Pension Trends

Elaine Fultz, DirectorILO Subregional Office for Eastern

Europe and Central Asia1 September 2008

Political Economy of Pension Reform

• Early shocks of transformation• Financial imbalance in national pension scheme• Flattening and lowering of pension benefits• Shift of power for pension policy making from

Labour/Welfare Ministry to Finance Ministry• Neoliberal economist links with World Bank• Pension privatization

Political economy (continued)

• Circumvention of normal channels for pension policy making– Weak reform deliberations

• Unsettled design features – Undefined benefit package– Unfunded “transitional financing costs”– Inadequate regulation of private savings funds

Poland - “Hole” in pension finance due to privatization

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.

Retirement ages in EU member states, 2007 Current law Men Women

Bulgaria 2000 63 59, increasing to 60 in 2009 by 6 months per year

Czech Republic 1995 63 63 with no children;59-62 with children, depending on #

Estonia 1998, in force 2000

63 60, increasing to 63 in 2016 by 6 months every second year

Hungary 1996 62 61, increasing to 62 in 2009 by 1 year every second year

Latvia 1996 62 61.5 (from 1 July 2007), increasing to 62 in 2008 by 6 months per year

Lithuania 1994, 2000 62.5 60

Poland 1998 (in force, 1999)

65 60

Romania 2000 (in force April 2001)

63 (in the first quarter of 2007), increasing to 65 in 2014 by 3 mos/year

58 (in the first quarter of 2007), increasing to 60 in 2014 by 3 months per year

Slovak Republic 2003 (in force Jan. 2004)

62 60 with no children, increasing to 62 in 2009;women with children will reach 62 by 2010-2014, depending on the no. of children

Slovenia 1999 62, increasing to 63 in 2009

55 and 8 months increasing to 61 in 2023*

Hungary – Private investment returns(end of 2005)

• 6.8% average annual return

• 6.1% average inflation

• 0.7% positive return to workers

EU member states – privatization scorecard

Countries with mandatory, privately managed individual savings accounts

Countries without such schemes

Hungary (1998) Czech Republic

Poland (1999) Lithuania (1)

Latvia (2001) Slovenia

Estonia (2002)

Bulgaria (2002)

Slovak Republic (2005)

Romania (2008)

(1) The second tier is voluntary for all workers, both current and future, but is financed by a diversion of contributions from the public pension system for each worker who joins.

Other followers of privatization policy prescription

• Croatia

• Kazakhstan

• Kosovo

• Macedonia

• Armenia

• Kyrgyzstan

• Turkmenistan

Where do we stand ?

• Benefit package still undefined

• Retirement from mixed systems starting soon

• Damage control– Limit private administrative charges– Confront transition costs– Define “equity” for those who made

disadvantageous choice

Where do we stand – neglected issues

• Collection of contributions

• Pension scheme governance

• Aging and pension finance

• Gender equality

Improving the collection of pension contributions

• Insist that govts lead by example• Redefine non-compliance as social issue• Invest in enforcement• Piggyback on existing procedures• Reduce the compliance burden• Radical changes can be destabilizing• Tackle shadow economy step by step

Employment rates, 2005Lisbon Strategy target: 70% (15-64) and 50% (55-

64) by 2010

Note: Figures of Bulgaria, Croatia and Romania are not included in the calculation of the EU averages, since Croatia is still in the accession process and Bulgaria and Romania joined the EU in 2007.

Source: EUROSTAT, 2005 employment tables.

Average pension for a woman (as a percentage of the average pension for a man), Poland, simulation for 2050

With continuing early retirement for women (60, 65)

With equal retirement at age 65

Old system

75 81

New system

57 73