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Pension Reform in Pension Reform in the Slovak the Slovak republic republic Experiences and Experiences and Recomendations for Recomendations for Moldavian Government Moldavian Government Pension Reform Workshop Leogrand Hotel Chisinov, 10-11 June 2008 Marek L e n d a c k y Slovak Republic

Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

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Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government. Pension Reform Workshop Leogrand Hotel Chisinov, 10-11 June 2008. Marek L e n d a c k y Slovak Republic. Slow reaction of social system to market economy. - PowerPoint PPT Presentation

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Page 1: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Pension Reform in Pension Reform in the Slovak the Slovak republicrepublic

Experiences and Experiences and Recomendations for Recomendations for Moldavian GovernmentMoldavian Government

Pension Reform WorkshopLeogrand HotelChisinov, 10-11 June 2008

Marek L e n d a c k ySlovak Republic

Page 2: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Slow reaction of social Slow reaction of social system to market economysystem to market economy

Socialism era – Social Security Act adopted in 1988 So called „Velvet Revolution“ in November 1989 Financing of social security from state budget Transformation from planned to market economy started

in 1990 Worsening of economic and demographic situation Splitting of Czech and Slovak republic in 1993 First structural change in 1994 – creation of Social

Insurance Agency Introducing contributions as form of financing social

insurance benefits Further structural changes followed

Page 3: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

...early steps in pension ...early steps in pension system not sufficientsystem not sufficient

Introduction of supplementary pension insurance companies (1996)

Exclusion of social assistance kind benefits from pension system(1997)

Removing special early retirement provisions (2000)

Contributions for working pensioners, limitation of substitute periods, increasing contribution rate (2001)

Page 4: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Pension reform agendaPension reform agenda

„„The government The government willwill create conditions for gradual establishment create conditions for gradual establishment of a safe and fair pension system, based on three pillars, which of a safe and fair pension system, based on three pillars, which will be universal for the entire economically active population. will be universal for the entire economically active population. The primary goal of the reform is to halt further rise of the The primary goal of the reform is to halt further rise of the implicit debt of the pay-as-you-go financed pension system and implicit debt of the pay-as-you-go financed pension system and to increase individual involvement in decisions on personal to increase individual involvement in decisions on personal well-being after retirement.“well-being after retirement.“

Programme Declaration of the Government of the Slovak Republic, 2002Programme Declaration of the Government of the Slovak Republic, 2002

although the wording of the reform plans were considered very ambitious for a four-year time horizon, the government managed to push through all reform ideas

...but some trade offs had to be taken...

Page 5: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

The concept of the reformThe concept of the reform

Step 1Step 1 Social Insurance Act (2004) parametric reform of PAYG pension system

Step 2Step 2 Old-Age Pension Savings Act (2005) structural change: mandatory, fully-funded

component of statutory pension system

Step 3Step 3 Supplementary Pension Savings Act (2005) transformation of supplementary pension

schemes to standard pension funds

Page 6: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Public perception of the Public perception of the reformreform The reform approach has found a positive public feedback

Do you agree with the concept of the pension reform?

0% 20% 40% 60% 80% 100%

1

Yes, I agree

No, I disagree

Do not know

Page 7: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Architecture of the new system

Old age pension contributions

Old age pension contributions

Old age pension

Old age pension

Option 1 Option 2

Social

Insurance

Agency

Social

Insurance

Agency

Individual

Account in

PAMC

Tier 1 Tier 1 Tier 2

Page 8: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Timetable of the PAYG reformTimetable of the PAYG reform

June 2003June 2003 Slovak government

approved the new Social Insurance Act

September 2003September 2003 parliament passes the

government’s proposal

October 2003October 2003 President vetoes the

Act parliament overrides

the veto, confirms the new legislation

Page 9: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

What has the reform left What has the reform left behind?behind?

high degree of leveling of pension rights high level of redistribution

weak link between contributions paid and benefits

low retirement age; different treatment of men and women

preferential treatment of certain groups (with exception of military forces and some other groups)

threat of massive and unsustainable deficits in the pension system

low motivation to contribute to the system

Page 10: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

high degree of leveling of pension rights

Old benefit formulaOld benefit formula

Up to 2500 SKK 1/1From 2500 to 6000 SKK 1/3From 6000 to 10 000 SKK

1/10Above 10 000 SKK...Zero!

Assessment period: best 5 years

Old assessment baseOld assessment base

Min: minimum wage

Max: 32 000 SKK (occasionally ad hoc

increased from 1988 till 2003)

Page 11: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

high level of redistribution

Replacement rates

0%

20%

40%

60%

80%

100%

120%

0,4 0,5 0,6 0,7 0,8 0,9 1,0 1,1 1,2 1,3 1,4 1,5 1,6

’old’ benefit formula

’new’ benefit formula

Page 12: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

32783770

45435379

62947195

81549226

1000310728

1143012365

1351114365

0

2000

4000

6000

8000

10000

12000

14000

16000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Years

Average monthly wage in SKK

rapid nominal wage increase not linked to pension rights

Page 13: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

New benefit formulaNew benefit formula

P =APWP*L*APV

APWP = average personal wage point

L = length of carrier APV= actual pension value (level of

replacement rate for average person)

New assessment New assessment basebase

Min: minimum wage

Max: 3 times average wage

Page 14: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

low retirement age with different treatment of men and women

53

54

55

56

57

58

59

60

61

62

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Page 15: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

miners, pilots, special chemical industry, deep divers, professional dancers

strong resistance and lobbing very long transitional period (till 2023) ...but effectively much more shorter...

...but some categories still persist: military forces, police, custom officers have special social system

preferential treatment of certain groups

Page 16: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Problematic issues in PAYG Problematic issues in PAYG – lessons learned– lessons learned

publicly unacceptable disparities between low and high earners (shift from unsustainable solidarity to individual responsibility)

publicly unacceptable disparities between people working after reaching the statutory retirement age and retiring shortly before and after the overhaul of PAYG system (January 1, 2004)

publicly unacceptable disparities between widowers having lost their spouse before January 1, 2004 and widowers suffering after that date

Since the purely PAYG financed system covers all current retirees, such disharmony was publicly viewed as one of the major shortcomings of the pension reform, prompting the government to step in and polish the discrepancies

Page 17: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Reform’s impact on pension Reform’s impact on pension benefitsbenefits

new benefit formula strengthens the link between contributions paid to the pension system and the level of benefits via point system

effectively eliminates relatively generous solidarity between low-earners and high-earners*

fixes the individual replacement rate at about 50 %

Replacement rates

0%

20%

40%

60%

80%

100%

120%

0,4 0,5 0,6 0,7 0,8 0,9 1,0 1,1 1,2 1,3 1,4 1,5 1,6

’old’ benefit formula

’new’ benefit formula

transitional period originally set at 3years... UNACCEPTABLE!...postponed to 11 years

too many low income earners belowsubsistence minimum...UNACCEPTABLE!...closer link to social assistance schemeimplemented

Page 18: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Stronger link to social Stronger link to social assistance scheme createdassistance scheme created

Subsistence minimum 5130 SKK (for productive person)

Special provision for pensioners – 25% of their pension not taken into account when calculating social assistance benefit + additional 1% for each further year of insurance

Covering all types of pensions, but only for old-age additional 1% benefit applied

Ministry of Labor responsible for sending information on actual subsistence minimum level to SIA

SIA responsible for information towards poor pensioners (in productive age) or directly to state offices providing social assistance benefits (in post-productive age 62+)

no automatic mechanism, no „pension right“, mandatory claim

31.12.2007 – 38 606 pensioners out of 1 244 392

Page 19: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Stronger link to social Stronger link to social assistance scheme createdassistance scheme created

Page 20: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Preferential treatment of Preferential treatment of longer working lifelonger working life

Assumptions:Assumptions: two brothers (twins) first brother born Dec. 31,

1936 second brother born Jan. 1,

1937 completely identical working

career, earning 1.85 times the nation-wide average monthly wage

period of pension insurance: 38 years

retiring 7 years after reaching the statutory retirement age!!

What pensions?What pensions?

Brother 1: 9 219 SKKBrother 2: 19 627 SKK

Difference: SKK 10 408 SKK

The second brother’s pension is more than twice the pension of the first brother.

UNACCEPTABLE!

Page 21: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Equal treatment of survivor’sEqual treatment of survivor’s

Widower’s pensions

till December 31, 2003, widowers were not entitled to almost any kind of survivor’s pensions (only small fixed sum)

the new Social Insurance Act has established their right to widower’s pension, a move that set a hardly accepted difference between men who lost their wife before Jan 1, 2004 and after this date

RESULT:

new legislative initiative aimed at erasing this disparities adopted in 2006

Page 22: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

ConclusionsConclusions

multi-pillar reform approach appears to be an effective way to ensure the long-term sustainability of the pension system and meeting the pension promise, but in transitional period flexible PAYG system changes are inevitable

fast implementation of the reform did not deliver absolutely publicly acceptable results (e.g. few extremely high pensions), urging the government to accept measures to smoothen the transition from one-pillar pension system to modern multi-pillar system

special focus needed to create „rescue wheel“ in social assistance scheme when creating pure point pension system

Page 23: Pension Reform in the Slovak republic Experiences and Recomendations for Moldavian Government

Thank you for your Thank you for your attention!attention!