It Is Time for Guaranteed Minimum Reform in Bulgaria

Rembrandt van Rijn: Moneychanger // Public domain

Just a few weeks ago IME presented the main challenges to social protection faced by Bulgaria in the post-pandemic period. One of the key takeaways was that Bulgarian social policy is unfocused, ineffective and that it flat out fails to address poverty and inequality.

While such issues are mainly solved through economic recovery, new jobs and wage growth, the role of social policy should be focused as much as possible on those most in need, and not on the application of broader large-scale measures with huge coverage and low efficiency. That is why we now present a reform proposal within one of the most precisely focused social assistance programs – the guaranteed monthly minimum income.

In the past weeks we saw multiple events related to the state of social benefits in Bulgaria. First, a new version of the National Recovery and Sustainability Plan (NRSP) was presented. This was followed by a state consultation on altering the guaranteed minimum income (GMI) – the foundation of the most basic and unconditional type of social support that the country offers to its poorest and most vulnerable population, almost unconditionally. After that came a proposal for updating the budget to feature fundamental changes to social transfer payments and pensions. These events, although it does not appear so at first glance, are actually directly related.

For years now the European Commission has been making recommendations for the amendment of the coverage and adequacy of GMI, indicating evidently that this has been set as a condition for the adoption of the NRSP. In other words, if Bulgaria does not amend the reach of the current GMI system, then the country’s recovery plan may not be approved. This is exactly what provoked a rush of government efforts to change the coefficients applied to the GMI in the process of determining the differentiated minimum income.

At the same time, although it comes fully into force in 2022, this year’s proposed budget update puts forward a new social benefit supplement for pensioners – to the government’s BGN 369 poverty line – which in practice will function as a new GMI, but one that is intended only for pensioners.

This all sounds quite confusing, and as expected, the public’s focus on this issue is blunted. Nevertheless, these are discussions of paramount importance, and therefore deserve more special attention.

At the moment, monthly social benefits in the country are provided on the basis of a differentiated minimum income, which is defined as the individual coefficient of each person or family multiplied by the GMI. The latter is currently BGN 75, and individual coefficients vary with age, marital status, health status and property ownership. In most cases, individual coefficients vary from 0.66 – for a person of working age who lives with others, to 1.65 – for a person over 75 who lives alone.

Over the last more than 10 years, the GMI has hardly changed. In 2009, it was BGN 65, and after 2018, it was fixed at the current level, which is BGN 75. While in 2009, the GMI was more than 27% of the minimum wage in the country, it has become only 11.5% in 2021. The low level of the GMI makes the income criterion for providing monthly social benefits very restrictive, and, accordingly, the program has very limited reach.

In practice, the program that most strongly focuses on the poorest part of the population covers a mere 76 thousand people in 2020.  This is less than 1% of the country’s population, which is significantly lower than the 23% of the population who currently live below the poverty line, and the 10% who are currently in deep poverty, with an income of less than 40% of the median income.

In fact, the program is so restrictive that it has a very limited impact on poverty and inequality levels in the country. In comparison to other large-scale and expensive programs aimed at recipients such as families with children and disabled people, the monthly social benefits program has the single greatest potential to remedy the aforementioned issues.

For comparison, by looking at the budget, GMI-related monthly social benefits account for about 28 million leva per annum, while child support up until the completion of secondary education is 280 million BGN per annum. The difference is 10 times in favor of child support over GMI.

With this in mind, the government is proposing changes to the GMI, which are aimed at expanding reach and to some extent are a response to criticism from the EC. The changes proposed by the government address the percentages used to determine the differentiated minimum income, with no foreseen changes in the base level of the GMI yet again. The proposal is to increase percentages by a coefficient of 1.1 in 2022, 1.365 in 2023, and 1.224 in 2024. The total proposed increase in percentages used to determine the differentiated minimum income is by a coefficient of 1.84 by 2024.

This proposal is too timid. The increase in the differentiated minimum income in 2022 as a result of the proposed changes will barely reach 10%, which means that there will be little difference in the reach of monthly social benefits observed. The beneficiaries of the program will remain about a hundred thousand people, which is below 1.5% of the total Bulgarian population.

The projected impact of this proposal for 2024 is also questionable, as the median income is expected to grow quickly in the coming years, and with that, the new level of the differentiated minimum income will again lag behind.

Currently, the GMI of 75 BGN is approximately 10 percent of the 2020 median income in Bulgaria, which is 752 BGN according to the NSI, and about 17 percent of the poverty line for 2020, which is 451 BGN. In the motives behind the government’s proposal, it was recorded that the EC expects the GMI-based monthly social benefits to reach a level of approximately 30% of the poverty line in the lead up to 2024. This is most likely not going to happen with the government’s current proposal.

However, even if we leave EC projections out of the debate for a moment, economic logic shows that social support should be aimed at the poorest, in order to have the greatest impact on addressing poverty and inequality.

Over the past few months IME has developed numerous scenarios for amendments to the GMI, including specific calculations for the reach and impact of each proposed change. All options considered, the base proposal of IME is to increase the base rate of the GMI to BGN 150, coming into force as early as 2022. As such, the GMI would account for 20% of the median income in Bulgaria, or a third of the poverty line.

In this scenario, the reach of the monthly social benefits program expands to 280 thousand people, or over 4% of the nation’s population. This would have a momentous impact on the nation’s livelihood – this reform would produce a reduction in the Gini coefficient of 2.4 percentage points, and a fall in the share of households living in poverty by 3.4 percentage points. If the base rate of GMI is increased to BGN 150, the total estimate of the budget expenditures for GMI-related monthly social benefits becomes 150 million BGN, which is still far from that of many other programs with much lower efficiency.

The potential increase of the GMI would also allow for changes in targeted heating benefits. One of the options is to unify the criteria for monthly social assistance and targeted heating benefits – the increase of the GMI to 150 BGN would enable it to be used in determining access to the latter.

At the moment, the base income required to receive targeted heating benefits is BGN150, twice as much as the current GMI, precisely to expand reach and to ensure more people have access to heating. Aligning the income criterion for both benefits programs is more logical, and necessary.

The great impact of such a reform on levels of poverty and inequality may come as a surprise, but at the same time, it is quite expected. Focusing aid measures on the lowest part of the income curve usually has a serious impact on inequality, incomparable in scale to measures that are applied to all income groups.

Postponing such a reform would apply a constant pressure for unjustified transfer payments and greater redistribution of the budget, a testament to which can be found in the national inequality narrative. Social welfare programs aimed at the poorest people in the country are crucial to the success of social policy and the maintenance of macroeconomic stability.

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