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Pension reform stuck before it starts

A MASSIVE reform of the pension system that is needed to prevent its eventual collapse will not be launched during the term of the Mikuláš Dzurinda government, say analysts. Stalled discussion with labour groups and delayed legislation are responsible, they add.
Although the cabinet last week approved a Social Insurance Law raising the retirement age for women to 60 by 2026, a crucial law introducing personal pension savings accounts has now been put off until October 2002 - a month after the current cabinet's term in office ends.
A cabinet plan from August 2000 predicted the law establishing personal accounts would take effect in July 2002.


THE SLOVAK POPULATION is greying at an alarming rate, say pension reform backers.
photo: Spectator archive

A MASSIVE reform of the pension system that is needed to prevent its eventual collapse will not be launched during the term of the Mikuláš Dzurinda government, say analysts. Stalled discussion with labour groups and delayed legislation are responsible, they add.

Although the cabinet last week approved a Social Insurance Law raising the retirement age for women to 60 by 2026, a crucial law introducing personal pension savings accounts has now been put off until October 2002 - a month after the current cabinet's term in office ends.

A cabinet plan from August 2000 predicted the law establishing personal accounts would take effect in July 2002.

"Not having that legislation before elections means it's very likely that the actual reform of the pension system will not happen until the latter half of the next government's election term, as new debates on the shape of the reform are sure to arise," said Marek Jakoby, an analyst with the economic think tank Mesa 10.

The current system, all agree, is fast becoming financially unsustainable, and is unable to guarantee that pensions will be paid in future. It is based on the principle of 'inter-generational solidarity', which means that firms and the current working population pay dues that support retired people (also known as the 'pay-as-you-go' principle.

A major problem is that the dues extracted from the working population by the social insurance agency that distributes pensions do not cover the costs, and additional funds have to be transferred every year to meet pension commitments.

Record unemployment is also deepening the gap between the dues collected and the amount needed to cover old age pensions.

Finally, people making higher salaries pay more in dues, but everyone receives a standardised pension when they retire.

Martin Barto, senior analyst at the private bank Slovenská sporitelňa, said that "the current system is completely unfair as there is no real link between what people pay and what they get in retirement pensions. There is no motivation for people to save for their pensions."

The need for reform is also underlined by the rapid greying of the population. While the Slovak population is expected to remain at around its current 5.5 million over the next 40 years, the ratio of people beyond their productive years will increase dramatically.

The trouble will start when the 'baby boom' generation hits retirement age starting around 2005. Labour Ministry statistics predict that the ratio between the working population and post-productive population will fall steeply from 3.7 productive persons per retiree in 2000 to 1.6:1 in 2040.

Under the planned reforms from August 2000, a new system of pensions dues would incorporate contributions from the state, company pensions and private supplementary pensions. Retirees would get money from three sources, or 'pillars', one being the current pay-as-you-go system, whose share will be gradually decreased by 33 per cent in favour of the second source, personal accounts at several state-regulated pension funds.

These two mandatory sources, according to the concept, should secure payers a pension that is from 50 to 60 per cent of their average income over their working lives.

The third possible source is voluntary savings in specialised supplementary pension companies that would get some tax relief.

Jakoby said that under the cabinet's concept, "the systemic defects in the current pension system will remain, as the share of the pay-as-you-go source would remain undesirably high - 2:1 - compared to contributions from private savings. This ratio should be the exact opposite."

For this reason - the high commitment the state is taking on - there is much concern about how much the reform process will cost. By the time the reform finishes about the year 2028, the entire current productive population will have retired, meaning that even a gradual switch to 'personal account' insurance will not stop a major deficit in the pay-as-you-go accounts.

While there is no accurate prediction of how much the total deficit will be, and thus how much money the government must earmark to support the reform, cabinet last week agreed to finance it from revenues from the privatisation of a 49 per cent stake in gas utility SPP. The original plan to use the fixed sum of Sk55 billion from the sale was modified to half the income from the SPP deal, which may come to as much as Sk75 billion.

Barto said: "It's right to use the privatisation money for this, but I would have put an even higher amount towards financing pension reform."

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