Upload
winfred-thompson
View
221
Download
1
Tags:
Embed Size (px)
Citation preview
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
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
...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)
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...
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
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
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
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
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
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)
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
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
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
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
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
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
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
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
Stronger link to social Stronger link to social assistance scheme createdassistance scheme created
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!
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
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
Thank you for your Thank you for your attention!attention!