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Cash-poor Socialna Poisťovňa scrambles for a financial lifeline

Unpaid insurance premiums, an outdated pension system and widespread fraud has brought one of the country's largest insurance companies, Sociálna Poisťovňa (SP), to the brink of collapse. SP expects to lose 2.45 billion Slovak crowns ($58 million) this year, and for the first time in its history to finish with a deficit in its basic pension fund.
Although the company will compensate for the pension shortfall by transferring money out of its basic health insurance fund, this move will lower SP's reserves by 7.5 billion crowns to 1.8 billion at the end of 1999. In other words, if the pension fund haemorrhage is not plugged this year, the company will not have sufficient reserves to cover next year's deficit.

Unpaid insurance premiums, an outdated pension system and widespread fraud has brought one of the country's largest insurance companies, Sociálna Poisťovňa (SP), to the brink of collapse. SP expects to lose 2.45 billion Slovak crowns ($58 million) this year, and for the first time in its history to finish with a deficit in its basic pension fund.

Although the company will compensate for the pension shortfall by transferring money out of its basic health insurance fund, this move will lower SP's reserves by 7.5 billion crowns to 1.8 billion at the end of 1999. In other words, if the pension fund haemorrhage is not plugged this year, the company will not have sufficient reserves to cover next year's deficit.

After four months of 1999, SP had 4.6 billion crowns in outstanding claims. The biggest non-payers of insurance premiums are state companies like Slovak Railways (ŽSR), state-run hospitals and former co-operative farms. In 1995, the state transferred some 5 billion crowns to SP's basic pension fund through these institutions, but this year, the total will reach hardly a quarter of that figure.

"This is the reason why SP is now in this situation," explained Igor Lipták, SP's General Director, adding that the company's financial situation was very serious and its future was uncertain. SP officials say they expect the government to make up the shortfall in premiums by subsidising SP with extra money from the state budget. They also expect the government to make legislative changes to prevent a similar crisis from occuring in the future.

The government, however, says it has no intention of coming to the aid of SP. Finance Minister Brigita Schmögnerová has said that the draft of next year's budget makes no provisions for covering SP's deficit, which she believes has been caused by Slovakia's overall economic situation rather than bad financial discipline shown by the state.

Schmögnerová's view was supported by SP's Economy Director Eva Kopasová, who said that Slovakia's high level of secondary debt - Slovak companies owed each other 370 billion crowns, or 50% of GDP, at the end of 1998 - was preventing firms from paying their insurance premiums.

"It's a vicious circle," she said. "Companies don't have money, and the amount of their debts is increasing as are the penalties."

Kopasová said she felt optimistic that SP would find a way out of its pension fund squeeze. "Taking into consideration the constantly rising cost of living, we must and we certainly will find financial sources to index [adjust upward for inflation] the pensions of the 1.2 million retired people in March next year," she vowed.

Other SP officials, however, are not so confident. "Increasing pensions next year will be impossible," said Lipták during a press conference on September 2, stressing that "responsibility for paying pensions will have to be taken over by the state, in accordance with the Social Insurance Act."

Fixing the system

Even if the state provides temporary pension relief next year, economic experts say that only reform of Slovakia's antiquated pension system can bring permanent relief.

According to Martin Barto, chief strategist with state bank SLSP, the main source of SP's current financial troubles is a sudden drop in the levies the state pays to SP. In the past, he explained, the state had overpaid SP and thus built up reserves of state money at the company. The current government, attempting to save money, has lowered its levies from 4.73 billion crowns in 1995 to 946 million crowns this year, expecting SP to make up the difference from reserves.

Barto said that SP's current situation could only be solved by wholesale change. "Revenues from privatisation could be used to finance the pension system, as has been done in other countries," he suggested. Barto also advanced the idea of a three-pillar pension scheme for Slovakia, in which people could make extra contributions to pension funds.

Whichever system the government adopted, he said, time was running short. "If we stop paying out on pensions in an environment where the cost of living is steadily growing, we will create a group of people that will be really poor. We should bear in mind that most of these people are disciplined voters. Certain political groups could try to capitalise on this [group of disaffected voters] and force the government to pay more money from the state budget to cover the living expenses of retired people. And that could be a disadvantage for the younger generation."

While the government is nit hurrying to pay SP's debts, it appears willing to reform the Slovak pension system, first by raising the retirement age. Labour Minister Peter Magvaši has already announced that the current welfare system in Slovakia cannot be maintained because of the rapid greying of the Slovak population. According to Magvaši, pension reforms are scheduled for adoption in the year 2000, beginning with an increase in the retirement age of women.

Adding to SP's troubles are fraudulent claims, a practice that some company officials fear is widespread. According to Kopasová, a businessman may collaborate with a doctor to squeeze funds from the SP by fraudulently registering up to 20 employees as ill at any given time. "The worst thing about this [practice] is that there is no way to prove it is happening. We only have figures saying that we pay companies more and more money every month," Kopasová said .

Kopasová added that pension and insurance fraud is not limited to business people. According to her, many people who are officially retired and drawing a pension also receive a regular salary from either a full or part time job. "These people, of course, are thinking only of their own gain," she said.

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