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 government’s 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. Old assessment base Min: minimum wage Max: 32 000 SKK (occasionally ad hoc increasedfrom 1988 till 2003) 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 • high degree of leveling of pension rights

11. high level ofredistribution

12. rapid nominal wage increase not linked to pension rights

13. New assessment base Min: minimum wage Max: 3 times average wage New 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)

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. Reform’s 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. 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: 9219 SKK Brother 2: 19627 SKK Difference: SKK 10408 SKK The second brother’s pension is more than twice the pension of the first brother. UNACCEPTABLE! Preferential treatment of longer working life

21. Equal 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

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!