Pension Systems in Central and Eastern Europe: in times of Crisis, Austerity and Beyond 9 March 2011, Ankara
Kenichi Hirose Senior Specialist in Social Security ILO Decent Work Technical Support Team for Central and Eastern Europe Email:
[email protected].
Objectives of pensions
Provide adequate income security for the elderly Basic requirements
Sustainable in the long run
Credible for the commitment of future generations
Pension reform addresses these issues while ensuring the main objective of the retirement income provision
Recent literature on pension reform
World Bank, “Averting the old-age crisis”, 1994 Beattie, R and McGillivray W, “A risky strategy”, ISSR, 1995 Stiglitz, J. E. and Orszag. P.R., “Rethinking Pension Reform: Ten Myths about Social Security Systems”, 1999 (in H-S below) Holzmann, R. and Stiglitz, J. E. (eds.), “New ideas about old age security”, 2001 Barr N, “Reforming Pensions: Myths, Truths and Policy Choices”, IMF Working paper, 2000 (ISSR 2002) Gillion et al., “Social Security Pensions: Development and Reform”, 2000, ILO/ISSA. ILO, “Social security: a new consensus”, 2001 Holzmann R. and Hinz R. (eds.) “Old Age Income Support in the 21st Century”, 2005 Holzmann R. and Palmer E. (eds.), “Pension reform: issues and prospects for non-financial defined contribution (NDC) schemes”, 2006. Barr N and Diamond P, “Reforming pensions”, Nov 2008
Trends of Pension Reforms in CEE countries
Early 1990s
From mid-1990s to mid-2000s
Pension system was used to resolve the unemployment problem Rapid deterioration of the system demographic dependency Reform adopting a Chilean type mandatory private funded pension pillar by scaling down the state pension Parametric changes to tighten benefits (longer insurance period, higher retirement age, indexation from wage to price)
From 2008 to present
Global economic crisis affected public and private pensions Pressure to cut benefits in the context of fiscal consolidation in Europe (especially the countries receiving financial assistance)
Challenges in the Pension Systems in CEE countries
Ensuring adequate pension benefits, retirement age and indexation method
Non-compliance by undeclared work and evasion by underreporting of wages Weak enforcement for contribution collections
Heavy financial dependence on the State budget Concerns with long-term sustainability in the ageing population Vulnerable to political interference
Conflicting interest of key stakeholders
Typology of pension schemes Social insurance pension DB / DC
Basic pension
Private pension
Pillar II
Sweden (NDC)
Sweden (FDC)
DB
DB
DC (or DB)
DC
DC
DC
PAYG / Pre-funding
PAYG
PAYG
Funding
Funding
PAYG
Funding
Public / private
Public
Public
Private
Private
Public
Public clearing house (PPM)
Mandatory / voluntary
Mandatory Employed
Mandatory Universal
Voluntary
Mandatory
Mandatory
Mandatory
Contribution / tax
Cont.
Tax or cont.
Cont.
Cont.
Cont. + tax
Cont.
Pension privatization in CEE and CIS states
Countries which introduced mandatory, privately-managed pensions Hungary, Poland(*), Latvia(*), Bulgaria, Estonia, Croatia, Slovak Republic, Romania, Ukraine Kazakhstan(**), Russia, Azerbaijan, Kyrgyzstan(*), Tajikistan(*), Turkmenistan(*) Countries with PAYG pensions and considering the introduction of mandatory private pensions Albania, Bosnia and Herzegovina, Lithuania, Moldova, Serbia Armenia, Belarus, Georgia, Uzbekistan Countries with PAYG pensions and no mandatory private pensions(***) Czech Republic, Slovenia
Notes: (*) NDC, (**) Full privatization, (***) Recent developments
Comparison of Pillar II systems in selected CEE countries Hungary Poland Year of implementation
Bulgaria Croatia
Slovak Romania Republic
1998
1999
2000
2002
2005
2008
8% (33.5%)
7.3% (19.52%)
5% (23%)
5% (20%)
9% (18%)
2.5% (29%)
Membership of the current workers at the start of the scheme
>49: stay out 3030-49: option 49: stay out 3030-49: option =40: stay out 49: stay out 4040-49: option 44: stay out 3535-44: option
