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

1
Pension Reform in the Slovak republicExperiences
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
2
Slow reaction of social system 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

3
...early steps in pension system 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)

4
Pension reform agenda

• The government will create conditions for
  gradual establishment of a safe and fair pension
  system, based on three pillars, which will be
  universal for the entire economically active
  population. 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 to
  increase individual involvement in decisions on
  personal well-being after retirement.
• Programme 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...

5
The concept of the reform

• Step 1
• Social Insurance Act (2004)
• parametric reform of PAYG pension system
• Step 2
• Old-Age Pension Savings Act (2005)
• structural change mandatory, fully-funded
  component of statutory pension system
• Step 3
• Supplementary Pension Savings Act (2005)
• transformation of supplementary pension schemes
  to standard pension funds

6
Public perception of the reform

• The reform approach has found a positive public
  feedback

7
Architecture of the new system
Option 1
Option 2
Old age pension contributions
Old age pension contributions
Tier 1
Tier 1
Tier 2
Social Insurance Agency
Social Insurance Agency
Individual Account in PAMC
Old age pension
Old age pension
8
Timetable of the PAYG reform

• June 2003
• Slovak government approved the new Social
  Insurance Act
• September 2003
• parliament passes the governments proposal
• October 2003
• President vetoes the Act
• parliament overrides the veto, confirms the new
  legislation

9
What has the reform left 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

10

• high degree of leveling of pension rights

Old benefit formula Up to 2500 SKK 1/1 From
2500 to 6000 SKK 1/3 From 6000 to 10 000 SKK
1/10 Above 10 000 SKK...Zero! Assessment period
best 5 years
Old assessment base Min minimum wage Max 32
000 SKK (occasionally ad hoc increased from 1988
till 2003)
11

• high level of redistribution

12

• rapid nominal wage increase not linked to pension
  rights

13
New benefit formula P APWPLAPV APWP
average personal wage point L length of
carrier APV actual pension value (level of
replacement rate for average person)
New assessment base Min minimum wage Max 3
times average wage
14

• low retirement age with different treatment of
  men and women

15

• preferential treatment of certain groups

• 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

16
Problematic issues in PAYG 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

17
Reforms impact on pension benefits

• 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
  

transitional period originally set at 3 years...
UNACCEPTABLE! ...postponed to 11 years
too many low income earners below subsistence
minimum...UNACCEPTABLE! ...closer link to social
assistance scheme implemented
18
Stronger link to social assistance 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

19
Stronger link to social assistance scheme created
20
Preferential treatment of longer working life

• 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?
• Brother 1 9 219 SKK
• Brother 2 19 627 SKK
• Difference SKK 10 408 SKK
• The second brothers pension is more than twice
  the pension of the first brother.
• UNACCEPTABLE!

21
Equal treatment of survivors

• Widowers pensions
• till December 31, 2003, widowers were not
  entitled to almost any kind of survivors
  pensions (only small fixed sum)
• the new Social Insurance Act has established
  their right to widowers 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

22
Conclusions

• 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

23
Thank you for your attention!