Slovenian Pension System in the Context of Upcoming Demographic Developments

1
Slovenian Pension System in the Context of
Upcoming Demographic Developments

• Boris Majcen and Miroslav Verbic
• Institute for Economic Research

2
Contents of the Presentation

• Relevant characteristics of the on going
  Slovenian pension reform
• Estimated effects of the pension reform on fiscal
  sustainability and welfare
• Supplementary pension savings
• Concluding remarks

3
Pension Reform Options

• Higher contributions (or budget transfers)
• Lower benefits
• Later retirement
• Keeping status quo not possible!
• Who will loose? Only young and future generations
  or also pensioners?
• What about pension reform in Slovenia ?

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Relevant characteristics of the pension reform

• Improved horizontal equity in the pension system
• The gender divide regarding eligibility and
  benefits considerably narrowed (equalization of
  accrual rates, eligibility criteria for women
  closer to those for men)
• Greater emphasis on the principle of vertical
  equity or solidarity (minimum and maximum
  pension base, not capped social security
  contributions)
• Flexible retirement with bonuses and maluses
• Enabled development of supplementary pension
  savings within the second pillar
• Gradual introduction of many stated changes
• The pension system is highly intransparent

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Lower benefits

• Pension base from 10 to best 18-year average
  of net wages
• Acrual rates from 85 of pension base to 72,5
  (till 2024) equilized acrual rates for men and
  women
• Correction of acrual rates also for the existing
  pensioners
• Revalorization of pension base (horizontal
  equalization of pensioners)
• Indexation of pensions
• Maximum pension base 4 times minimum pension
  base

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Later Retirement

• Women Eligibilty criteria
• pension qualifying period (p.q.p.) from 35 to 38
  years
• Pensionable age from 58 to 61 years (p.q.p. 20
  years)
• Pensionable age from 55 to 63 years (ins.period
  15 years)
• Early retirement no special provisions with
  some exemptions
• Flexible retirement
• The ageing problem solved?

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• Table 1 Estimates of total balance of the state
  pension fund (in of GDP) using different
  assumptions about retirement age and indexation
  level of pensions
• Source Calculations using generational accounts
  model (March 2007) cf. Verbic (2007, p. 281).

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• Figure 1. Welfare effects in Slovenia in case of
  applying different sources of financing the
  pension system
• Source Authors simulations using SIOLG 2.0.

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The Second Pension Pillar

• Includes approximately 400.000 insured persons.
• Low participation of employees from medium-sized
  and small enterprises.
• Relatively underdeveloped system low collected
  premia and low profitability.
• Pension schemes can be individual or collective.
• Tax reliefs are substantially more favourable
  with collective schemes however, they are
  conditional on at least 51 participation of
  employees in an enterprise.
• High administration costs.
• Highly regulated system required minimal rate of
  return amounts to 60 of yield on long-term
  government bonds.

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Figure 2. Supplementary pension savings required
in order to keep the total pension at the given
level

• Source Authors simulations using SIOLG 2.0.

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• Figure 3. Expected change in the supplementary
  pension savings required in order to keep the
  total pension at the given level in case of
  increasing retirement age to 65 years
• Source Authors simulations using SIOLG 2.0.

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• Figure 4. Expected change in the deficit of the
  Slovenian state pension fund in case of mandatory
  second pillar keeping the total pension at the
  2000 level
• Source Authors simulations using SIOLG 2.0.

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Concluding Remarks

• Implementation of the pension reform not
  sufficient to compensate expected demographic
  developments
• The level of expected deficit of the
  PAYG-financed state pension fund is worrying
• Higher activity levels among elderly and changed
  indexation rule would substantially decrease
  state pension fund deficit
• The volume of supplementary pension saving is
  insufficient at present to compensate the
  deterioration of rights from the first pension
  pillar (insufficient participation and too low
  premia)
• 8,5 of net wage savings for compensation of
  total effects of pension reform (5 for
  compensation of the pension legislation from
  2005)
• Increasing retirement age by one year reduces the
  additional second pillar savings by 0,4
  percentage points