PENSIONS IN CEF COUNTRIES

AN OVERVIEWDUŠAN KIDRIČ

UMAR/IMAD

Dušan KIDRIČ

Transitionsfrom

• one complex and federal state to single independent states (for some countries)– Not completed jet

• socialist to parliamentarian political system• no market to market economy• war to peace

– Completed (?)

• public obligation to private responsibility for social security

Dušan KIDRIČ

Implications touching pensions in transition countries

• Decrease in activity all • Less insured persons all • Increase of informal activity – employment all • Evasion of contribution payment all • Decline of revenues disposable all • Increase of beneficiaries all • Pension arrears some • Reduction of pension benefits all • Same pension providers (institutions) Mainly • Unchanged way of operating Mainly• Distrust in current pension system some

Dušan KIDRIČ

Population, retirement

4.442

3.581

2.001

21.624

3.843

2.0433.149

7.533

7.679

0

5.000

10.000

15.000

20.000

3,0 4,0 5,0 6,0 7,0 8,0

population/pensoiner ratio

GD

P p

er

ca

pit

a

ALB BIHBGR

HRV

MKD

MDA

ROM

SRB* +

SVN

MNG

size of bubles correspond to population of respective country

Dušan KIDRIČ

Responses to the situation

• Pension reforms– New concepts

• Political and social discussion

– Parametrical adjustments (tightenining)

– New forms of pension provision and practice

• International assistance

Dušan KIDRIČ

Political and social discussion on concepts

• New ones– Empowering

– Individualization

– Poverty alleviation

– Actuarial fairness

– (Pre)funding

– Diversification

• Traditional ones– Redistribution

– Solidarity

– Earning based rights

– Social justice

– PAYG

– Equalization

Dušan KIDRIČ

Reforms adopted

Dušan KIDRIČ

Parametric changes

• Rising statutory retirement age– Range 62 to 65 for men– Range 56 to 65 for women

• Reduction of yearly accrual rate– For 0 to 0,5 percentage points

• Enlarging qualifying period– Range from18 to 40 years

• Increase (reduction) of pensions when retired later (earlier)– From 0 (non existing) to 3,6% per additional

(missing) year

Dušan KIDRIČ

Parametric changes

• Capping the benefits and contributions– All possible combinations

• Invalidity adjustments– More severe conditions

• Indexation of benefits– Les generous, more complicated

• Opening the scale of total accrual rates– Yes and not

• Instruments for achieving actuarial neutrality– Not many (one certainly)

Dušan KIDRIČ

Main data

  ALB BIH BGR HRV MKD MDA ROMMNG

* SRB* SVN

gdp/capita in US$ 2.677 2.398 3.442 8.418 2.833 691 4.556   3.31317.03

0

population in thousands 3.149 3.843 7.679 4.442 2.043 3.581

21.624   7.533 2.001

population/pensions 5,84 7,55 3,38 4,26 7,59 5,85 4,80 0,00 5,99 4,10

life expectancy at birth W (years) 78,60   76,30 79,00 75,88 71,70 75,47 75,00 75,40 81,30

legal retirement age W (at the end of transitory period) 60 65 60 60 62 57 60 60 60 61

life expectancy at birth M (years) 72,1   69,1 72,0 71,4 63,8 68,2 71,0 70,0 74,1

legal retirement age W (at the end of transitory period) 65 65 63 65 64 62 65 65 65 63

Dušan KIDRIČ

Two gender specific systems

MKD

MDA

SVN

BGR

MKD

MDA

ROM

SVN

ALB

BGR HRV

ROMMNG*

SRB*

ALB

HRVMNG*

SRB*

56

57

58

59

60

61

62

63

64

65

66

62,0 64,0 66,0 68,0 70,0 72,0 74,0 76,0 78,0 80,0 82,0

life expectancy (at birth)

leg

al r

etir

emen

t ag

e

Dušan KIDRIČ

Legal retirement age and life expectancy

24% 21% 24% 18% 21% 20% 20% 20% 25% 10% 9% 10% 10% 3% 5% 8% 7%15%

55,0

60,0

65,0

70,0

75,0

80,0

85,0

ALB BIHBGR

HRVM

KDM

DARO

M

MNG*

SRB*SVN

ALB BIHBGR

HRVM

KDM

DARO

M

MNG*

SRB*SVN

men women

Dušan KIDRIČ

Adjustment of benefits and indexation of pension base

• Variety of rules

ALB BIH BGR HRV MKD MDA ROM MNG* SRB* SVN type of pension adjustment (price, wage, combination, other)

other, pensions

are still indexed to

funds available

W,P W,P 2 times per year

- W (W,P) (W,P) W

type of pension base indexation (price, wage, combination, other)

- combination

20% base wage 40% comb.

- price combined - pensions

Dušan KIDRIČ

Level of benefits

• Generally very low– Less than 50% of average wage

• Minimum benefits (minimum pension, guaranteed pension) still lower– Around one third of average pension

• Distribution of pensions– Concentration on the lower classes

Dušan KIDRIČ

Low coverage

Dušan KIDRIČ

Fiscal elements current situation

• Less contribution revenues than obligations (except in case of FBiH) in pension systems– Need to budgetary transfer

• Contribution rates and contribution bases different from country to country and even in the same country

ALB BIH BGR HRV MKD MDA ROM MNG*

SRB*

SVN

24,0%

23,0%

20,0%

21,2%

- 29,0%

21,6%

22,0%

24,4%

Dušan KIDRIČ

Some elements for assessing long term perspective

• Demography (Problems with population census)

– Ageing• Life expectancy will

(with high probability) increase

• Fertility rates are low

– Migration will cause shortage of labor supply

• Economic performance– Integration in a larger

economic area• Catching up the

neighbors• Foreign direct investment

– Better utilization of domestic resources

– Peace

Dušan KIDRIČ

Some social phenomena to be taken into account

• Social stratification– Poverty

• Low pension benefits• Low coverage

– Enrichment • In the privatization

process• New monopoles

– Free movement of people

• Social cohesion and social in(ex)clusion– Older workers

• Heavy adaptability

– Elderly people• Alone and not enough

support– From family– Systemic

– Health services provision

Dušan KIDRIČ

Fiscal elements long term perspective

• The contribution rates could hardly be increased– The share of contribution revenues will decline or in best option

remain the same as it is now

• The amount and share of pension obligation will increase– Due to ageing of population– Due to non possible reduction of current level of pension

benefits

• The difference between obligations (liabilities) and revenues (assets) will increase

Dušan KIDRIČ

Pension reform (mainly financial) answers

• Introduction of explicit funding– Mandatory as a II. Pillar according to WB

classification• Croatia, Macedonia, Bulgaria, Romania, Kosovo, …

– Voluntary • All except BiH

• Introduction of a NDC for a first mandatory pillar– In consideration in many countries

Dušan KIDRIČ

Explicit funding

• The chicken / egg phenomenon– Underdeveloped financial market

• New and not enough financially solid domestic intermediaries• Lack of expertise• Very few domestic financial instruments

– Low premiums– High initial cost

• Bad country risk rating• High fees and low return on available instruments

– Regulatory and supervisory problems

Dušan KIDRIČ

Members in the new pension schemes

• At the end of 2006 more than 5 millions persons are included in mandatory or voluntary (pre)funded pension schemes– Most of them in Bulgaria and Croatia– Macedonia – Slovenia in a voluntary (but mainly collective)

pensions schemes

• In the 2006 and 2007 is expecting to start (or started yet) in many other countries

Dušan KIDRIČ

Pension reform (less financial and more social ) answers

• Enlargement of state subsidies– For non insurance based benefits

• Maternity leave• Military service• Veterans • …

• Introduction of a state (social) pension as a universal benefit in the old age – zero pillar– Redefinition and redesigning of existing minimum

benefits in pension and social assistance systems• Possible reduction of pension contribution as a part of labor

cost

Dušan KIDRIČ

Conclusions

– Parametric reforms were introduced and the new parameters gave the possibility to master current fiscal problems

• Politically the reforms are always under revision; they are many signs that some parameters are not any more sympatric to politicians

– To cope with long term fiscal sustainability, the reforms have to open new instruments to strengthen the individual responsibility and make clear consequences for individual decisions

• The pension providers have to supply better and accurate information of individual and common (societal) pension situation

Dušan KIDRIČ

Conclusions

– Mandatory redistributive part of the pension system has to rethink the “philosophical” bases of social insurance

• Is the limitation of solidarity exclusively on formally employed persons and on those with achieved (prescribed) work history still sufficient?

• Could be social cohesion and general taxes as revenue the rationale for enlarging the eligibility criteria

– The new forms of calculating pension base seem to be more convenient to changed and changing world

• The NDC system is one of newly introduced type, which could serve also for financial literacy purposes in (pre)funded schemes

Dušan KIDRIČ

Conclusions

– Explicit funding (second and third pillar) have the same logic and limitations

• The length of saving period has to be as long as possible; in connection with social insurance part both are interested on prolongation of activity

• The premium or contributions have to be greater then currently are. The complementary nature of supplementary pension insurance will fulfill the expectations only with sufficient assets on individual accounts

– The new pension providers must have in mind that fees and costs are essential for social acceptance of them

• If the sentence “Get reach – slowly” is valid for pension saving, the same must be observed from new financial intermediary