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PROPOSAL TO INCREASE WAGE LEVIES TO SOCIAL SECURITY FUNDS DEFEATED, BUT LONG ROAD REMAINS TO CAPITALISATION PILLAR

MPs approve first step in major pension reform

PARLIAMENT passed a major change to the rules governing Slovakia's pension system on May 29, tying pensions in future more closely to how much a contributor earns, raising the retirement age of women and stripping politicians of the power to decide annual pension increases.
In one of the first steps towards pension reform the Dzurinda government has taken, the legislature agreed that people who contribute more to the pension fund because of higher earnings should have a right to higher retirement earnings. The changes are expected to take effect as of the beginning of next year.
The changes also pave the way for 30 per cent of contributions to go into a special account that will collect interest - called a 'capitalisation pillar' - but which will continue to be administered by the state Sociálna poiszovoa insurance house.

PARLIAMENT passed a major change to the rules governing Slovakia's pension system on May 29, tying pensions in future more closely to how much a contributor earns, raising the retirement age of women and stripping politicians of the power to decide annual pension increases.

In one of the first steps towards pension reform the Dzurinda government has taken, the legislature agreed that people who contribute more to the pension fund because of higher earnings should have a right to higher retirement earnings. The changes are expected to take effect as of the beginning of next year.

The changes also pave the way for 30 per cent of contributions to go into a special account that will collect interest - called a 'capitalisation pillar' - but which will continue to be administered by the state Sociálna poiszovoa insurance house.

Reform has been urged by international financial groups in order to reduce the cost of the current pension system and prepare the country for an expected steep increase in the ratio of retired people to the economically active population.

Martin Barto, chief economist at the Slovenská sporiteľoa bank, welcomed the changes, but said full reform of the system still required the important step of creating individual pension savings plans for employees managed by private companies.

"This law is a half-step on the way to reform, because it introduces the possibility of a capitalisation pillar, but with significant restrictions. It does not let the private sector in," he said.

At the moment, every retiree receives a pension calculated according to the five top wage-earning years during their last economically active decade, irrespective of how much they contributed to the pension fund during their lifetimes.

Henceforth, pensions will be calculated from the best five waging-earning years over an employee's working lifetime, and will take into account the amount contributed, meaning that higher wage-earners receive larger pensions.

The retirement age of women will also rise to 60 from its current 55 by 2027, which is expected to reduce the impact of the greying of Slovakia's population.

Finally, deputies approved an automatic system for calculating annual increases in pensions to keep up with inflation, which is to replace the current system in which MPs every year decide the extent of the pension rise.

This year, which will see national elections in September, parliament has already approved a five per cent pension rise as of July, even though pension fund officials say they cannot cover the costs of the increase.

MPs have not yet, however, approved a second 'pillar' for the pension system, which would be state and personal pension accounts that would accumulate interest during the lifetimes of contributors, and would help the pension system become self-sustaining. Now, pension contributions are immediately spent on retirees.

At the same time that they approved the new pension rules, MPs defeated a Labour Ministry proposal that would have increased social fund payments by employees and employers.

The increase would have meant that people earning over three times the national average wage, along with their employers, would pay an additional 29 per cent in dues to social security funds. Analysts had warned the move would increase Slovak unemployment and would mean a rejection of recent recommendations by international economic bodies that the state reduce its role in the national economy.

The Slovak government has recently come under attack for excessive spending, as well as the taxation required to support it. The state now levies a surcharge of 50.5 per cent of paid salaries to go towards funds to pay health care, unemployment benefits and pensions, 38.5 per cent of which is paid by the employer on top of straight wages.

A recent survey of managers in Slovakia found that less than half expected to hire more workers in the next two years, largely because of the salary levies.

The high cost to employers of keeping workers is seen as fuelling unemployment, which in Slovakia hovers around 20 per cent.

However, authors of the draft law said the state needed the extra money to cover its social programmes.

"If the new system is not implemented, pensions could lag behind income growth, and the situation could get to the point that even the minimum required level [of social payments] would not be reached," explained Eleonóra Novotná, head of the Labour Ministry's social insurance section.

However the Slovak Taxpayers' Association, one of the most vocal critics of the proposal, said: "Slovakia has the highest social funds payments among all OECD member countries. These high payments are the main barrier to business sector development and employment growth. The proposed amendment would increase employers' annual payments by approximately Sk100 million."

Labour Ministry officials rejected criticism that the proposal had been a populist tax-the-rich measure introduced by Labour Minister Peter Magvaši, a member of the former communist SD1/4 party, in the run-up to September's parliamentary elections.

The SD1/4 is in the cellar in most polls with around two per cent public support.

"It's positive that parliament did not approve this increase," said Barto. "It was a malicious attempt to increase social fund payments, which are already very high in Slovakia."

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