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Pension hike passed with 10% compromise

After three weeks of political bickering over pension hikes parliament approved a 10% compromise increase effective August 1.
Despite a huge shortfall in the state pension fund's coffers and the government's stated reluctance to allocate finances to insurance firm Sociálna poisťovňa (SP) - the body responsible for pension payments - coalition as well as opposition deputies have called for a bigger hike.
At the original May 31 cabinet session when the government approved a 7% figure, Finance Minister Brigita Schmögnerová emerged most satisfied with the amount saying it was the most acceptable rise taking into account the potential dangers for the state budget if the figure was anything more.

After three weeks of political bickering over pension hikes parliament approved a 10% compromise increase effective August 1.

Despite a huge shortfall in the state pension fund's coffers and the government's stated reluctance to allocate finances to insurance firm Sociálna poisťovňa (SP) - the body responsible for pension payments - coalition as well as opposition deputies have called for a bigger hike.

At the original May 31 cabinet session when the government approved a 7% figure, Finance Minister Brigita Schmögnerová emerged most satisfied with the amount saying it was the most acceptable rise taking into account the potential dangers for the state budget if the figure was anything more.

"It [a higher rise] would have a serious impact on the deficit of the public finances," Schmögnerová said at the time.

Schmögnerová's Party of the Democratic Left (SDĽ) colleague and Labour Minister Peter Magvaši, however, criticised the government's decision. In April his ministry had proposed a 19.4% rise based on its calculations of the increase in the cost of living since the last 8% pension hike in July, 1999. The SDĽ itself had wanted pensions to be increased by 10% - a figure both many deputies and SP officials said was most likely to be the compromise solution in the parliamentary debate.

But after the 10% rise was approved Magvaši said he was satisfied with the compromise deputies made.

However, any pension increase promises to threaten the finances of the troubled SP, which is already likely to find itself approaching bankruptcy at the beginning of next year. "For SP it doesn't matter how large the pension hike will be because we cannot cover even a 1% increase from our own sources," said SP's Economic Director Eva Kopasová.

Debt at SP's Basic Pension Fund is currently running at 429 million crowns ($9.705 million).

Had parliament approved a 7% rise SP would have needed an additional 1.9 billion crowns ($43.1 million) to pay pensions - expected to be covered by money transfered from SP's Health Fund. With the 10% rise SP will need an additional 2.75 billion Slovak crowns ($62.5 million) in its Pension Fund. While SP is expecting to generate a profit of 215 million crowns ($4.8 million) this year it will close 2000 with no money in its Pension Fund and will have an illiquid Health Fund.

SP, in Kopasová's words, expects help from the government, which under law is obliged to guarantee pension payments. "I am a pessimist by nature but in this case I simply cannot accept that pensions won't be paid and sources for it won't be found," Kopasová said.

Finance Ministry spokesman Peter Švec said that his ministry would opt for any solution that would involve the use of SP resources and not the state's funds. "For us, it is crucial to keep the state budget deficit at its projected level [18 billion Slovak crowns - Ed.note]," Švec said. He added at the time that a 7% hike would not require any additional financing from the state budget. "However, a larger than 7% hike presents a risk that the budget deficit would increase," Švec said.

The Pension Fund needs five billion crowns ($113.6 million) every month to cover existing pension payments. This year's commitments will leave the fund with only about 215 million crowns on account, SP said, insufficient to meet even the January 2001 payment, much less cover any increase passed by parliament. "This means that the government will have to find sources for us anyway," Kopasová said.

But Marián Mesiarik, head of the parliamentary housing and social affairs committee, said that if a 7% pension rise had been approved pensioners would have been left in an untenable position.

He added that pensions should grow by 14% to reflect the real situation for pensioners in the country. But he admited that a a 10% increase was an expected compromise. He added that SP can cover a pension increase from the state coffers by using the government's revenues from upcoming privatisation deals and by selling its debts at a low price, essentially allowing companies to forfeit their debts to SP.

The Finance Ministry has rejected any direct coverage of a pension increase from privatisation revenues.

However, analysts said that even with pensions increased by 10%, the social situation will still not improve with 1999 inflation running at 10.6%. "In real terms pensions will be lower anyway," said Ján Tóth, analyst at ING Bank in Bratislava.

Tóth said that one source for covering the pension increase is efficient public sector reform, which would relieve pressure on the budget and cure SP's illiquidity. "There are certainly areas where finances can be saved and used in a more reasonable way," Tóth said.

A recent audit of the state administration calculated that savings of between 2.6 billion crowns ($59 million) and 3.9 billion crowns ($88.6 million) could be made without having any serious impact on the state sector.

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