Dear A.M. Costa Rica:
I read your article about ‘some modest proposals for cutting the budget” in your Oct. 1 edition and felt invited to come up with ideas how to solve the national problem.
Ás a retired economist from the Netherlands, I followed the political and economic issues in this country with above average interest for approximately 20 years now.
I fully agree with your statement that ”the political establishment (and in its slipstream the entire pubic sector) has enriched themselves for so long at the expense of the private sector that you can hardly expect them to reform.”
The country has reached or may already be over the acceptable limits in charging the private sector for financing the overprivileged public sector.
With the uncontrolled growth in budget deficits and pubic spendings, this country has many things in common with Greece some year before the collapse. Greece was saved by the European currency member states, but Costa Rica is certainly not ”too important to fall” and has to find the solution in itself.
Crucial is that Costa Rica pretends to allow itself European social benefits for their workers (pensions, the Caja, labor laws) but apparently using U.S. tax rates to finance.
European countries can only finance their social security system with tax rates higher than 50 percent for the middle and higher income groups, and pensioners have to pay a full contribution to the medicare, as everybody does.
The highest income tax rate in Costa Rica is, as far as I know, 25 percent, and all pensioners are exempted to pay for their medicare.
In Europe the retirement age is going up towards the age of 70 in order to keep the system financial stable. In Costa Rica however it is a national sport to retire between 50 and 60 years old (keeping the full salary as their pension), specially for the higher (public) income group.
It is obvious that this country can only survive by breaking down the many privileges especially those of the public sector and also by higher taxes for higher incomes (mainly in the public sector). Because of its leveling effect, it will keep the private sector motivated to contribute as well.
It is very disappointing to hear that the new president comes up with old ideas to charge other and new taxpayers for the public spendings. It won’t help if you don’t level out the privileges and eliminate the corruption.
Voters might easily become misled by politicians, but taxpayers won’t. Voters might go into the streets and stamp with their feet, but taxpayers don’t. They just reduce their contributions if they feel insulted by politicians.
And this is precisely the situation where Costa Rica stands today.
If no drastic steps are taken, the system will collapse. And that will mean that many public institutions and workers will be closed and laid off, pensions will be cut, and inflation might rise when government might seize the instrument of monetary funding. In a certain way, this will also lead to an elimination of privileges as well, but the process will be fully out of control with many unexpected and unwanted side effects.
Earlier this year Costa Rican voters choose for a drastic change, and it is now up to the president to perform. Let’s hope that he proves to be as wise as he pretends to be.