Pension Systems in Central and Eastern Europe:

Pension Systems in Central and Eastern Europe: in times of Crisis, Austerity and Beyond 9 March 2011, Ankara Kenichi Hirose Senior Specialist in Soci...
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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