pension reform in central and eastern europe
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Pension Reform in Central and Eastern Europe. Elaine Fultz Senior Specialist in Social Security ILO Budapest. Presentation:. ILO Budapest regional technical cooperation project Regional trends Issues and Problems. Regional trends:. Change design features of public pension schemes - PowerPoint PPT PresentationTRANSCRIPT
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Pension Reform in Central and Eastern Europe
Elaine Fultz
Senior Specialist in Social Security
ILO Budapest
2
Presentation:
• ILO Budapest regional technical cooperation project– Regional trends
– Issues and Problems
3
Regional trends:
• Change design features of public pension schemes
• Strengthen scheme financing
• Scale down public schemes and replace with privately managed individual savings
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Change design features:
More individualized benefits
•eliminate redistribution
•count more years of work
•Notional defined contribution (NDC)
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Retirement Ages – New EU States Current law Men Women
Czech Rep. 1995,2003 increasing to 63 by 2013 by 2 months/year
Increasing to 59-63 (depending on no. of children raised) by 4 months/year in 2013
Estonia 1998, in force 2000
63 Increasing to 63 in 2016 by 6 months/year
Hungary 1996 increasing to 62 in 2001 by 1 year every second year
Increasing to 62 in 2009 by 1 year every second year
Latvia 1998 increasing to 62 in 2003 by 6 months/year
Increasing to 62 in 2008 by 6 months/year
Lithuania 1994, 2000 increasing to 62.5 in 2003 by 6 months/year
Increasing to 60 in 2006 by 6 months/year
Poland 1998
(in force, 1999)
65, with early retirement eliminated beginning in 2007
60, with early retirement eliminated beginning in 2007
Slovak Rep. 2003 Gradual rise to age 62 Same as for men
Slovenia 1999 63 61
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Unified collections
Latvia (1996)Slovenia (1996)Estonia (1999)
Hungary (1999)Bulgaria (2002)Romania (2003)
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Pension Privatization
• Averting the Old Age Crisis, World Bank, 1994– Pay as you go pension schemes are
unsustainable in the face of demographic aging.– Governments are corrupt, tend to over-promise.– Both problems can be circumvented by scaling
down pension systems and replacing them with privately managed individual savings accounts.
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Pension privatization in the new EU member states
Countries with mandatory, commercially managed individual savings account
Countries without such scheme
Hungary (1998) Czech Republic
Poland (1999) Lithuania
Latvia (2001) Slovenia
Estonia (2002)
Slovak Republic (2003)
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Issues and Problems
• Impact of second pillar on first
• Transitional financing costs– The “hole” in the financing of the public
pension system created by diverting part of the contribution rate to the new private savings accounts
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Transitional financing costs in Poland
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
year
% GDP
privatisation revenues credit public pillar savings
Chlon, Agnieszka, "The Polish Pension Reform of 1999," in Fultz, E., Ed., Pension Reform in Central and Eastern Europe, Vol. 1, ILO: Budapest, 2002.
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Private Investment ReturnsILO reports (Dec. 2004)
• Hungary 3.75% average annual internal rate of efficiency over first 6 years of operations 6.6% inflation rate
• Poland 20.3% increase in value of second pillar savings over December 1999 – June 2004 24% inflation rate
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Hungary – end of 2005(1998-2004)
• 6.8% average annual return
• 6.1% average inflation
• 0.7% positive return to workers
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Why the low/negative returns?
• Poor stock market performance?• Industry charges and fees?
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Admin. charges and their impact Poland 2001
Poland new legislation
Kazakhstan 2001
Kazakhstan new law
Croatia 2002
Croatia draft legislation
Upfront fee (% of contribu-tion)
8.5 7.0 1 0 0.8 0.8
Mgmt. fee (% assets)
0.6 Up to 0.54 none 0.6 None 1.2
Perform-
ance fee (% of return)
none Up to 0.06% of assets
10 15 25 None
Reductions in assets
17.4 14.4 10.3 16.5 29.3 26.4
Reductions in yield
0.82 0.65 0.37 1.13 1.61 1.19
Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.
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Rethinking of Privatization
• Flaws in economic logic
• Disregard of necessary preconditions for success
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World Bank (2001):
“In the end, both types of schemes (pay as you go and funded) require a subsequent generation to fulfil the generational contract, either in the form of current contributions (in unfunded schemes) or through the purchase of accumulated assets (in funded schemes). Money put aside for retirement alone does not change this fact …”
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World Bank (2006): Initial Conditions for Multi-Pillar Reforms
• Macroeconomic stability
• Developed banking sector
• A low risk for corruption
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Many Countries Had High Inflation at Reform
-5 5 15 25 35 45 55 65 75 85 95
EcuadorPeru
UruguayLatvia
MexicoColombiaRomania
RussiaHungary
KazakhstanPoland
NicaraguaArgentina
Costa RicaDominican Republic
CroatiaBolivia
EstoniaBulgariaUkraine
FYR Macedonia
Percentage increase in CPI
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Poor Financial Sectors Characterize Some ECA Multi-pillar Reformers
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
Russia
KazakhstanUkraine
Romania
Bulgaria Latvia
FYR Macedonia
CroatiaPoland
Estonia
Slovak RepublicHungary
EBRD rating at time of reform
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Many Reformers Had Poor Corruption Index at the Time of
Reform
KazakhstanEcuador
NicaraguaUkraine
RussiaLatvia
El SalvadorColombia
MexicoBolivia
RomaniaArgentinaBulgariaPeru
CroatiaSlovakia
PolandHungary
Costa Rica
FYR Macedonia
Dominican Republic
0 25 50 75 100World Bank Institute "Control of Corruption"
percentile (closest year to reform)
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New understanding
• An old age crisis will not be averted by a change in pension financing
• Under any type of pension system, what matters is national economic output and the ratio of workers to pensioners.
• Creating a “hole” in the financing of the public pension system will make addressing the problem of demographic aging more difficult.
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Employment rates in 2002
0
1020
3040
5060
70
Esto
nia
Latvi
a
Hung
ary
Polan
d
Bulg
aria
Kaza
khsta
n
Croa
tia
Mac
edon
ia
Employment rate(15-64) Employment rate (55-64)
EU average (15-64)
EU average (55-64)
Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.