Challenges of an ageing population

WHILE population ageing is a problem in all of Europe, the most recent predictions indicate that Slovakia may particularly face problems due to its ageing population and there might not be enough funds in social insurance accounts or state coffers to provide pensions or health care for seniors. 

(Source: Sme)

Some possible solutions might be painful and unpopular but the Labour Ministry has praised measures that have already been adopted that it believes will significantly improve the sustainability of the state pension scheme.

“It may please us that we will live longer but we will also work longer simply because there will be nobody to replace us,” Zdenko Štefanides, chief economist with the VÚB bank, said when discussing the kinds of impacts that the ageing of Slovakia’s population would have. “There will be not enough workers who would pay for the pensions of future retirees and thus we will need to save for our old age needs ourselves. A similar problem will also occur in health care, especially in the long-term care. While the number of older patients will increase, there will be less money coming from health-care levies.”

Based on prognoses made by Eurostat, the number of Slovak citizens will shrink by 800,000 people over the next 45 years, meaning that the population would decrease from 5.4 million now to 4.6 million in 2060.

Štefanides stressed that as the consequence of population ageing, the number of people in the productive age group (age 15 to 64) will decrease by more than 1.4 million and Slovakia will have the highest share of citizens over 65 years compared to the productive age group within the European Union.

“In other words, the demographic crisis within the whole EU will be the worst in Slovakia,” said Štefanides. “This means that the ratio of people older than 65 years to the active population will not be higher anywhere else than in Slovakia, having huge impacts on the economy and other areas.”

Demographic changes

Currently Slovakia enjoys the benefits from the large generation of so-called Husák’s children, the sizeable current labour force born during the population wave that started at the beginning of the 1970s, supported by the state’s pro-family policies. Its name comes from Gustáv Husák who became the country’s president in 1974. But since that time Slovakia has failed to replicate a similar population increase and to the contrary the national fertility rate has decreased significantly since the fall of the communist regime. This alone results in a larger share of older citizens.

The European Commission in its 2015 Ageing Report predicted that Slovakia’s share of citizens older than 65 years of age will increase from its current 14.2 percent of the total population to more than 35 percent in 2060. The share of very old citizens, those over 80 years, will increase from 3 percent to 13 percent.

“We are living longer, simultaneously fewer babies are being born and the fact also is that we are not very welcoming to immigrants, something that is currently a hot topic,” said Štefanides. “These are three demographic factors that in the future will determine what the population of Slovakia will look like.”

First, the life expectancy of men and women in Slovakia is predicted to increase, to roughly 87 years for women and 82 years for men by 2060. While this will be still less than the EU average, it is still a significant increase from life expectancy in 2013: an increase of 9.7 years for men and 7.5 years for women.

Secondly, the fertility rate for replacement of the current population is roughly 2.1 births per woman, but the fertility rate in Slovakia is now only about 1.34. It hit its lowest point ever around 2000 when it was about 1.2 births per woman. It is predicted that the fertility rate could increase, but only to 1.53 percent in 2060, still far below the replacement rate. In this respect Štefanides pointed out that no country in the EU is expected to achieve a replacement fertility level so Slovakia is not the only country in Europe facing this problem.

The third factor is that while there is a chance to remedy the productive-age population deficit by welcoming foreign immigrants, Slovakia is lagging behind the average for in-bound migration within the EU and the EC expects that the situation in Slovakia will not change dramatically and net migration will remain low.

Possible consequences

The predicted shrinking of Slovakia’s population and those remaining becoming much older means a lower number of productive workers and thus fewer contributors into the national pension scheme.

Štefanides noted that within the current old-age pension scheme, contributions of those who are currently working are used to pay pensions for retired persons within the so-called pay-as-you-go or first pillar of the Slovak system.

“The current situation is that about 2.3 million people contribute to the first pillar while about 1.2 million people are receiving pensions from it,” said Štefanides. “This means that currently 1.75 people work per pensioner and this is predicted to decrease to 0.98 in 2060.”

Štefanides recalled that a previous ageing report published by the EC three years ago predicted even a worse scenario but due to pension system changes adopted in 2012 it was somewhat ameliorated.

Economist Vladimír Baláž from the Institute for Forecasting of the Slovak Academy of Sciences pointed out that beginning in 2017, the retirement age for both genders will automatically be increased each year in relation to higher life expectancy, meaning that as people live longer the retirement age will go up. He said in the Sme daily that this method of adjusting the pension scheme started to be prepared during the term of former prime minister Iveta Radičová and that the current government has adopted it.

The Labour Ministry stated that other changes contributing to sustainability of the pension scheme that have been adopted by the current government include a modification of the valorisation mechanism for current pensioners, an increase in the maximum assessment base for calculation of old-age pension contributions by those working, and strengthening of intergenerational solidarity.

“The later retirement age will hardly please anyone,” wrote Baláž. “But from the professional point of view one should very well appraise this government’s step because it has significantly contributed to the sustainability of the pension scheme and public finances as well.”

Nevertheless, Štefanides warned that if further changes are not made the state may not manage to pay currently earned pensions and cover health care costs of the retired population in the future. He cited the findings of the Council for Budget Responsibility that under current policies, without other consolidation measures, the question of public finance bankruptcy will become topical in just three election terms, or after 12 years.

Proposed solutions

The Council for Budget Responsibility wrote that a solution lies in additional reforms and/or higher taxes. Štefanides said solutions include an increase in the fertility rate, boosting participation in the labour force, for example with more part-time workers and more pensioners working as well as marginalised groups of citizens who are not in the labour force, by more immigration, especially by attracting highly-educated foreigners, and increasing labour productivity. Other measures he proposes are related to the structure of the national pension scheme such as a reduction in the replacement rate of post-retirement income or an increase in income and payroll taxes.

Another proposed solution is to switch more responsibility for people’s future pensions onto individuals themselves and this includes the so-called second, privately-administered pension pillar and the third pension pillar of individual savings.

Peter Goliaš, analyst with the INEKO think tank, proposes that Slovakia adopt as a priority solution deceleration in the growth of newly-calculated pensions coming from the first pillar.

“Pensions as a ratio of one’s previous wage would be lower compared to today,” Goliaš told The Slovak Spectator, adding that there are also less politically-appealing alternatives like replacing pensions with one social benefit or acceleration of prolongation of the retirement age. “If the government does nothing, it will have to subsidise pensions more and more from the state budget, but this would require higher taxes and thus also slow development of the economy and standards of living.”

Goliaš thinks that immigration would solve Slovakia’s pension problems only if there was a massive inflow of foreigners and that is an issue that cannot be planned or on which calculations can be made.

“Nevertheless, Slovakia should make its immigration policy more flexible so that the country is more attractive, especially for educated foreign experts,”Goliaš said . “Qualified workers bring higher added value and have a bigger potential to create jobs for other people as well.”

According to INEKO, having high long-term unemployment is also part of the problem.

How much are pensions?

In 2014 the average old-age pension was about €400 per month and at this level it replaced about 47 percent of the average gross wage, Baláž noted. Based on the current structure of the national pension scheme, the EC report predicted that this ratio will decrease to 30.4 percent of the average gross wage in 2060.

But in this regard the Labour Ministry pointed out that this benefit ratio calculation does not take into consideration the second pillar. Michal Stuška, spokesperson of the Labour Ministry, told The Slovak Spectator that the ministry’s theoretical replacement ratio under the assumptions of a 40-year work career, retiring at the statutory retirement age and having earnings equivalent to the national average wage – and including pension benefits from the second pillar – lead to a replacement ration of 64.4 percent of the average net wage in 2013 and would gradually increase to 66.1 percent in 2053 when the second pillar is expected to account for 22.2 percent of the wage replacement. The replacement ration based on gross wage was calculated at 49.8 percent in 2013 and would increase to 51.8 percent in 2053 when the second pillar would account for 17.4 percent of the replacement income.

Stuška added that the EC report also did not take into consideration Slovakia’s minimum pension that the ministry believes will have a positive influence on the amount of pensions and their replacement rate. Parliament adopted legislation in mid-May introducing a minimum pension of 136 percent of the calculated subsistence level, which is €269.50 a month in 2015, but President Andrej Kiska vetoed the legislation and sent it back to parliament.

“For discussion about future pensioners it is unquestionably of key importance to look at their pension [replacement ratio],” said Stuška, adding that the amount of their pensions in regard to the quickly growing average wage “will decrease only moderately during upcoming decades and it will be even higher in 2060 that it is at today’s 47 percent.

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