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RETIREMENT AGE TO GRADUALLY RISE TO 62, PAY-AS-YOU-GO PENSION SYSTEM MODIFIED, UNIONS UNHAPPY

Slovaks to turn pensioners later

THE RETIREMENT age in Slovakia will increase to 62 for both men and women, according to a newly passed law on social insurance that is seen as an important part of the country's fundamental pension reform.
The new retirement age will not, however, be applied immediately as of January 2004. Instead, the new scheme will increase the retirement age gradually, in a transition period stretched over several years, by adding nine months of extra work each year for all employees who were expected to retire after 2004.

THE RETIREMENT age in Slovakia will increase to 62 for both men and women, according to a newly passed law on social insurance that is seen as an important part of the country's fundamental pension reform.

The new retirement age will not, however, be applied immediately as of January 2004. Instead, the new scheme will increase the retirement age gradually, in a transition period stretched over several years, by adding nine months of extra work each year for all employees who were expected to retire after 2004.

Currently, men in Slovakia retire at the age of 60, and women without children retire at 57. Depending on the number of children, mothers can leave the working world earlier.

The measure, which is viewed as a means for a fairer distribution of pensions based on individual employees' earning records, abolishes the minimum state-guaranteed pension and also eliminates the maximum allowed pension level, which is Sk9,132 (€222) a month.

The law, passed by MPs on September 24, will change the current pay-as-you-go pension insurance system of the social security provider Sociálna Poisťovňa (SP) and establish a so-called capitalisation pillar, in which employees divert part of their wages into pension accounts with private asset-management companies.

On September 27, Finance Minister Ivan Mikloš and Labour Minister Ľudovít Kaník agreed that as of 2005, employees will transfer nine percent of their gross wages to their personal pension accounts within the capitalisation pillar. They will also allocate an additional nine percent to the pay-as-you-go scheme of SP. Originally the Labour Ministry had proposed obligatory contribution rates of 10 percent of gross wage into each of the two pension savings categories. Instead, the missing cumulative two percent will flow into Sociálna Poisťovňa's reserve fund.

Overall, employee payments to the social system will not change. Even those that join the pension reform and save funds to their personal accounts will continue to transfer a percentage of their wages into the social system. The only difference is that nine percent will flow into a private pension fund.

Though rightist reformers advocated slashing the influence of the state in the system, on this point, the state will maintain a regulatory role.

"The state will be responsible in terms of guarantees, regulations, and the security of the system, and will set the rules for the operation of private asset-management companies," spokesman of the Labour Ministry Martin Danko told The Slovak Spectator.

The state-controlled Sociálna Poisťovna will collect payments to the capitalisation pillar, as well as to its own pay-as-you-go pension scheme. Private companies will only administer and increase the value of these contributions.

"Funds in the capitalisation pillar will formally be part of public finances," Mikloš told news wire SITA. He assumes that the pension reform will have no negative impact on the total deficit of public finances.

The creation of the capitalisation pillar has been the most discussed part of the reform, weaving a tapestry of concerns that the move will have a negative impact on public finances.

The Labour Ministry is certain that the government will be able to keep the expenses of this second pillar below one percent of the GDP.

In early September, the Governor of the National Bank of Slovakia (NBS), Marián Jusko, warned that the financing of the country's pension reforms might deepen the public finance deficit to the point that Slovakia would be unable to introduce the euro by 2007, as previously planned. In order to join the euro, the deficit must fall below three percent of the GDP.

"The new pension system will not imperil the introduction of the euro by 2007, as the deficit will not exceed one percent of the GDP," Danko told The Slovak Spectator.

However, the former general director of the Labour Ministry's social reform section and the father of the capitalisation pillar idea, Ivan Švejna, has become increasingly critical of the pension reform that the parliament launched on September 26. He claims that the state does not have the money to finance Kaník's reforms, and if it promises higher pensions, it is only demagogy.

"There is no point in undergoing pension reform if it brings people lower pensions," said Pavol Kárász, analyst with the Institute for Slovak and World Economy at the Slovak Academy of Sciences, in July. He claimed that the state is essentially ignoring the fact that the Slovak economy is not very strong, and the public sector is not very efficient.

According to Juraj Kotian, analyst with Slovenská sporiteľňa bank, pension reform is more about making the system work efficiently than about ensuring higher payouts.

The Labour Ministry claims that the new social security law is to maintain macroeconomic growth.

"All the countries with long-term pension reform experiences based on a strong capitalisation pillar have described the system as having a very positive impact on economic growth and social stability. The second pillar increases the citizens' savings, contributes to a healthy capital market, and raises contributions to the social system. These factors are crucial in terms of the labour market and the reduction of unemployment," Danko told The Slovak Spectator.

Danko explained that Slovaks are spending billions on pensions. Their payments to the funds are high, but their pensions are still very low, which has a negative impact on the country's employment.

The social security law still has to be signed by President Rudolf Schuster. Vojtech Tkáč's People's Union (ĽÚ) suggested that if Schuster fails to veto the law, the former members of the Movement for a Democratic Slovakia (HZDS) will challenge the legislation in the Constitutional Court. The ĽÚ dislikes the government's failure to increase the pensions of widows and widowers.

The number of pensioners outnumbers the number of children in Slovakia for the first time in the country's history, according to the Statistics Office (ŠÚ). As the number of births has declined from just over 60,000 in 1996 to less than 51,000 last year, pensioners are living longer.

The change in demographics is likely to put even more pressure on the social security system, say analysts.

The average Slovak is now 35 years old, has two children, has a life expectancy of 70 years, and is 40 percent likely to divorce, according to the ŠÚ.

Half a million Slovaks are saving for their retirement, according to the Association of Pension Providers. In the last year the number has risen by 176,000.

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