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Pension Reform in Central and Eastern Europe

Pension Reform in Central and Eastern Europe. Elaine Fultz Senior Specialist in Social Security ILO Budapest. Presentation:. ILO Budapest regional technical cooperation project Regional trends Issues and Problems. Regional trends:. Change design features of public pension schemes

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Pension Reform in Central and Eastern Europe

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  1. Pension Reform in Central and Eastern Europe Elaine Fultz Senior Specialist in Social Security ILO Budapest

  2. Presentation: • ILO Budapest regional technical cooperation project • Regional trends • Issues and Problems

  3. Regional trends: • Change design features of public pension schemes • Strengthen scheme financing • Scale down public schemes and replace with privately managed individual savings

  4. Change design features: More individualized benefits eliminate redistribution count more years of work Notional defined contribution (NDC)

  5. Retirement Ages – New EU States

  6. Unified collectionsLatvia (1996)Slovenia (1996)Estonia (1999)Hungary (1999)Bulgaria (2002)Romania (2003)

  7. Pension Privatization • Averting the Old Age Crisis, World Bank, 1994 • Pay as you go pension schemes are unsustainable in the face of demographic aging. • Governments are corrupt, tend to over-promise. • Both problems can be circumvented by scaling down pension systems and replacing them with privately managed individual savings accounts.

  8. Pension privatization in the new EU member states

  9. Issues and Problems • Impact of second pillar on first • Transitional financing costs • The “hole” in the financing of the public pension system created by diverting part of the contribution rate to the new private savings accounts

  10. Transitional financing costs in Poland Chlon, Agnieszka, "The Polish Pension Reform of 1999," in Fultz, E., Ed., Pension Reform in Central and Eastern Europe, Vol. 1, ILO: Budapest, 2002.

  11. Private Investment ReturnsILO reports (Dec. 2004) • Hungary 3.75% average annual internal rate of efficiency over first 6 years of operations 6.6% inflation rate • Poland 20.3% increase in value of second pillar savings over December 1999 – June 2004 24% inflation rate

  12. Hungary – end of 2005(1998-2004) • 6.8% average annual return • 6.1% average inflation • 0.7% positive return to workers

  13. Why the low/negative returns? • Poor stock market performance? • Industry charges and fees?

  14. Admin. charges and their impact Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.

  15. Rethinking of Privatization • Flaws in economic logic • Disregard of necessary preconditions for success

  16. World Bank (2001): “In the end, both types of schemes (pay as you go and funded) require a subsequent generation to fulfil the generational contract, either in the form of current contributions (in unfunded schemes) or through the purchase of accumulated assets (in funded schemes). Money put aside for retirement alone does not change this fact …”

  17. World Bank (2006): Initial Conditions for Multi-Pillar Reforms • Macroeconomic stability • Developed banking sector • A low risk for corruption

  18. Many Countries Had High Inflation at Reform

  19. Poor Financial Sectors Characterize Some ECA Multi-pillar Reformers

  20. Many Reformers Had Poor Corruption Index at the Time of Reform

  21. New understanding • An old age crisis will not be averted by a change in pension financing • Under any type of pension system, what matters is national economic output and the ratio of workers to pensioners. • Creating a “hole” in the financing of the public pension system will make addressing the problem of demographic aging more difficult.

  22. Employment rates in 2002 Chlon, Agnieszka, "Funded pensions in the transition economies of Europe and Central Asia: Design and Experience", FIAP, 2004.

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