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MPs biting nails over pension reform

Reform of the pension system in Slovakia is one of the most complex and politically sensitive programmes the government is facing in the near future. Its difficulty is borne out by the fact that no government since 1990 has managed to put pension reforms into practice.
After the political and economic changes in 1989, politicians realised that the old pension system (also called "pay as you go"), based on the principle of a fund storing pension contributions that are drawn from the monthly salary of people and then used to cover retired peoples' pensions, would not be sufficient to cover these pensions in the future.
Business sector decline and an increase in the unemployment rate during the last nine years has confirmed that a one pillar pension system can only last for a few more years, making the deficit of Sociálna poisťovňa (SP) - the institution in charge of collecting pension contributions - even higher.


Slovakia's graying population has made pension reform unavoidable.
photo: Spectator archives

Reform of the pension system in Slovakia is one of the most complex and politically sensitive programmes the government is facing in the near future. Its difficulty is borne out by the fact that no government since 1990 has managed to put pension reforms into practice.

After the political and economic changes in 1989, politicians realised that the old pension system (also called "pay as you go"), based on the principle of a fund storing pension contributions that are drawn from the monthly salary of people and then used to cover retired peoples' pensions, would not be sufficient to cover these pensions in the future.

Business sector decline and an increase in the unemployment rate during the last nine years has confirmed that a one pillar pension system can only last for a few more years, making the deficit of Sociálna poisťovňa (SP) - the institution in charge of collecting pension contributions - even higher.

The only way to curb this deficit and manage pension payments in the future is, according to government officials as well as labour experts, a new three pillar system involving active engagement of people in valorising their pension contributions. The new system would, for the first time, take a key burden of responsibility for the money collected on the pension funds away from the state and give a free hand to the ordinary citizen in determining the size of his or her pension.

To put any new pension reform into practice, however, the government needs additional financial resources as well as voter support to take some unpopular steps, particularly those concerning the country's retirement age.

Key to the new three pillar system is the creation of a second pillar, where 30% of the pension contribution will be drawn from the account of an insured person and invested by financial institutions which will then be in charge of that money.

People will have the right to choose which financial institution they prefer, and thus to decide where their money will be invested. The remaining 70% of the pension contribution will be deposited on SP's pension fund as it is now.

Employees will also have the option of additional pension insurance which they might pay collectively with their employer or just by themselves without paying tax on it. This third pillar has already been put into place in some Slovak companies, but has not yet been put into legislative practice.

Reasons for change

According to SP's Economy Director Eva Kopasová, one of the most significant reasons for the establishment of the new pension system is the growing deficit at SP. The pension fund shortfall is currently about 4.5 billion crowns ($95 million).

"Taking into consideration the valorising of pensions in August this year, the deficit of the fund in 2001 will be about 20 billion crowns ($421 million). This deficit is like a snowball. Moreover, the only thing that can bring the sun to melt this ball is the new pension system," Kopasová said.

Another aspect that labour experts have voiced concern over is the demographic structure of Slovakia's citizens, which has shown a fall in the number of citizens in pre-productive age (0-15 years) from 26.4% in 1986 to 19.8% in 1999, and is projected for 2010 at 17.1%.

On the other hand, there has been a slight increase in the number of citizens in the post-productive age bracket (55 and above for women and 60 and above for men) from 17.1% in 1986 to 18% in 1999, with a projected increase to 21.1% in 2010.

According to Martin Barto, head of strategy at the state-owned bank SLSP, the current pension system worked when there were several working people for every retired person. "Nowadays, there are only two working people for every retired person. This figure itself shows that pension reform has to be established as soon as possible," he said.

Government officials say that this reform pre-supposes that several unpopular steps will need to be taken. "Everybody speaks about how quickly we should put the pension reform into practice, but nobody thinks about why the preparation of this reform started in 1994 but hasn't yet been finished. Every politician will think twice before he decides to prolong the active working age and set a higher number of years that one has to work before being able to retire," said Michal Szabo, the head of social insurance section at the Ministry of Labour, Social Affairs and Family.

According to Barto, however, the age at which people retire is lower in Slovakia than in most foreign countries. "There might be a lack of political will to make this step (increasing the retirement age), but it will eventually have to be made," Barto said.

Another reason why this reform has taken so long to put into practise is lack of financial sources for establishment of the second pillar.

Szabo said that it would cost 50 billion crowns ($1.05 billion) to establish the second pillar of the new system. "Other countries solved a similar problem by taking the loan from the World Bank or OECD [Organisation for Economic Cooperation and Development], so we might do the same thing," Szabo said.

But Barto and Kopasová said that revenues from the privatisation of state-owned companies could be another source of money that can be used to saturate the pension fund after the creation of this second pillar. "It would be very reasonable if we used these revenues this way, instead of investing them, for example, into agriculture," Barto said.

Despite the fact that many more issues have to be solved and the political will to make important changes has to be found, experiences with pension reform in countries like Poland and Hungary should, according to Szabo "stimulate Slovakia in its effort to put this reform into practice."

He explained: "The Poles have got furthest with their pension reform. They have already established a second pillar and have had a positive experience with it. The Hungarians are in a similar position. The Czechs are falling behind a bit, with only one pillar working, but with the possibility of additional pension insurance and other pension advantages for citizens."

Following discussions last year in both the government and parliament, cabinet will in the next few weeks bring the concept for social insurance back to the discussion table with a view to having the second pillar approved in 2002 and taking effect from January 2003.

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