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Challenges of Bulgarian Pension System

Challenges of Bulgarian Pension System. Asta Zviniene Sr. Social Protection Specialist Human Development Unit Europe and Central Asia Region World Bank March 16, 2010. Features of Current System. Average pension spending for the region

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Challenges of Bulgarian Pension System

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  1. Challenges of Bulgarian Pension System AstaZviniene Sr. Social Protection Specialist Human Development Unit Europe and Central Asia Region World Bank March 16, 2010

  2. Features of Current System • Average pension spending forthe region (does not include state financed pension supplements)

  3. Pension Spending in EUEuroStat2006 • Western Europe: better demographics, better coverage, also often not self-sustainable • Bulgaria: average spending among EU10, but contribution rates the lowest • Bulgaria: 8.5% for 2008, NSSI • Poland, Hungary – substantial reforms in 2009

  4. Features of Current System • Average pension spending for the region (does not include state financed pension supplements) • Relatively low retirement ages

  5. Ret. Ages and Life Expectancy • Retirement ages in the OECD are almost universally at 65 for men and women • Target retirement age of 65 in increasingly the norm in Eastern and Central Europe; gender gap was never defendable and is being eliminated • Crisis has triggered active debates on retirement age increases in Lithuania, Latvia, Poland, Romania

  6. Features of Current System • Average pension spending for the region (does not include state financed pension supplements) • Relatively low retirement ages • Widely used early retirement and disability schemes

  7. Early Retirement is Prevalent(Effective retirement age is 59/60, even lower if disability is included)Proportion of population retired before reaching certain age

  8. Features of Current System • Average pension spending for the region (does not include state financed pension supplements) • Relatively low retirement ages • Widely used early retirement and disability schemes • Ad hoc pension increase practices • Very low contribution rates

  9. Pension Contribution Rates 2009 reforms: Romania 27.5% to 31.3%; Lithuania 26.3% to 28.3%; Russia 20% to 26%;

  10. Recent Fiscal Performance(40% budget subsidy in 2008)

  11. NewChallenges • Triple demographic hit: • Baby boomer retirement • Sharp drop in fertility • Emigration • Easy gains in coverage and wage growth are in the past • New macro-economic pressures in state budget makes previously generous budget support unsustainable • High scale budget support is distortive as it subsidizes insured population at the expense of general population (often poorer)

  12. Projected Fiscal PerformanceAssumes further 20% drop in pensions

  13. What can be done on the financing side? • Increase coverage • not much room without increasing effective retirement ages

  14. Coverage & early retirement age Coverage is calculated as number of contributors over population aged 20-65

  15. Formalization of labor force typically depends on per capita income

  16. What can be done on the financing side? • Increase coverage • not much room without increasing effective retirement ages • Raise contribution rates – contrary to the recent policy • Rationalize pension system into one where state budget provides basic pensions for all and self-financing insurance scheme provides contributory pension supplements for insured • Review investment and disbursement rules for the Silver Fund – amounts are small compared to needs

  17. What can be done on the expenditure side? • Raise effective retirement ages • Reduce early retirement and disability inflows • Eliminate gender differences in retirement ages • Increase statutory retirement age • Increases do not have to start during the crisis, but decision can and should be taken now (people will have more time to adjust) • Review rules for pension supplements • Ensure rules based inflation indexation of benefits • Cut pension levels • Not desirable, but may result from inaction

  18. How can benefits be raised in a fair and sustainable manner? • Raising effective retirement ages can substantially increase benefits - especially for women from 2nd pillar • Improved regulations in the 2nd pillar can make investments safer without reducing potential returns • Better investment procedures of Silver Fund can help to defray more costs of aging • Freeing up state budget for investment in physical and human capital can raise growth rates of the economy increasing wage and pension incomes

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