Pension reform - experience of the Slovak Republic

400 views

Published on

Pension reform - experience of the Slovak Republic

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
400
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
3
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Pension reform - experience of the Slovak Republic

  1. 1. FPIFPI Financial Policy Institute Ministry of Finance of the Slovak Republic www.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
  2. 2. Financial Policy Institute Ministry 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
  3. 3. Financial Policy Institute Ministry 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
  4. 4. Financial Policy Institute Ministry of Finance of the Slovak Republic FPIFPI 1. 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
  5. 5. Financial Policy Institute Ministry 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% 2099 2499 2899 3299 3699 4099 4499 4899 5599 6399 7199 7999 8799 9599 10499 11499 12499 13499 14499 15499 16999 18999 20999 2001 2002 2003 2004 2005 2006 • 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
  6. 6. Financial Policy Institute Ministry of Finance of the Slovak Republic FPIFPI 2. 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
  7. 7. Financial Policy Institute Ministry 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
  8. 8. Inštitút finančnej politiky Ministerstvo 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 2004 Reform 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
  9. 9. Financial Policy Institute Ministry 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
  10. 10. Financial Policy Institute Ministry 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 2005 Black- with second pillar – current legislation
  11. 11. Financial Policy Institute Ministry 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% 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 Decline of expenditures of the first pillar (%GDP) Decline of revenues of the first pillar(%GDP) Transformation costs Transformation gains
  12. 12. Financial Policy Institute Ministry 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% 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 Cummulative transformation costs – free of interest Cummulative transformation costs (real interest rate 3%)
  13. 13. Financial Policy Institute Ministry 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
  14. 14. Financial Policy Institute Ministry 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
  15. 15. Financial Policy Institute Ministry of Finance of the Slovak Republic FPIFPI www.finance.gov.sk/ifp 15 Thank you for your attention Marek Porubsky marek.porubsky@mfsr.sk

×