moldova pension reform workshop, chisinau june 10 – 11, 2008 bulgarian pension system phd. jordan...

MOLDOVA PENSION REFORMworkshop, Chisinau June 10 – 11, 2008

BULGARIAN PENSION SYSTEM

PhD. JORDAN HRISTOSKOV

MAIN TOPICS General overview of Bulgarian pension

system and reform Strengthening the link between contributions and

benefits and separation of social assistance from social insurance

Treatment of special privileges for certain occupations,

Introduction of the second pillar and readiness conditions,

Impact of reforms on labour costs, Lessons learnt, Pros and cons of the reforms undertaken.

Occupational sickness

Old age

Work injuries

Maternity

Invalidity

Death

General sickness

Unemployment

Fund “General sickness and

maternity”

Fund “Work injuriesand occupational

sickness”

Fund “Pensions”

Fund “Unemployment”

3.5 %(60:40)

0.4 – 1.1 % Employers only

22 % 5 % of which for the II pillar

(60:40)

1.0 %(60:40)

N

S

S

I

N

R

A

PUBLIC SOCIAL SECURITY IN BULGARIA

Motivation for radical pension reforms (1998 – 1999)

• Low and nearly flat rate pensions – the replacement rate in 1997 was 27%. The ratio between minimum and maximum pension was 1 : 3;

• De-motivation for participation in the public social security system and increase of the illegal labor market;

• Generous benefit formula and large practice of early retirement, and as a result of this:• Accumulation of pension promises without financial

coverage and future financial deficits;• Increasing social insurance contributions/decreasing

compliance rate;

Philosophy framework of the pension reform

Based on the World Bank conception for multipillar social protection system, considering the national traditions and specificity:

• Keeping the leading role of the solidarity PAYG system, but changing it parameters;

• A new paradigm – building a supplementary well regulated privately managed funded pension schemes – both mandatory and voluntary.

Content of the parametric reforms in solidarity I-st pillar

• Unification : covers all economical active population in one public scheme - incentives for labor mobility, low administrative costs;

• Supplemented with non-contributive pensions – 0 pillar (old age and invalidity social pensions, personal pensions) based on state budget transfers in fund “Non-labor pensions”;

• Gradually shifting the early retirement pensions in special segment of the II - pillar;

• Stronger qualifying condition for pension access in the I - pillar.

New retirement point system

OLD SYSTEM NEW SYSTEM MEN WOMEN MEN WOMEN

Retirement age

60

55

63

60

Insurance service

25

20

- -

Pension points

- . 100

94

Life expectancy

after retirement

15.4

23.2

13.5

19.0

Conclusion: the contributive period increases at the expense of the pension receiving period

Essential steps in the systematic part of the pension reform

Development of a mandatory fully funded II pillar with two types of pension funds: Occupational pension funds – early retirement pension plans for those

working in higher risk, sponsored by the employer; Universal (open) pension funds – life time pension schemes for those

born after 1959, sponsored by the employer and the employee; Regulation of the voluntary pension insurance (fully funded III

pillar) based on voluntary contributions from the employers and personal savings. Tax incentives;

Establishment of a strong state regulator – integrated supervision for all non-bank financial institutions;

Codification of the whole social security legislation in one act (bill) – Social Insurance Code

Good public – private partnership

I PILLARMandatory

public social security(PAYG)

NSSI

II PILLARSupplementary

mandatory pension insurance

(Fully funded)Private pension funds

III PILLARSupplementary

voluntary pension insurance

(Fully funded):Private voluntary

pension funds (since 1994);

Occupational pension funds, based on collective labor

agreements (since 2007)

Bulgarian pension modelBulgarian pension model

Universal (open) pension funds –

mandatory insurance for those born after 1959

(since 2002)

Occupation pension funds – mandatory for workers

from special categories of labor

(since 2000)

EU AND BULGARIA - STRUCTURAL CORRESPONDENCE (DISCREPANCY)

EU BULGARIA

Statutory public social security

(I pillar)

Public social security (Solidarity PAYG schemes)

(I pillar)

Occupational (corporative) pension

schemes(II pillar)

Supplementary statutorypension insurance

(Fully funded)(II pillar)

Individual pension savings

(III pillar)

Voluntary pension insurance (III pillar)

MAIN TOPICS General overview of Bulgarian pension system and

reform Strengthening the link between contributions

and benefits, Treatment of special privileges for certain

occupations, Separation of social assistance from social

insurance, Introduction of the second pillar and readiness

conditions, Impact of reforms on labour costs, Lessons learnt, Pros and cons of the reforms undertaken.

LINKING OF CONTRIBUTION AND BENEFITS – Policy measures

In order to create more incentives for longer contributing, following polices were taken:

Design a new benefit formula, taking into account the personal contribution throughout the whole working life;

Increasing the maximum pension and removing entirely the limits in 2010;

Financial separation of contributive from non-contributive pensions

LINKING OF CONTRIBUTION AND BENEFITS – Benefit formula (1)

The new legislation (2000) introduced a new benefit formula. All pensions had been recalculated applying the following formula:

Old Age Pension = CP * 1% * IC * AMII (12),

were: CP - Contribution period (years of service), IC - Individual coefficient of the pensioner, AMII (12) - Average monthly insurable income

in the last 12 months before granting the pension


The pension formula does not comprise directly the replacement rate. The pension level depends on the following three elements:

1. Length of participation in the system (each year of participation brings 1% of the average monthly insurable income. For the period of postponed retirement 1 calendar year of service brings 3% (5% from January 2009).


2. The pensioner’s individual coefficient – a ratio between the individual insurable income and the average country insurable income. This coefficient is a quantitative indicator for one’s contribution in the insurance system and stimulate the employee to require that their employers make social contributions on their real salary and not only on the minimum wage established for the country (which was a practice in private business). When calculating the individual coefficient, three consecutive years out of the last 15 years of service, before 31 December 1996, are selected by the person. The period after 31 December 1996 until the moment of retirement is included compulsory. In that way, the reference period in the benefit formula for those entering the labour market after 1994 is the whole working life.


3. The average monthly insurable income for the previous 12 months before retirement. This is an element, which creates a link between pension levels and the income which have to be replaced. This indicator is calculated and reported by the National Social Security Institute every mouth.

Reference periods for pensions – European practice

Minimum period of membership Reference periods

Belgium 0 Entire duration of insurance

Bulgaria 15Best 3 consecutive years in the last 15 till 1996 and entire period after 1997

Czech 15 All earnings since 1985Germany 5 Entire duration of insuranceEstonia 15 Full carreer from 1999Greece 15 5 best during the last 10 yearsSpain 15 180 monthsFrance 0 25 yearsIreland 5 Entire duration of insuranceItaly 20 Last 5 years or entire working life since 1996Cyprus 3 Entire period Latvia 10 Entire period since 1995Lithuania 15 Entire period Luxembourg 10 40 yearsHungary 15 Entire period since 1998Malta 10 Best 3 consecutive years in the last 10Austria 15 Bets 18 yearsPoland 0 Entire period for persons born after 1949Portugal 15 40 yearsRomania 15 Entire duration of insuranceSlovenia 15 18 consecutive years after 1970Slovakia 10 Entire period since 1984Sweden 0 Entire duration of insuranceUnited Kingdom10 Entire duration of insurance

The benefit formula for invalidity pensions

The benefit formula for invalidity pensions is also linked with real contributions with some particularities:

In case of general sickness invalidity the indicator CP is the real year of service + granted period which is equal to the difference between the age of the insured person and the retirement age. This period is reduced by special coefficients according to the percentage of the lost work capacity;

In case of occupational invalidity the last salary of the insured person is multiplied by special coefficients according to the percentage of the lost work capacity.

Maximum pension

Initially (2000) the maximum pension was increased from 3 to 4 minimum social old age pensions;

2004 – the maximum pension is 35% of the maximum insurable income (1000 EUR in 2008);

No limits on the pensions issued in 2010 and after.

Indexation (adjustment) is also part of he policy of linking the contribution and pensions Pre-reform period - ad hoc decisions,

depending on revenues of the PAYG scheme and the state budget;

2000 – 2006 – index between CPI and earnings increase in the previous year;

2007 - ad hoc decisions, depending on revenues of the PAYG scheme and the surplus in the state budget;

2008 – index according to the Swiss rule (50% of PPI + 50% of earnings increase)

Separation of contributive from non-contributive pension (1)

The contributive pensions, financed by fund “Pensions” are: old age pensions, general sickness invalidity pensions and survivals pensions; occupational sickness pensions are financed by fund “Occupational accidents and occupational diseases”;

These pensions are strongly linked with personal contribution throughout the whole working live of the insured person and they have minimum and maximum limits. The max – min ratio at present is 1 : 5

Some special measures for access to contributive pensions Relief pension access at age 65 (male and female)

with 15 year of work service; Unemployment benefits for long term

unemployed in pre retirement age; Special employment programs – help for retiring; Granted work service – maternity, army service; Possibility of “paying” pension points:

For the period of higher education In case of lacking up to 5 years of work service

PENSION FRAUDS !!!

Separation of contributive from non-contributive pension (2)

Non- contributive pensions are: social old age pensions, social and military invalidity pensions, personal pensions for orphans. Those pensions are financed by fund “Non labor pensions” with the main source – state budget transfers. The non-contributive pensions are flat rate. The social old age pensions are means tested – they are granted at the age of 70 if the average income per person in the family is below the minimum guaranteed monthly income (35 EUR).

Other social policies oriented to the groups in risk

Monthly income support assistance (after means test);

Winter electricity and heating assistance (after means test);

Maternity and family assistance (after means test)

Cash and in kind support (integration supplements) for the invalids;

Those policies are administered by Social Assistance Agency at the MLSP. The non-contributive pensions are still managed by National Social Security Institute, but there is a plan for shifting to the Social Assistance Agency.

MAIN TOPICS General overview of Bulgarian pension system

and reform Strengthening the link between contributions and




Impact of reforms on labour costs, Lessons learnt, Pros and cons of the reforms undertaken,

Privileges and privileged groups

Privileges of early retirement: Workers of I category of labour (with more

hazardous occupations); Workers of II category of labour (with less

hazardous occupations); Military and police servants; Teachers (special teacher’s pension fund);

Privileges of multiplied work service for 1 calendar year - for the workers of I labour category 1 year of service is equal to 1.67 or to 3 years, depending on the specific conditions and for the workers of II labour category I year of service I equal to 1.25 years.

Policies to limit privileges and their negative impact on financial stability

of pension fund Economic and administrative measures to

decrease the number of privileged workers (from 600 thousand to 150 thousand): closure of enterprises with dangerous and bad

working conditions; Improving the work environment and re-

qualification of the labor categories in some industries;

Increasing the qualification conditions and pension age for early retirement: For military and police servants the required

years of service increased from 20 to 25 years; For the workers with hazardous occupation, inc.

teachers, the pension age increased with 5 years.

Shifting the early retirement of special categories of labor to II

pillar Workers of I and II category of labor are covered

by insurance contributions in special mandatory occupational pension funds since year 2000;

The period of accumulation in the individual accounts is from 2000 to 2010; This is also a transitional period in which the insured has a choice – to get early retirement pension and to transfer the assets from his/her account to the public pension fund or to retire at “normal” pension age and to get the accumulated amount as a lump sum;

Early retirement after 2010 is possible only at the expense of the individual’s account in the occupational fund.

Some details about II pillar occupational pension funds

Occupational pension funds are mandatory and they are only for the workers with hazardous occupation;

The workers has a personal choice of a fund regardless their age;

The contribution rate is 12% for the workers of I labor category and 7% for the workers of II labor category. The contributions are at the expense of the employer only;

The early pensions are only fixed - time pensions – the time between early retirement age and the standard pension age;

The access to the individual account is not possible before pension age except in a case of life time invalidity.

Conditions for early pension from the occupational pension fund

The workers are eligible for early pension under the following conditions:

The workers of I category of labor can retire 8 years earlier if they have at least 10 years of employment in that labor category;The workers of II category of labor can retire 3 years earlier if they have at least 15 years employment in that labor category.

If these conditions are not covered the workers can get their money as a lump sum or as programmed withdrawals when they reach the standard pension age. They can also transfer the accumulated amount in their universal pension fund, if they are born after 1959.

OCCUPATIONAL PENSION FUND(OPERATION CHART)

EMPLOYERS

NRA

PMC

OPF

CB

II

IAW

EARLY

PENSIONS

WORKERS1 2

Universal (open) pension funds – main characteristics

The universal pension funds were establish by law in 2000 but started operating in 2002;

Based on transfers from the I pillar (PAYG) to the II pillar;

Coverage – everybody born after 1959; Membership – free choice and possibility of

shifting once a year; Contribution rate – 5%, shared between

employer and employee; Benefits – life time annuities; Regulation – “Draconian” in a process of

shifting to moderate regulation.

Introduction of II pillar – readiness conditions

Political will for transfers from I to II pillar;

Maintaining an unified register of insurers and insured persons;

Collection of contributions and compliance control by state institution (NSSI and NRA);

Special state regulator (initially) and integrated regulator from 2003;

State incentives (tax relieves, training, PR campaign)

UNIVERSAL PENSION FUND(OPERATION CHART)

EMPLOYERS

NRA

MPC

UPF

CB

II

IAI

ANNUITY

WORKERS

WORKERS

SELFEMPLOYED

SELFEMPLOYED

Two main aspects of the reform impact on the labor

costs

The positive impact of the parametric reforms in the I pillar;

The “double price issue” or the transition costs of the II pillar. The effect from the II pillar is contradictory in a short and medium term and positive in a long term.

The positive effects from the reforming I pillar

The process of increasing contribution rate and decreasing collection rate was stopped;

The improvement of the system dependency ratio allows the Government to decrease the contribution rates;

The linkage between contributions and benefits improved the labor force participation in the official economy, encouraging employees and self-employed to discover part of their real incomes.

The impact of the II pillar on the labor costs The transition costs are influenced by the

rate of contribution diverted to the II pillar, the total number of insured persons who joined the universal pension funds and the average earnings of the II pillar participants.

In order to limit these costs Bulgaria applied the so-called cautious approach in the design and development of the II pillar.

Other state policies compensating the increase of the labor costs Transfers from the state budget on account of

other tax revenues – the subsidies increased from 1% to nearly 3% of GDP;

Increasing the tax base and improving the contribution compliance by compulsory registration of labor contracts and introduction of minimum insurance thresholds by occupational groups and economic activities;

Shifting part of the cost to the current beneficiaries by applying less favourable (thrifty) indexation rules;

Establishing pensions reserved fund

Conditions for a successful pension reform

• Strong political will and responsibility with large public support

• Favorable macroeconomic environment• Favorable public attitude • Institutional capacity and well developed

information and communication system • Bridge between reformers and researchers • Technical and financial support by

international community• Active PR

Adequacy of the reformed pension system Access to pensions – almost full coverage

of the population. Conflict points – high unemployment rate among the population in pre-retirement age;

Replacement rate from the three pillars (final goal of the reform) – 70 – 80%, as follows: I-st solidarity pillar – 40%; II-d funded pillar – 20%; III-rd funded pillar - 10 – 20%

Individual accounts, good motivation and personal choice in II-d and II-rd pillar.

Outcomes of the parametric reforms in the first pillar

Improvement of the dependency ratio – from 104 pensioners to 100 insured in 1999 to 82 pensioners to 100 insured in 2007

Early retirement is shifted from first to second pillar (transitional period to 2010)

Enlargement of the coverage and the tax basis of the social insurance, including due to the incentives of participation in the second pillar

Improvement of the replacement rate - from 34% in 1999 to 43 in 2007

Widening of the pension differentiation – from 1 : 3 in 1999 to 1 : 5.5 in 2007

Pension coverage in Bulgaria /private pension funds members as % of the labor force/

Source: Financial Supervision Commission

Funds2002 2003 2004 2007

Universal 24,70% 34,03% 41,93% 66,52%

Occupational

3,29% 3,48% 3,69% 3,79%

Voluntary 10,28% 10,88% 11,20% 14,42%

Total coverage:

38,27% 48,38% 56,82% 84,73%

Source: Financial Supervision Commission

0

1000000

2000000

3000000

4000000

5000000

2002 2003 2004 2005 2006 2007 2008 2009 2010

Universal Professional Voluntary Total

Net assets accumulation in the pension funds (thousand BGN)

6.4

2.7

% GDP

Sustainability of the new pension system against time challenges

Risks for the parametric part of the reform

Economical risk - negative growth, employment and income drop, bankruptcy in the real sector, high percentage of the gray economy

Demographic risk – worse than expected rate of natural growth, new emigration wave and others

Management risk – simultaneous reforms – health care reform, economic restructuring, military reform.

Political risk – populist solutions, solving the problems of economy restructuring, unemployment and decreasing of birth rate at the expense of social security.

Sustainability of the new pension system against time

challenges

Risks for the system part of the pension reform

Finance destabilization, bankrupts and collapse of the trust in the reform

Bad management of the pension assets and low profitability

Political risk – suspension of the reform and regressive steps towards the old system

Institutional risks – bad public – private partnership

Alternatives of the current pension model

Two alternative solutions are under discussion in the public space:

Absolute domination of the public PAYG system and restriction of the funded schemes only as a voluntary pension saving plans;

Privatization of the public pension system – the Chilean model

Why we should not rely only on the solidarity PAYG system?

The aging of the population and intensive emigration make the future pensions of the present young generation very risky;

Lack of personal choice; Lack of motivation among the young

people to participate in the solidarity system;

Lack of accumulation and capitalization of pension assets.

Why we should not remove the public solidarity PAYG

system? PAYG system has a leading role in most of the

developed countries. It is one of the great achievements of the civilization;

It is almost impossible to reject (or to compensate) the accrued pension rights of the middle and pre-retirement age population;

The transitional costs are very high. The double price issue;

Bilateral and multilateral agreements in the social security area can not be canceled easily. EC - 1408 Regulation;

The social protection of the elderly population can not be exposed to the risk of the emerging capital market.

THANK YOU FOR YOUR ATTENTION!

? QUESTIONS ?

moldova pension reform workshop, chisinau june 10 – 11, 2008 bulgarian pension system phd. jordan...

Documents

pension access

maximum pension

accumulation of pension

voluntary pension insurance

pension reform development

radical pension reforms

types of pension funds

bulgarian pension system