

Et 1Ct 1  Pt 1 t 1   t 1 

Et 1Ct 1 Pt 1

(2)

Replacing (2) to (1) we get:

it 1

Et 1Ct 1 Et E C   1  t 1 t 1  1 Ct Et C t

This relationship shows that the internal efficiency of the insurance system equals to the contributions growth rate of employers and employees.

The contribution evasion is the biggest headache of the insurance system in Greece. In the Social Insurance Institution (IKA) accounts for 30% of its revenues while losses reach 3.5 billion annually. Unpaid government contributions to IKA amounted to 8.5 billion euros, while the dept of individuals reaches to 4.2 billion.

The number of Social Insurance Funds debtors is estimated to reach 800,000.

450,000 of these are companies and self-employed, 250,000 are farmers who have not paid their contributions to the Agricultural Insurance Agency (OGA) and 100,000 are borrowers with second and third professional activities. Debts of individuals to large insurance funds (IKA, OAEE, etc.) reach 11 billion euros. One (1) of four (4) workers is uninsured; the number of uninsured workers is more than 600,000 people and one (1) of nine (9) companies is non-registered.

Since 2003, the contribution evasion annual growth rate is 20% annually, a figure that is expected to rise due to recession. According to data collected from the Social Insurance Institution (IKA) within 2011, the percentage of policyholders who do not pay current contributions amounted to 36% for OAEE, 33% for OGA and 26% or 27% for IKA.

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4. CONTRIBUTION EVASION & UNDECLARED EMPLOYMENT Undeclared or illegal employment is the paid work outside the tax authorities and Social Security Organizations; it remains inconceivable and therefore illegal. According to the Eurobarometer (2007), illegal immigrants, unemployed and freelancers show high rates of illegal work.

For Greece, according to data of the Hellenic Labour Inspectorate (SEPE 2011), the undeclared work is estimated at 25% of GDP, according to Professor Anggelou S. at 20%, while according to OECD reaches 28.2%, classifying the country in the category with the highest proportions worldwide. We note that in the EU the rate ranges between 3% and 15% of GDP. The contribution evasion is consistent with the black labor, a phenomenon particularly prevalent in businesses employing less than ten (10) employees.

The aim of the Ministry of Labour is to reduce the uninsured employment to 12% in the next three years 2012-2014. Like the tax evasion, the contribution evasion occurs in countries with extensive shadow economy. In the latest OECD report on Greece (2009), the underground economy is estimated at 25% to 37% of GDP. An IMF report entitled ÂŤHiding in the ShadowsÂť (2002) covering the period 19992001, estimates the percentage at 30%, while a study of Foundation for Economic and Industry Research (IOBE), entitled "Underground Economy and Tax Evasion in Greece" for 1997, increases the rate at 36.7%.

The reasons necessitating the involvement of state mechanism to social security are related to the fact that some people, just face reality myopically; they neither think nor take care of their future, and thus not saving enough money during their youthness in order to cope with the difficulties of the old age, preferring the present consumption. Such immature behavior turns to a social problem for two main reasons: The first reason is that, as people getting older it is possible to change their preferences regarding the amounts they would like to have saved. And when this happens it is too late to rectify.

The second reason is that, if people do not save enough to secure their old age then the obligation to support their decent living is transferred to the rest of the society. This may prevent other people from saving when young, staying inactive and relying on contribution and support of the rest of the society. Then of course,

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an ethical problem is created by passing this personal obligation to the wider community, known as free riding or moral hazard.

The institution of minimum pensions also may create a moral hazard for the waiver of insurance. An insured, knowing that he will receive a minimum pension, has little interest in not losing time insurance. Moral hazard is also the delinquent behavior of organized networks which act towards granting illegal pensions to people who do not qualify. The illegal circuits, in which law firms, doctors and public servants are involved, ensure provision of disability pensions to people, who not only have not made contributions and of course are not disabled, but also to those who work, and in many cases even in construction and factories. According to data from IKA, 14% of its pensions are disability pensions, when the European average is 10%. Areas with rates that surpass 20% are Crete (about 30%), Lefkada, Arta, Alexandroupolis, Veria and Athens.

As regards the illegal payment of pensions to people who did not pay contributions, it was discovered a damage of tens of millions euros in IKA. This was caused by criminal networks submitting false “Periodical Analytical Statements” through the internet (1262 false electronic traces), declaring employees and days of employment, which did not always correspond to actual employment or projects with the use of credited insurance stamps unbeknownst to their owners. Some criminal networks were creating nonexistent and virtual businesses or were looking for companies bankrupt or liquidated, in order to claim from IKA insurance coverage for Greeks or foreigners who had not established their pension rights. In case of companies under liquidation or bankrupt, a lawyer typically assumed the debts of the employer, as a receiver or liquidator and by means of false witnesses claimed that the company had not paid insurance contributions for its workers. The owners of these companies were usually persons without assets (usually very elderly) then every foreigner willing to retire or renew his labor card, but lacking the necessary 250 insurance stamps per year, was complaining that he was working uninsured, in the company. So, first the authorities imposed fines in a person without assets which therefore were not collected, while on the other hand, IKA was obliged to accept the complaint and cover, the workers’ pension and medical care.

The illegal network had exploited priceless insurance stamps of 1982 that were left unclaimed in the cooperative tobacco industry “SEKAP”. These stamps were sold to people who needed fake evidence, to prove that they were insured before 1983, in order to retire with a favorable status, avoiding the hard insurance measures of the memorandum. The total number of these people is estimated to exceed 10.000, in which other 20.000 pensions must be added which for years paid to people who have died, as well as in a significant proportion of pensioners receiving double pensions while they were declaring only one.

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5. CONTRIBUTION RATES. A question that arises during the whole investigation of the issue is whether the reduction in the contribution rate lowers the contribution evasion.

If the penalties are linked to the amount of unpaid contributions, the reduction of rates would increase the contribution evasion (Yitzhaki, 1974). The decrease in rates may reduce contribution evasion, provided that the penalties will be based on undeclared income from wages and salaries.

If a reduction in contribution rates could function as an incentive for greater compliance of people for honest statements, the result would not necessarily increase the revenue of SSO. Assuming that individuals have stable income, penalties are based on undeclared income and there is no cost of tracking for offenders.

Considering that: R = expected revenue from contributions of a typical individual, θ = contribution rate, X = declared income from wages and salaries, w = total income from wages and salaries, π = penalty and ρ = probability of arresting, Then we take the equation of revenues R , of SSO from contributions as follow:

R  X   (w  X )

The effect of the change in the contribution rate “θ” in the above revenue R is given by the first derivative of the above mathematical expression.

R  X  w  X  R /  (X  w  X ) /  R /  (X ) /  ( w) /  ( X ) /  R /   / X  X /  0  X /  dR dX dX  1X      d d d dR dX  (   ) X d d dR  (   ) X   X d

Where Χθ is the first derivative of X to the θ

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Assuming that an increase in the contribution rate encourages contribution evasion, that is we assume

dX 0 X 0 d or  Contribution Evasion will require         0 and therefore the funcdR  (   ) X   X tion d , cannot take a sure sign (plus or minus).

A reduction of the contribution rate may cause an increase or decrease of revenues of SSO as: a) It can lead to increased openness and thereby increase revenues. b) It can lead to a reduction in revenues due to lower rates.

Followers of Keynesian theory are placed against the lower tax rates arguing that this would lead to an increased demand, inflation and fiscal deficits. On the contrary, economists of the supply theory, argue that a reduction in rates, leads to lower production costs and furthermore increases competitiveness, boosts consumption, supports production, increases tax revenues, and reduces the fiscal deficit.

Similar is the effect of contribution rates of SSO’s.

Assuming that between income and contribution rate, exists a linear relationship, we have the equation: Y=a-b*e

(3)

Where: Y is the total average income. e is the average annual contribution rate and a, b are coefficients of the linear relation.

The above relation indicates that any increase in the contribution rate reduces the average income of workers and employers.

The revenues of social security system are given by the relation T=c+Y*e

(4)

Where T is the revenues of SSO’s and c the intercept of the linear function.

Substituting the relation (3) to (4) obtain: Τ = c + αε – βε2

(5)

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

This relation represents a curve function and establishes a quadratic relationship between the tax-paying basis (average income) and revenues from contributions.

The first derivative of the relation (5) is dT/dε=α-2βε, the contribution rate ranges between 0 < ε <1, the root that eliminates the first derivative is ε= α/2β, as ε>0 then α/2β>0=>α>2β, and because ε<1 we conclude that the first derivative is dT/dε>0, so the function is increasing. Then we examine the convexity of the curve, taking the second derivative d2T/dε= -2β<0, and we realize that the function turns the hollow in the negative Y axis, so it is a concave curve. This function displays the maximum contribution rate ε= α/2β which eliminates the first derivative.

Should the government decide to increase the contribution rates given that, there are low wages and high living costs, the non-linear function may be attributed to the response of non-payment of contributions. In other words, the shape of the function may be attributed to the dominance, of the substitution result.

The strict negative relationship between alternative levels of contribution rate and the average income is explained by a preponderance of the substitution effect and the tendency to avoid paying contributions. With increasing contribution rates, the labor supply is expected to move from the formal to the informal sector of economy and the inflow of illegal work will not be reported in the financial managers, thereby aggravating the phenomenon of shadow economy. In the Keynesian theory of liquidity preference, we will now have the motive of contribution evasion, except for the motives of transaction and of speculation.

The function that establishes a quadratic relationship between average income and revenues from contributions (relation 5) is shown in the figure below. The horizontal axis represents the percentage of contribution while the vertical the average income.

Figure 1 Function of Contributions

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As shown in Figure 1, the maximum revenues from contributions are achieved with a percentage of εmax, when the rate is too high at the boundaries of ε3, at the point where the function intersects the abscissa, the revenues are zero. In ε1 and ε2 rates, we have the same revenues for SSO’s.

These findings are justified by the fact that individuals, working in the light of their personal interests, respond to any increase in tax and insurance burdens by reducing the supply of labor in the formal sector of economy; these people do not necessarily increase their leisure time for recreation, as claims the neoclassical model of income and rest. As submitted by Becker and Leibenstein, the working hours that are released will be used at least partly, in the informal sector of economy.

Model Specification The determination of the relationship between the revenues of social security funds from contributions and the contribution rate is examined in the context of an econometric analysis with the following non-linear function for the period between 1980 and 2007. Τ = β0 + β1 ε + β2 ε2+ u Where T = total revenues for the main social insurance funds from contributions of employers and employees (dependent variable). ε = the contribution rate (independent variable). β0 = the intercept of the linear function. u = the disturbance term. β1, β2 = coefficients of the function.

The model becomes linear, if we set becomes:

 s   s* for s = 1, 2, ..., k so the relationship

T   0  1 1*   2  2*  u , Then it is estimated with the use of least squares method.

Data The revenues of SSO’s from contributions of employers and employees are derived from social security’s budgets. These data were converted at constant prices by using the deflator with base year 2000 (deflator for ECU / euro).

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

The contribution rate is calculated from the equilibrium relationship P   * E *W *   P *  whose solution gives us E W the ratio P / E is known as demographic dependency ratio, (P=pensioners and E=employees), and the ratio σ/W is known as replacement rate index (σ=average pension, W=average wage) We consider as replacement rate 80%, that is, the average pension is 80% of the average wage.

The rows of revenues T and percentage of ε are stationary in level, while the ε2 in first differences. The function takes the form: Τ=-12857775.16+52326901.25ε1-34005126.87ε2 The contribution rate interprets 93.6% of the variability of total revenues of main social insurance funds (dependent variable). The coefficient of determination is R2 = 0.936 and the adjusted coefficient is 0.931. The negative correlation between the dependent variable and the second independent variable, suggests that by increasing the contribution rate, the revenues of pension funds will increase initially, but when the rate exceeds a limit, the total revenues decrease progressively by a preponderance of substitution effect and the tendency of avoidance contributions. With increasing contribution rates, the supply of labor will move from the formal to the informal sector of economy and the inflow of illegal work will not be declared to the fiscal administrators.

Tests of significance The cases H0: β0 = 0 H0: β1 = 0 and H0: β2 = 0 with t – Statistic, are rejected for significance level α = 5%.

From the cases H0: β0 = β1 =β2 = 0 and H1: (β0 = β1 =β2)  0 with F – Statistic we find that F = 176.48 > Fα, ν1, ν2 = 4.26, hence the case Η0 is rejected for significance level α = 5% and therefore, there is predictive power in the model.

Stability tests Consecutive residuals. Not apparent instability in the parameters, since no point is outside the limits of two standard deviations.

Sequential estimates. Successive estimates of the coefficients are within two standard deviations within their boundaries.

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CUSUM Test

CUSUMSQ Test

Control of multicollinearity between explanatory variables.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

Check for Heteroscedasticity We check the violation of the assumption that the variance of the disturbance ut2   2 , applying the criterion of White. The case term is constant i.e. Η0: α1=α2= α3=…=α35 =0 that there is no Heteroscedasticity is rejected, because TR 2  20.82   02.05,5  11.07 .we correct the problem of Heteroscedasticity.

Check for Autocorrelation We check the violation of case Ε(ut, us) = 0, where t  s , with the help of Breusch - Godfrey Serial Correlation LM test, namely we check that the prices of disturbance term are not correlated or that their covariance is zero. We estimate the auxiliary regression

   ut   0   1  t1   2  t 2   3  t1  ...   k  tk  1ut 1  ...   p ut  p   t There are Τ-ρ observations for assessment. The null hypothesis that the disturbance term is not characterized by autocorrelation is : Η0 : ρ1 = ρ2 = … = ρρ = 0, because of

(T  p) R 2  14.73  X 02.05, 2  5.99

the hypothesis Η0 Is rejected.

Test for ARCH Then follows a testing for the existence of ARCH (1) effect, since if a chronological series presents autocorrelation AR(p), because the value of u in period t depends on the value of u in period t-s, this dependence also creates Heteroscedasticity, i.e. violation of the assumption of constant variance of u. That is Eu2 = σ2 The hypothesis Η0 : α1 = α2 = … = αρ = 0 there is no ARCH effect The relation

    ut2   0  1u 2 t 1   2 u 2 t 2  ...   p ut2 p   t

is estimated, we have

2 TR 2  3.28  X ap  5.99

so the null hypothesis that there is no ARCH effect is accepted, which means that there is homoskedasticity.

TR 2  5.22  X 2  5.99

ap Then we will examine the process of ARCH (2). We have so the null hypothesis is accepted, which means that there is homoskedasticity.

Control of incorrect specification-RESET

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We apply the general error control «Regression Specification Error Test» of the Ramsey because the specification errors result in giving an expected price of the disturbance term other than zero. The control of zero hypothesis is based on the augmented regression Υ = Χ β + Ζ α + ε which evolved from the original regression Y = X b + e with the addition of variables Z. As variables Ζ we use Υ2 Υ,3 Υ4 etc, from the calculated values of Υ.

The null hypothesis and its alternative are H 0 : u  (0,  2 I ) H1 : u  ( , 2 I )

The control of non existence of specifications errors in the null hypothesis α = 0, is performed by F-Statistic.

Η0 :

F - Statistic = 1.856 < Fα, ν1, ν2 = 2.82 for α=5%, ν1 = 5-1 = 4 and ν2 = 27-4-1 = 22, so Η0 is accepted.

For Greece, an attempt is being realized (Provopoulos, Kapopoulos, 2001) in order to estimate the contributions to be paid based on year 1994, when the OECD identified the implicit debt of social insurance funds at a rate of 196% of GDP. The benefit obligations are

Bt  Pt  t , considering that the contributions are used enB  E

t t . Then if we assume that the requiretirely to fund the pensions, we have t ment of the system is distributed equally among all generations and if we call φt the net contribution of the period t +1 we have the relation:

 t   t Et 

 t 1 Pt 1 1  rt 1

The change in implicit debt between periods t and t +1 is given by the following relation (Geanakoplos J, Mitchel O, Zeldes S., 1998).

Bt 1  Bt  rBt  t In an economy with constant growth rate g the hidden debt will increase

Bt 1  Bt  gBt So the net contribution will be:

t  (r  g ) Bt

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

Assuming r = 4.5%, g = 2% and Bt = 56.93 billion (OECD), Provopoulos G and Kapopoulos P calculated that the net contributions for 1995 would be 1.42 billion.

This amount is equal to 7% of total private consumption.

Figure 2 illustrates how an increase in contributions leads through increased labor costs, to increase of evasion and favors underground economy, while enhancing unemployment and worsening the recession.

Figure 2 Consequences of the Increase of Contributions

According to the above figure, an increase in contributions over a maximum limit will have negative effects on revenues of Social Security Organizations due to increased contribution evasion and the underground economy in general.

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6. CONTRIBUTION EVASION AND EMPLOYMENT. Many second thoughts are born about whether contribution evasion, apart from negative consequences for the insurance system and public finances, has a positive effect on employment as it reduces labor costs. The approach to the problem will be based on the “Granger Causality” in order to find out a causal relationship between contribution evasion rate and employment rate for the period 1980 to 2009.

We suppose that the current contribution evasion rate (TE), is a function of its previous prices and previous prices of employment rate. We also suppose that the current price of the employment rate (RA) is a function of its past prices and previous values of the contribution evasion rate. That is:

DTE   0  1 DTEt 1   2 DTEt 2  1 DPAt 1   2 DPAt 2  ut DPA   0   1 DTEt 1   2 DTEt 2  1 DPAt 1   2 DPAt 2   t

(6)

In the above equations as time series, we take the first differences of the employment rate (DPA) and of the contribution evasion rate (DTE), because the series are not stationary in level. Initially, we take two years as lags (m = 2) and we perform tests on 5% significance level. The two relations (6) are estimated firstly unrestricted and then restricted with β1 = β2 = 0 and γ1 = γ2 = 0, so we take:

DTE   0  1 DTEt 1   2 DTEt 2  ut

DPA   0  1 DPAt 1   2 DPAt 2   t

After checking according to the contribution

  ( u r2   u u2 ) / m F   uu2 /(T  k )

we find

Fα ν1 ν2 = 3.39 (for α=5% ν1 = 2 and ν2 = 27-2=25) (a) Significance test of dTE. FdTE =



0.000579  0.369 0.001568 so FdTE = 0.369 < Fα ν1 ν2 = 3.39 not significant.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

(b) Significance test of dPA. FdPA=



0.000022  0.692 0.00003176 so FdPA = 0.692 < Fα ν1 ν2 = 3.39 not significant.

Working the same way, with α=5% and m=1 we take:

If m=3 we take:

Eventually we find that for α = 5% significance level, there is no causality in any direction.

By exploring the causality between the level of contribution evasion and the percentage change in nominal labor cost for the period 1980 - 1997 (for which figures are available), no results were shown whether the changes in the level of evasion precede, follow or concur with the changes in nominal labor cost, as shown below.

The series of change in nominal labor costs CW is stationary in the first differences, while the series of contribution evasion rate TE, is stationary in level. We take as significance level α = 5% and m = 2 (lags).

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7. TREATMENT POLICY OF CONTRIBUTION EVASION. The inability, to capture the "insured material", is an endogenous pathogenicity of the Greek social security system that blocks its growth and viability. An effective mechanism is required immediately in order to deal with and prevent from contribution evasion, in a period of deep crisis and strong unemployment (the insurance system loses 800 million euros, per 100,000 new unemployed, for one unit of unemployment IKA loses 340-450 million euros while for one unit of earnings reduction, it loses 115 million euros).

The state has in its possession two basic tools that can be used to deal with the problem of contribution evasion; firstly the appropriate legal framework (limiting the possibility of infringement-severity of penalties) and secondly the introduction and expansion of computerization (enhance the probability of detection). The challenge is to identify the values of detection probability and severity of punishment, in such way that their ideal combination can manage to reduce, if not eliminate, this phenomenon. In a theoretical framework, Figure 3 shows an indifference curve which depicts the relationship of the inverse ratio, between detection certainty and punishment severity. Considering as “ρ” the probability of detection, as “π” the penalty for undeclared work and as “ε” the average contribution rate, the indifference curve is essentially a honesty curve for which is that p * π = ε.

Figure 3 Honesty Curve.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

On the curve we have combinations between detection probability and penalty, for which there is indifference and ρ*π=ε. When the probability of detection or penalty, or both of them simultaneously are low, i.e. it is ρ*π<ε, people will be involved in evasion of contributions in order to reduce labor costs (area K). The phenomenon of contribution evasion is developed below the indifference curve.

For those parts of the area H, located above the indifference curve, we have ρ*π>ε. In this area, there is no evasion, because the penalties and the probability of detection are high.

The question is, what part of the region H should be chosen, since there is an infinite combination between π and ρ satisfying the condition ρ*π>ε. Judging with strictly financial criteria, we find out that the increase of ρ, costs more than the increase of π (e.g. purchase of hardware, software, maintenance, professional staff, etc.). So it would seem reasonable for an excellent policy to impose a ρ = 0 and a    . In practice, however, the penalties for such violations are very small, to the point that they are motivations for evasion (Skinner, Slemrod 1985, Keith Report,1983).

This is imposed by two reasons. Firstly, the need to adjust the punishment to the crime, (reasonable limits on the severity of punishment) and secondly, the “principle of equality”, as some offenders will not be punished, due to deficiencies of the state control mechanism. The tax authority can not base its policy on inexpensive sanctions, but they must also use expensive methods of detection.

To curb contribution evasion, the development of a specific project which is specialized in the following measures is proposed.

1st Measure.

Structural and functional re-engineering of audit and collection mechanisms of the state, so that, with the implementation of an appropriate strategy, organizational changes will be achieved, action plans will be established, objectives will be prioritized, and changes will be made on mechanisms that identify contribution evasion and arrange the collection, in order to achieve the final goal, namely the capture of “the insurance material”. Restructuring of the Labor Inspectors Body (SEPE) should be based on: a. The vision, the ideal situation in which we wish to develop this body in the distant future. b. The mission (purpose), which specifically will describe how to achieve the vision through the process of defining a workable strategic plan. c. The strategic objectives to be achieved. d. The tactic of implementation of the redesign.

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The development path of an action plan for the reorganization of SEPE is shown below.

Figure 4. Configuring the Action Plan of Reorganization.

The contribution evasion acts as a reward for the poor organizated mechanisms which detect, control and collect the revenues of SSOs, so, in determining of strategies and restructuring action plans we have to take into account:  The need to redesign and modernize the organizational framework to meet the new conditions (eg, operational redesign, job descriptions, organizational restructuring of the system, etc.).  The development of a clear and comprehensive picture for the current conditions and the future trends.  Re-evaluation of the institutional framework for the control function.  The existing differences between Pension Funds, insurance branches (differences in the way of calculating contributions, different definitions of insurance material between the SSOs, lack of coordination, etc.).  The differences in the type of job (e.g. people that are paid by issuing receipts for services, part-time employees, employees at home, telecommuting, employees paid per line of code, etc).  The differences in the procedures followed (e.g. certified contributions, debt collection, lapse, suspensions and penalties).  The improvement of identified weaknesses of control and collection mechanisms.  The exploitation of economies of scale for the release of significant administrative and other resources.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

 The adoption, diffusion and use of anti-evasion techniques that have been applied successfully in other countries.  The improvement of resource management and the standardization (e.g. documents, control papers, compatibility of computer applications, etc.).  The human resource, management and development (e.g. education for employees, skills mix, link between people and goals, attitudes and behaviors, skills development plans etc).  The need to modernize infrastructure and processes.  Establishing planning processes.  A performance management system (goal setting, indicators, incentives).

With the vision to protect labour and social security, through auditing and supporting action, the SEPE will have as a mission to control the application of legislation for labour and social security, around the clock, to combat illegal employment, to provide information to employees and employers and resolve disputes. The SEPE’s responsibilities include: control of workplaces with all the appropriate means, application of provisions of labor and insurance laws, implementation of employment contracts, of legality of employment, of equal treatment, etc. To fulfill this mission, it must have free access to the premises, books, records, documents and files of each operation with the possibility to impose administrative sanctions and to cooperate with other relevant public departments.

For reasons of independence and flexibility, the SEPE will report directly to the Minister of Labour and Social Security, and according to the law (N.3996/2011) this body would be consisted of the Special Secretary, the General Inspectors, and the administrative staff that offer secretarial and other support. The staff should be trained and certified, because the success of an anti-evasion plan, inter alia, depends on the performance of auditors. The functions of the body will extend across the country, through central and regional offices, which are divided into divisions, departments and agencies. To better control action, the establishment of a separate office for the reception, assessment and management of complaints relating to breaches of legislation is considered of major importance, which would coordinate a team of immediate response, set up to exercise direct control of complaints. It is also necessary the formation of special teams to strengthen the control mechanisms of social security funds.

2nd Measure Analysis, evaluation, review, and redesign of the regulatory framework, since the existing insurance law seems that sometimes favors the contribution evasion (con-

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tinuous grace settings). Overregulation, contradictory legislation and multiple settings that exist for the definition of insurance material, control mechanisms, potential intersections and sanctions, all these make it difficult to combat against evasion and complicate the position of law-abiding insured people, in the effort to be consistent with their obligations.

The reform of the social security legislation, should be towards the formation of a single legislative framework, elimination of contradictions, removal of excessive legislation, establishment of uniform procedures, adjustment of insurance law in new forms of employment (such as housework, the telecommuting, flexible retirement, part-time employment etc) simplification of the system and rigidity of sanctions.

Many times historical particularities of social insurance funds, determine the calculation and allocation of contributions. There are contributions that are calculated as a percentage of work, or calculated per capita, depending on the number of workers (freelancersâ&#x20AC;&#x2122; fund, self-employed fund); or even contributions based on inputs (e.g. kgs flour) and other that are calculated on the basis of product or turnover. This fact is a source of heterogeneity to be taken into account in the redesign of the legislative framework. The failure to adapt insurance legislation in the modern organization of labor creates problems in the social security and losses of revenue through contribution evasion. For example, the introduction of the â&#x20AC;&#x153;dayâ&#x20AC;? as a unit for insurance of part-time employment, except for the loss of revenue, creates problems between insured people, who have the same working hours, which are allocated into more or less days.

Where the law provides for cancellation of debts, a greater emphasis is given on collection of earlier debts, in the timeframe specified by statute, rather than of newer debts, which are larger and have greater chances of collection.

Regarding the sanctions, we can say that they often remain inactive as the mechanism of sanctions itself, is oriented to identify the simplest cases of evasion.

Moreover, the increments vary from fund to fund, creating a climate of inequality and often their height is such that operates as a deterrent to recovery. In addition to the increase of the severity of penalties for breaches of insurance legislation or relapse, the individual responsibility of employees should be increased too, in cases of contribution payment refusal under pressure of their employers. Generally, the formation of a unified legal framework is required, adapted to the new working conditions and technological developments. This framework should be oriented to combat contribution evasion, to inspire confidence, to cultivate conscience of social insurance in individuals, and to work towards, both prevention and repression.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

3rd Measure Differentiation of probabilities control, between the obligated to pay contributions, can be a means of cutting evasion. The reasoning starts from the fact that there are sectors with a higher wrongdoing degree than others, such as food and beverage industries, chemical industries, pastry shops, hairdressing salons, nail care centers, playgrounds, law firms, workshops, gas stations, washing cars, private car parks, schools for student support, language schools, funeral and related activities offices, recycling companies, fish farms, constructing and engineering companies and subcontractors, cleaning companies, publishers of media, employees on the internet, motorists, suppliers of domestic work (maids, home care, child care), employees in restaurants and bars, agricultural workers, freelancers and generally businesses employing 1 up to 5 employees (they are over 80% of debtors). In the simple implementation of the measure, we separate people into random groups and then perform random control with different probabilities.

GROUPS

G1

G2

PROBABILITIES

P1

P2

Where P1< P2.

If a person of group G1 is tested and found guilty for evasion, then he/she will be fined and will be moved to group G2, whereas if a person of group G2 is tested and found to be honest, it will be given a reward and will move to group G1.

Another practice is to consider as “α” the acceptable percentage of those who do not pay their obligations and to divide the population into three groups with relative size and likelihood of control, as shown in the following table.

GROUPS

G1

RELATIVE SIZE OF GROUP POSSIBILITY CONTROL TRACKING

OF &

G2

α

G3

1-α  P ( )* 1 2

P 2

0

1

Individuals that belong to group G1 will commit a fraud, because they are within acceptable limits and there is only a small chance of detection. People undergone this control, will move to group G2. For people who belong to group G2, it is wise to make a frank statement, so if he/she is honest and checked, he/she will return to group G1, while if he/she evades, he/she will move to group G3. Members of 35

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G3 group will make a frank statement, because the probability of control is equal (ď Ą

p ) 2 people will move from group G1 to group G2 and vice

to 1. In each period, versa. As a result, the sizes of groups G1 and G2 remain stable and the number of people, who avoid contributing, continues to be confined in the socially acceptable level Îą.

By this measure, the focus of control is given where there is widespread contribution evasion, while honesty is rewarded. A discrete control policy is better, than giving the same probability of control to all, since the complete elimination of contribution evasion is very expensive.

4th Measure The adoption and expansion of technology increases the probability of identifying the contributions, and allows faster collection of revenue. The anti-evasion in different countries has developed its own technology and know-how. A modernization predisposes that the supervising agency must ensure technological sufficiency and utilizes more effectively its human resources. The technological modernization is not sufficient to be implemented only in systems and applications, but need to be reflected in the daily operation of the staff. Components of this measure will be the enhancement of the equipment, the infrastructure, the necessary support staff, the daily processing and exchange of information from the monitoring system and the financial data administration system, and the development and operation of specialized applications that will improve the quality of available information.

The technological upgrade should aim for effective cross-check of data (e.g. interface between IKA, SEPE and OAED through the common electronic platform of the Ministry of Labour and Social Security) which is the main ingredient of the antievasion policy. The comparison of a database where the traders and businesses have an interest to conceal evidence, with other bases where the incentives are in the opposite direction, can provide much information. Extending the computerization demands updated databases, for whose creation, the register of firms and the serial number of social security (AMKA), may have a decisive role.

During the implementation of the measure we should not forget that reducing evasion by increasing the number of controls is a process that costs. Thus the complete eradication (more infrastructures, multitudinous personnel, education) might be proven more damaging rather than beneficial, because of its cost. The cost to curtail contribution evasion should be up to the point where the marginal cost of such activity equals the marginal benefit from it. As such a policy (MC = MR) is difficult to be implemented in practice, a streamlined balance between the

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

required expenses and the profits that will come from the effort to identify is needed (e.g. the agreement between IKA and Intracom for IKAâ&#x20AC;&#x2122;s computerization announced in the 1992, the award and the commencement of implementation in 1999, the project delivery in 2008, along with problems and costs that were 400% higher).

As the inadequate control and the poor quality of accounting systems have been reported as the main causes that enhance evasion (Provopoulos 1987, OECD 1997, Leandros 1997), we believe, that besides all the above, computerization contributes to the function of management of Social Security Organizations, from 1 -1 1998 they are obliged to apply a sectorial chart of accounts (SCA), drawn up by the General Secretariat of Social Insurance. The SCA requires from insurers to depict the accounting events in the national accounts from which, useful information is provided. The measure application should be combined with the creation of working groups that will draw up action plans to control the gaps of information systems (for the IKA, due to gaps in the Management Information System MIS, the evasion rate reaches up to 20%).

5th Measure There should be a complete and detailed inventory of all businesses operating in the country, with a complete record of their employees by specialization, working relationship and wage level. The inventory should lead to the creation of updated databases, because 1 of 9 companies is non-registered and 1 of 4 employees is uninsured. At this point, the register of firms and the serial number of social security (AMKA) play a decisive role. The completion of the register of insured and retired employees is a pressing necessity (it has been legislation for this). When some retired or insured, are registered in more than one insurance fund and some pensioners are deleted late from the records of the insured people, then, due to dual enrollment, incorrect information is provided both during the creation of Social Security budget, and any other statistical measurement. In parallel and independently the register of business and employers should be developed. After the census, inspections should be stepped up and penalties should be provided for those businesses that have not registered yet. These penalties, can range from simple administrative sanctions up to temporary or permanent shutdown of companies.

6th Measure The full record, in all working areas of those who are declared as freelancers, self employed, farmers, and self-insured. The existence of a unique registration number is a critical point for better organization of social security. It is necessary to provide a serial number of social security (AMKA), to all employees and retirees,

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in order to create a functional registry. In parallel and independently, the registry of freelancers or employers should be implemented.

7th Measure The control of incomes those who have acquired insurance coverage using the minimum required years of work. An audit can be conducted through intersections with data coming from competent public economic service, called D O Y (tax offices). In addition, control of family budgets of self-employed professionals, freelancers and farmers, to ensure the collection of contributions from those, who own proven earnings, and do not pay.

8th Measure The control and the collection of contributions that have been confirmed and the elimination of frequent settlements of debts, that result in large revenue losses of funds. The measure requires the establishment and organization of effective collection mechanisms and practices that will reach up to the seizure of assets on debt to insurance funds.

9th Measure Homogenization of contributions, so that the employees of the same or similar employment should not be allowed to be insured in insurance funds, where they can pay lower contributions (such as the TEBE), and homogenization of contributions across the country.

10th Measure Control for pensioners who continue to work, offering uninsured work. The aim of this measure must be the conception of the illegal work and contribution evasion, and not the limitation of flexible retirement, which can work in a positive direction.

11th Measure Designing of benefits with a contributory and redistributive character. The only benefits, with directly contributory character are those related to coverage for illness. Low or zero reciprocity of the system enhances the tendency of individuals for contribution evasion. When 70% of pensioners in the IKA which is the largest insurance organization in the country, receive the minimum pension (GSEE / ADEDY, 1998.2001), the marginal utility of contributions is zero. The payment of an additional unit of contributions, between 15 and 23 years insurance time has no return to pensioners, a fact that creates incentives for contribution evasion.

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

The need to restore a greater actuarial fairness, namely, a closer relationship between contributions and benefits, is imperative in order to reduce the evasion in our country.

12th Measure The transmission of the awareness for social insurance to the public is another measure against contribution evasion. The non-retributive character of social insurance system, the number of inactive legal provisions, the impunity, the frequent settlements of debts, the lack of confidence in the state and in the sustainability of the pension system, the crisis of moral values and the extent of the informal economy have led the citizens to believe that it is in their interest to avoid the payment of contributions due, thereby shifting their weight either to others or in the state.

The insurance mindset can be founded on mutual trust between state and citizen.

People need through continuous information to understand that the state is moving towards a fair social security system, which can not survive without social cohesion, either between individuals of the same generation or different ones, where everyone should bear the burden attributable to them. A series of information campaigns in the media, the awareness in schools of all levels, the establishment a contributory pension system based on the simplification and implementation of existing legislation, the stop of rewarding the informal economy, the removal of preferential treatment and the elimination of frequent debt adjustment will create a climate of responsibility to the citizens, in order to understand that depends on the future of themselves and their children the survival of the social security system. The insurance issue concerns all citizens and should be considered in the long term, since, possible cash surpluses do not ensure its viability, as; compared with future obligations, they are minimal. Those who in any period the burden of the proceeds of the insurance system, are the employees and taxpayers; there is no intermediary to pay the deficits. The refusal of payment of contributions is a waste of todayâ&#x20AC;&#x2122;s resources, and exhausts the possibility for future generations to have pension. The ultimate goal of the development, of awareness for social insurance, is to create a "virtuous cycle" for cooperation between the state and the world of work, the positive results of which will permeate society.

13th Measure.

The introduction of social stigma, through the disclosure of any unlawful conduct, which aims to avoid paying the contributions, may be another weapon of the state.

The decision to avoid or not to pay somebodyâ&#x20AC;&#x2122;s contributions is influenced by the extent of contribution evasion of others. If contribution evasion is widespread, the

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individual feels that it is fair to evade, if not, he/she feels that he/she must pay the corresponding contributions.

If we consider the following utility function: U = (-B+A*N)X+C*N

(7)

Where, B = the stigma or psychic cost of contribution evasion.

A = the reduction of stigma due to any other person who doesn’t pay contributions.

N = the others who don’t pay contributions.

X = is a dummy variable, with x = 0 when a person does not pay and x = 1 when the person pay.

C = utility or disutility due to evasion of others.

1. If a person decides to pay the contributions, then x = 0, then the utility function (7) is U0 = C * N 2. If a person decides not to pay contributions, then x = 1, then the utility function (7) becomes:

U1 = - Β+Α*N+ C*N=> U1 = - Β+(Α+ C)N The following diagram, depicts the utility functions with lines U0 and U1. The horizontal axis depicts those who do not pay their contributions (N), while the vertical axis shows the usefulness.

Figure 5 Contributions and Utility Function

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THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

a) If everyone pay their contributions it will be N = 0, so the usefulness of contribution evasion will be: U0 = C*N=> U0 = C*0=0. So if someone at some point decide not to pay his contributions (x = 1) he will not improve his welfare, on the contrary he will suffer a welfare loss, because of:

U1 = - Β+(Α+ C)N=> U1 = - Β+(Α+ C)0 => U1 = - Β

(the stigma).

b) If the contribution evasion starts. Suppose N1 atoms escape, where 0 <N1 <N *, because U0> U1 the utility of the individual is greater when he decides to pay than not. It is therefore reasonable, for the system to return in equilibrium at N = 0 at the start of axes, because the utility is higher for everyone. c) If the amount of evasion exceed the intersection N* of two utility functions.

Supposing that the people that avoid paying contributions are N 2, where 0 <N2> N1, because of U0 <U1, the utility of individual is greater when he decides not to pay his contributions, than when he pays them.

Generally, the equilibrium in N = N * is unstable while the solution of N = NT is stable, since NT represents the whole tax-paying population. Thus we conclude that the measures against contribution evasion may be ineffective if the rule has prevailed, that everyone is trying to avoid paying their contributions. On the other hand, if those who avoid paying contributions fall below the N * no further reduction efforts of contribution evasion are needed since the system will return to equilibrium at the point N = 0 at the start of axes, where the utility will be higher for everyone. According to this measure, businesses and individuals who try to evade their obligations will be exhibited, both in disapproval of society and under the tighter and more frequent monitoring, by the institutions of state. So, U0>U1 where the usefulness of the individuals who decide to fulfill their obligations, is greater.

14th Measure The efficiency of the institution of Analytic Periodical Statements (APD) that were established by the law 2972/01 (since 1/1/2001, abolishing of the payrolls that were submitted to the IKA by employers and of the insurance stamps) should be combined, with the intensification of inspections and the entirely implementation of the Integrated Information System (MIS). After an electronic processing of the APDs, their data will be appeared on individual social security accounts (sent to 41

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employees) and so it will be clear that every employee is insured. The MIS must enable the verification of whether the elements of the APDs filed by companies are true and if so, whether the statements of operations for IKA, agree with the content of APD. (After checking, 1262 electronic traces of false APDs were found because the IKA accepts APDs by "statement of the debtor").

15th Measure The introduction of compulsory payment of wages of employees in enterprises is required, through commercial banks, where each company must additionally pay, the payroll tax and the total of insurance contributions of employees and employers. Practically, a company will be unable to pay wages if it is not able to pay income tax and social insurance contributions. The banks, after the deposit of social insurance rights will be required to inform, with one unique declaration, the various public authorities (tax offices, Social Security's Institution, labor inspectorates, Employment Agency, etc.).

16th Measure The mandatory introduction of the â&#x20AC;&#x153;job cardâ&#x20AC;? is required, in which, the hours of arrival and departure of employees, and the working time will be displayed electronically (law 3996/11). The card, which will be used in an electronic clock will have an identical number with serial number of social security (AMKA) and will replace the traditional presence card of the staff. The elements of time measurement will be sent via interface to a common electronic platform, to IKA, in SEPE and OAED for comparison with the APD. This measure, consisting a special "electronic filing/monitoring", is expected to help reduce the problem of uninsured work and particularly of circumvention of the institution of part-time work, as it has been found out that thousands of employees, are paid for a four-hour job when in fact they are employed for eight hours. It will also help reduce bureaucratic burdens, and facilitate the audit. The implementation of the program should be catholic, starting with industries in which contribution evasion is booming. The implementation of the measure should be combined with incentives to entrepreneurs who adopt it and are consistent and the strengthening of control mechanisms with staffing, through transfers from other services.

17th Measure The insertion of the Cheque for Services is required as a unique mean of payment for casual work, like domestic workers, cleaners, gardeners, laborers, etc. who are often underpaid, with non-vested working conditions and uninsured. Their number is estimated at 250.000 individuals. It is a "coupon", that every employer will be able to get from banks, post offices or even super markets, with which he will pay the price of wage agreed with the employee. After redeeming the stamps of 42

THE CONTRIBUTION EVASION IN SOCIAL SECURITY SYSTEM, John Aznaouridis

work, the AMKA of employer and employee will be disclosed and the contributions will be deducted and deposited pro IKA and OGA. Since 1/12/1994, in France, the Cheque Emploi Service (CESU) has applied successfully, to combat undeclared domestic work. The CESU is a form of Cheque which is not surrounded by the classical type of bank check, but a document that states employment, salaries, and contributions and simultaneously is a paycheck. Individuals, who employ people for work at home, can buy a check book from banks, where they own an account. The check block has two parts, the part of check, given as payment to the employee and the social section which is a statement of employment. At the end of each month it is sent to the contributions collection organization, called URSSAF, which will deduct and hold the amount of social security contributions. A similar measure is applied in Belgium where each employer has as compensation, a reduction in income tax for 30-40% of value of these pay checks. Since 1997 employment checks have been introduced in Germany with tax cuts to employers as incentives.

18th Measure The arrangements between businesses and professionals for cooperation through "Employment Service Bulletins" and self-insurance should be limited. When the cooperation has a high frequency and duration, the employment relationship after a certain time (eg 3 months) should be converted to recruitment and be followed by employee's insurance, at IKA. So there will be a benefit to the insurance funds and professionals, and will stop the peculiar hostage of people who need to work.

Moreover, employees with "bulletin" who are calculated to reach 150,000, except for insurance benefits will be entitled to take holiday pay, bonuses and overtime.

19th Measure. This measure imposes the Introduction of a Social VAT, directing a part of the VAT to finance social security funds. The measure should be combined with a reduced contribution rate, because contribution evasion has received nightmarish proportions (17% of firms, 38% of insured in the OGA and 36% of freelancers), depriving in this way the IKA from revenues approximately 6 billion annually.

To these losses, must be added 4.2 billion, lost due to lower wages during the last two years. France increased the excise duty by 1.6%, calling this increase as â&#x20AC;&#x153;Social VATâ&#x20AC;? that will be channeled, in order to lead to the reduction of contributions on lowly paid. With the introduction of social VAT, we move from labor taxation to consumption taxation.

20th Measure We can apply specific measures by employee category. Examples: a) Legislation, that imposes the usage of a kind of stamp, for the social insurance of employees in information portals on the Internet.

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b) For motorists, the establishment of the insurance clearance as supporting document in the process of technical control in the technical control centers of vehicles (KTEO). c) For any financial transaction or other transactions with the public sector, an insurance clearance should be provided regardless of the amount. d) Exercise of a policy, which rewards, the consistency of payments, or the prompt payment of full amount of liabilities, through financial incentives, and facilitation of consistent employers who are unable to pay contributions. e) Adjustment of debts for 300.000 insurance contributions debtors that are estimated at 9 billion euros, with facilities for the payment and penalties for those who do not pay their contributions. Debtors must pay all current charges, plus a percentage of old accumulated contributions. f) Avoidance of the increasing wage policy by granting allowances which are not subject to contributions. The increases should be granted on the insurable earnings. g) Coordination of insurance agencies, for exploitation, by small and micro enterprises of a guarantee program of the National Fund for Entrepreneurship and Development (ETEAN SA, formerly TEMPME SA). In order to cover the outstanding insurance contributions, each company employing fewer than 50 people, can get from a bank of its choice (in cooperation with ETEAN) soft loans (low interest, grace period, etc.) that will guarantee, up to an amount, the ETEAN SA.

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