challenges for pension reforms in eastern europe zbigniew derdziuk president

Challenges for pension reforms in Eastern EuropeChallenges for pension reforms in Eastern Europe

Zbigniew DerdziukZbigniew Derdziuk

PresidentPresident

Social Insurance Institution (Social Insurance Institution (ZUSZUS) )

Montevideo, Uruguay, 19-20 March 2013

2

EU countries in Eastern EuropeBulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia

Challenges for pension reforms in Eastern Europe

The object of study

The subject of study

• Main reasons for reforms

• Current and future reforms


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Weak capital markets after transitions in 90-s

Fast economic growth as result of EU pre and post accession

Introduction of the 2nd pillar coincided with period when the rates of return in global capital markets were high

Active public government social campaign

High number of people entering to the labour market and to the system born in 70-s and 80-s (baby boom)


Introducing funded pension pillar - background


4

Main reasons of current reforms – rising life expectancy


60,0

65,0

70,0

75,0

80,0

85,0

90,0

1960 1970 1980 1990 2000 2005 2009 2010 2020 2030 2040 2050 2060

males females

Source: European Commission, 2012 Ageing Report: past trends in life expectancy at birth (1960-2009); projection of life expectancy at birth (2010-2060)

retirement ages not adjusted to rising life expectancy too many early retirements low effective exit age


5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0-14 15-64 GAP (2010-2060) 65+

rising dependency ratio low employment rate of older workers (55-64)

Main reasons of current reforms – negative trends in population structure

Source: European Commission, 2012 Ageing Report: decomposition of the population by age-groups (2010-2060)


2060


6

pension schemes are not balanced high burden of national budgets and PAYG systems

Main reasons of current reforms – rising pension expenditure to GDP

-5

0

5

10

15

20

2010 2060

Source: European Commission, Fiscal Sustainability Report 2012; Increase in total budgetary expenditure, 2010-2060, % of GDP



7

Increase effective retirement age - link to life expectancyBulgaria, Czech, Poland, Romania, Slovakia

Reduce early retirementBulgaria, Czech, Poland

Increase of the minimal length of service Bulgaria

Benefit indexation – to consumer prices instead of to wagesRomania, Slovakia

Increase employment rate of older workers Bulgaria, Lithuania, Slovenia


EU recommendations for reforms


Source: European Commission, White Paper on Pensions, 16th February 2012

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Increasing of the pension age (gradually)Bulgaria, Czech, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia

Reducing early retirementCzech, Poland, Romania

Increasing of the minimal length of service Bulgaria, Czech

Stricter pension calculation methods (elimination of inequalities)Hungary, Romania

Stricter indexation (price indexation)Czech, Estonia, Hungary, Latvia


Latest reforms



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Hungary2010 – abolished funded pillar, pension assets were used to finance current

expenses Estonia2009-2011 – temporary suspension of the transfers to the funded pillar to

reduce PAYG deficit

Latvia2009 – reduced contributions: from 8% to 2%, in 2012 increasing up to 6%


Latest reforms – changes in funded pension pillar



10

LithuaniaReduced contributions: from 5.5% to 2% with the possibility of increasing them

after crisis

Poland2011 – reduced contributions: from 7.3% to 2.3%; the contribution rate to

funded pillar will be increasing up to 3.5% in 2017

Czech2013 – workers will be able to transfer 3 pps. of their mandatory pension

insurance payments to private funds on the condition that they will add a further 2 pps. of contributions from their income


Latest reforms – changes in funded pension pillar



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Pension reforms in CEE countries are at early stage – there is no withdrawal phase yet – only contributory phase

Withdrawal phase is provided in Europe:i.a. Sweden and Denmark

Sweden is a good example in implementation withdrawal phase – three pension products with different risks distribution (inflation, longevity and investment risk) – withdrawal provided by a state institution - Pensionsmyndigheten (Swedish Pension Agency), which gives withdrawal sustainability and cost effective management

Withdrawal phase – funded pension pillar



Source: Heinz P. Rudolph, Anita M. Schwarz, Organizing Benefit Payments from Private Pension Funds in Poland, December 2012

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Pension reforms are constantly needed: - to keep sustainability pension systems

- to minimise burden of national budgets- to keep balance and equitability between working and retired people (difficult situation on labour market vs. retirement privileges for retired)

Pension reforms have to be introduced basing- on accrual calculations - with economic projections in long- term perspective

Rising and equalisation retirement age need to be linked to the rising life expectancy and supported by labour market reforms

Reforms are subject to wrong and not reasonable changes since policymakers are afraid of taking not popular decisions (political risk)

Conclusions



Thank you for your attentionThank you for your attention

Zbigniew DerdziukZbigniew Derdziuk

PresidentPresident

Social Insurance Institution ZUSSocial Insurance Institution ZUS

[email protected] @zus.pl

www.zus.plwww.zus.pl

challenges for pension reforms in eastern europe zbigniew derdziuk president

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