The Reduction of the Social Security Contributions

Law no. 123/2014 amending Law no. 571/2003 on the Tax Code, also known as the law on the reduction of social security contributions, entered into force on September 22^nd 2014. After many political disputes, President Traian Băsescu passed the law as a result of a new favourable vote of the plenary of the Chamber of Deputies.

The decision-making chamber had stated its opinion in favour of the draft law on July 2^nd 2014, but the President had refused at the time to pass the law, claiming the uncertainty regarding the possibility to compensate such reduction from other sources of revenue to the State budget. He had also exercised his right to send the draft law back to Parliament for review and he was going to be forced to pass the law if there was a new favourable vote, which was indeed the case.

It is important to note that, although the law entered into force on September 22^nd 2014, it is to be applied starting with the income for October of this year.

Until now the social security contribution rates to the public pension system were the following:

• 31.3% for normal working conditions, 10.5% accounting for the individual contribution and 20.8% accounting for the contribution payable by the employer;
• 36.3% for difficult working conditions, 10.5% accounting for the individual contribution and 25.8% accounting for the contribution payable by the employer;
• 41.3% for special and other working conditions, 10.5% accounting for the individual contribution and 30.8% accounting for the contribution payable by the employer.

Under the new regulations, the rates payable by the employer decreased by 5 percentage points, as follows:

• 26.3% for normal working conditions, 10.5% accounting for the individual contribution and 15.8% accounting for the contribution payable by the employer;
• 31.3% for difficult working conditions, 10.5% accounting for the individual contribution and 20.8% accounting for the contribution payable by the employer;

• 36.3% for special and other working conditions, 10.5% accounting for the individual contribution and 25.8% accounting for the contribution payable by the employer.

Under these circumstances, employers will save RON 45 for each employee who receives the gross national minimum wage (RON 900) as a result of the reduction of the contribution from RON 187 to RON 142. Since this amount varies directly with the wages, the main beneficiaries of the reduction of social security contributions will be the companies that pay their employees higher wages than the legal minimum wage and particularly those with large numbers of employees on their payrolls.

By contrast, companies that pay their employees the national minimum wage will experience an overall growth in labour costs, as the reduction of social security contributions is offset by the increase in the national minimum wage by RON 100 in the first half of this year, a measure that generated an additional cost of RON 125 per employee.

On the other hand, if employers decide to use the saving brought about by the reduction of social security contributions to increase the wages of employees, their income will increase by 5%. Such a decision by the employer will increase the employees’ standard of living, which will later translate into an increase in consumption and an economic boost. Moreover, the increase in income registered this year has already fuelled consumption, after many years in which it stagnated or decreased due to the economic crisis.

Meanwhile, this government measure is expected to provide far more than just symbolic support to companies that are burdened by taxes and it is estimated to result in a decrease in tax evasion and unemployment by bringing to light the undeclared work and by creating new jobs. It remains to be seen whether the effects of this one-off measure reducing the tax burden of entrepreneurs will match the forecasts or whether the governing authorities will be forced to consider the development of larger-scale tax policies, inspired by the experience of other countries, to encourage entrepreneurship.