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High social charges hinder Costa Rica’s exit out of underdevelopment and causing slowdown in private invesment

by |Published

QCOSTARICA — For Costa Rica to make a firm leap towards development, it is urgent that the country analyze the cost of the social charges that companies pay today.

Currently, Costa Rican companies are required to allocate 26.6% in social charges for each employee, whereas in the Organization for Economic Cooperation and Development (OECD), of which Costa Rica is a member, the average is only 12%.

Read more: Costa Rica officially becomes the 38th member of the OECD

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Of that 26.6% that is paid by each worker in social contributions, 14.6% corresponds to Caja Costarricense de Seguro Social (CCSS), while 4.75% is allocated to the complementary pension.

The rest, 7.25%, is transferred to Banco Popular, Fodesaf, INA and IMAS, which have nothing to do with CCSS insurance.

Thus, for an employee who earns say ¢600,000 monthly, the salary they take home, the employer is required to contribute ¢159,600 for social services.

This is a widespread call from the productive sector, which warns that Pequeña y Mediana Empresas (PYMEs) – Small and medium-sized enterprises (SMEs) – are the ones that suffer the most from high social charges, which translates into informality, less investment and unemployment.

On the contrary, if social charges are lowered, greater investment from the local private sector and better opportunities to attract foreign companies would be projected, which implies more jobs of all kinds, consumption, and, of course, new taxes for the country.

“There is no doubt that social charges greatly affect the costs of the country’s human resources, making the production costs of national companies higher in relation to other competitors from other countries. All this complicates the country’s escape from underdevelopment,” said Otto Guevara, consultant and former legislator and presidential candidate.

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Last week, the government announced that in the first quarter, foreign direct investment (FDi) increased by 42% compared to the same period last year.

This, regardless of the dollar exchange rate and social charges, so if the country improves its business climate, it is likely that investment, not only from foreign companies but more importantly from local companies, will skyrocket considerably.

“This is a factor that contributes to promoting the informality of business activities and self-employment, which discourages the creation of formal employment and also affects the competition and profitability of the companies of the definitive regime, particularly SMEs,” expressed the Cámara de Industrias (Chamber of Industries).

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“Historically, when it comes to operating costs, Costa Rica has been considered an expensive country, especially when compared to competitors in the region. As a result, there are multiple diagnoses, and even specific recommendations from the OECD, that invite the country to review the issue of costs, including social charges. Without a doubt, to continue attracting new FDI flows, as well as promote the growth of already established companies, the issue of operating costs must be addressed,” said Carlos Wong, president of the Asociación de Empresas de Zonas Francas (Association of Free Zone Companies).

Costa Rica doubles the OECD average

Social charges in Costa Rica are very high compared to the OECD average (figures in percentages):

  • Czech Republic, 27%
  • Costa Rica, 26.6%
  • France, 25%
  • Spain, 23%
  • Mexico, 10%
  • Canada, 10%
  • United States, 7%
  • Chile, 6%
  • Denmark, 0%
  • New Zealand, 0%

 

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