pension reform - experience of the slovak republic
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FPFPII
Financial Policy InstituteMinistry of Finance of the Slovak Republicwww.finance.gov.sk/ifp
Pension reform - experience of the Slovak
Republic -March 2011
Ministry of Labour and Social Policy of Ukraine, Kiev, 16-18 March 2011
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
www.finance.gov.sk/ifp 2
Reasons for reform
• Deficit first pillar – almost 100% coverage, mandatory,
benefit-defined, pay as you go (PAYG)
• Low motivation to pay contributions – weak links
between the level of contributions and the level of
pensions
• Problem for future – ageing of population – pressure
on expenditures in the first pillar
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
www.finance.gov.sk/ifp 3
Ageing of population
Long-term demographic determinants : fertility, length of life, migration
The age structure of population does matter, not the population size :
nowadays 6 persons in productive age on 1 in post-productive age, drop to 1.5 in future
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI1. Parametric changes – first pillar (2004)• Retirement age increase
– Prior to reform: men = 62 years, women = 53-57 depending on number of children
– After reform: men + women to 62 years on a step-by-step basis, • Pension indexation rule introduced
– Prior to reform : political decision– After reform : automatic index = 50% CPI + 50% of increase in nominal
wages• Possibility to work and to receive pension simultaneously• Possibility to receive early – old age pension
– pension reduced by 6% for every year below the retirement age– restriction introduced in 2008 (2 years before the retirement age at earliest)– in 2011 a ban to receive early old-age pension and to work simultaneously
• Possibility to retire later– Increased pension by 6% for every year worked-off
• Significant strengthening of the principle of merit for awarded pensions!
www.finance.gov.sk/ifp 4
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
www.finance.gov.sk/ifp 5
Stregthening of merit principle – awarded pensions
0%2%4%6%8%
10%12%14%16%18%20%22%24%26%28%
2 09
92
499
2 89
93
299
3 69
94
099
4 49
94
899
5 59
9
6 39
97
199
7 99
98
799
9 59
9
10 4
9911
499
12 4
9913
499
14 4
99
15 4
9916
999
18 9
9920
999
200120022003200420052006
• Temporary mechanism for starting the principle of full merit – low pensions are being increased, high pensions are being reduced
• Despite this mechanism , two groups of pensioners – retired prior to reform and after reform
• After reform only higher pensions are awarded de-facto (very expensive)
Pension amount (SKK)
% of pensioners
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI2. Systemic changes (2005) – second pillar• Defined-contribution, fully-funded, • 9 p.p. of 18 percent for old-age insurance -
transferred to private accounts of savers in pension funds management companies (private)
• Mandatory for newcomers to the labour market• Voluntary for others – transitional period (till 30
June 2006)• circa 1% of GDP revenue decline for general
governement• amount of savings in economy unchanched – thus
no impacts on monetary policy
www.finance.gov.sk/ifp 6
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
7
Reform results – implicit debt
• Definition – current value of accumulated pension entitlements resulting from– pensions already paid out – pensions that the currently insured persons would be entitled to if
the first pillar is fully closed in the particular year
• Factors having impact on the amount of implicit debt :
– Average amount of pensions
– Retirement age compared to the expected length of life = period of pension receiving
– Method of pension benefits indexation
Inštitút finančnej politikyMinisterstvo financií SR
IFPIFP
8
Implicit debt of public finance
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
2000
2010
2020
2030
2040
2050
2060
2070
2080
[% GDP]
Prior to reform 2004Reform 2004 - pillar I (62 years)Reform 2005 - pillar II (62 years)Reform 2005 - pillar II (65 years,CPI)
The pension reform has significantly reduced implicit debt from 400% GDP to the level of 150% GDP in 2080.
– partially eliminated : parametric changes reduce the implicit debt by 80 % GDP
- partially transformed : starting of pillar II of pension reform reduces the implicit debt by 170 % GDP, but on the other hand, the explicit debt will increase by the same amount (it is just the debt transformation)
Source IFP
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
9
Transformation costs of second pillar
• Introduction of second pillar – transforms the implicit
debt to explicit debt, i.e. the government must bear part
of the costs today
• Factors having impact on the amount of transformation
costs:
– Revenue decrease of the Social insurance agency
– Expenditure decrease of the Social insurance agency
– Interest costs – costs of financing the revenue shortfall of the
Social insurance agency
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
www.finance.gov.sk/ifp 10
Expenditure decrease of the Social
insurance agency% GDP
Grey - without introduction of the second pillar in 2005Black- with second pillar – current legislation
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
www.finance.gov.sk/ifp 11
...for the price of immediate shortfall of revenues
% GDP
-4,5%
-4,0%
-3,5%
-3,0%
-2,5%
-2,0%
-1,5%
-1,0%
-0,5%
0,0%
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
20
25
20
27
20
29
20
31
20
33
20
35
20
37
20
39
20
41
20
43
20
45
20
47
20
49
20
51
20
53
20
55
20
57
20
59
Decline of expenditures of the first pillar (%GDP)
Decline of revenues of the first pillar(%GDP)
Transformation costs
Transformation gains
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
www.finance.gov.sk/ifp 12
...reform beyond the scope of one generation
% GDP
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
20
25
20
27
20
29
20
31
20
33
20
35
20
37
20
39
20
41
20
43
20
45
20
47
20
49
20
51
20
53
20
55
20
57
20
59
Cummulative transformation costs – free of interest
Cummulative transformation costs (real interest rate 3%)
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
Practical experience• Problem of legislation stability
– Legislation stability is the basic pre-requisite for creating of expectations regarding the amount of future pensions
– Political consensus very important. Introduction of strong principle of merit in the Slovak Republic led to later tendency to increase low pensions
• Problem of principle of merit vs. solidarity – Is it of any importance to have 3 pillars based on principle of merit ?
Or does the strong principle of merit belong to public finance ? (high contributions high pensions)
– On the other hand, strong solidarity = attempts to avoid payment of contributions
• Problem of creating two groups of pensioners– Newly awarded old-age pensions in 2004 and 2005 were not lower
than in past– In spite of that, social pressure leading to re-calculation of low
pensions awarded prior to reform – reform overcharging
www.finance.gov.sk/ifp 13
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
Practical experience• Politically attractive to weaken the pillar II – additional income VS
– openings 2008 and 2009 – cancelled obligation to join – voluntary, default participation only in PAYG– repeated considerations regarding reduction of the rate of contributions
• Premature pensions – widely used • Indexation of pensions
– Nowadays, the existing pensioners benefit partially from growing real wages– Inflation indexation is cheaper in context of ageing costs, however there is the
problem with opening scissors between the new and old pensioners
• Fees in second pillar – Very sensitive to the level of future pensions– Higher stress on fess from revenues than on those from assets volume
• Regulation in second pillar – Too strict regulation = low revenues = lower pensions
www.finance.gov.sk/ifp 14
Financial Policy InstituteMinistry of Finance of the Slovak Republic
FPIFPI
www.finance.gov.sk/ifp 15
Thank you for your attention
Marek Porubsky marek.porubsky@mfsr.sk
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