Pension Reform in Central and Eastern Europe and the Commonwealth of Independent States: Trends, Iss

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Pension Reformin Central and Eastern Europe and
the Commonwealth of Independent States Trends,
Issues and Challenges"Social security without
borders"Joint ISSA-CISS-OISS High-Level
Interregional Meeting on Pension Reforms in the
Americas, Central and Eastern European Countries
and the Commonwealth of Independent States 9
December 2008, Santiago, Chile

• Kenichi Hirose
• Senior Specialist in Social Security
• Sub-regional Office for Central and Eastern
  Europe
• International Labour Organization, Budapest
• Email hirose_at_ilo.org.

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ILOs global mandate in Social Security

• Social Security is a core component of ILOs
  Decent Work Agenda
• Increase member States capacity to develop
  policies focused on improving social security
  systems and extending social security coverage
• Improve member States capacity to manage social
  security schemes and to implement policies
  focused on improving social security systems

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ILO values and tools on social security

• International Labour Standards
• ILO Social Security Minimum Standards Convention
  (C.102)
• Tripartism
• Emphasis in social dialogue
• Technical assistance at the country level
• Policy advice based on research and analyses
• Assistance in implementation schemes
• Capacity building and training
• Advocacy
• Global campaign for social security and coverage
  for all

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Social security why and what?

• Risks around us (sickness, death, unemployment,
  old-age, etc.)
• Development entails transformation of society
• weakening traditional family support
• ageing population due to lower birth rates and
  mortality rates
• Human ageing longer life after reproduction
• Cf. We (biological organisms) are survival
  machines robot vehicles blindly programmed to
  preserve the selfish molecules known as genes.
  Richard Dawkins, The Selfish Gene
• Social security is a societal measure to respond
  to these risks

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Widely accepted definition ofSocial Security

• ILO Convention 102 on Social Security Minimum
  Standards defines Social Security as
• the protection which society provides for its
  members through a series of public measures
  against the economic and social distress that
  otherwise would be caused by the absence or
  substantial reduction of earnings resulting from
  sickness, maternity, employment injury,
  unemployment, invalidity, old age or death. It
  also includes the provision of medical care and
  the provision of subsidies to families with
  children.

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Objectives of pensions

• Provide adequate income security for the elderly
• Basic requirements
• Sustainable in the long run
• Credible for the commitment of future generations
• Pension reform addresses these issues while
  ensuring the main objective of the retirement
  income provision

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The Starting PositionPension System under the
State Socialism

• Flat benefit structure
• Favourable conditions for certain groups
• Generous pension coverage for military services,
  maternity and child care period
• Indexation in line with wage increase
• Contributions transferred from enterprises
• Any deficit covered by the general budget
• Lower retirement ages for women

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Regional trends Pension Reforms since the
mid-1990s

• Change design features of public pension schemes
• Closer link between contribution and benefits
• Individualized benefit formulas (individual
  accounts, NDC)
• Strengthen scheme financing
• Retirement age higher age, equalization of men
  and women
• Indexation from wage to price (or in-between)
• Scale down public schemes and replace with
  privately managed individual savings

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Challenges in Social Security in CEE and CIS
countries from ILO perspectives

• Relatively high social security transfer
• Concerns with long-term sustainability in the
  ageing population
• Increasing number of migrant workers
• Non-compliance by informal work and
  underreporting of wages
• Weak enforcement for contribution collections
• Vulnerable to political interventions
• Complex and non-transparent policy and decision
  making process

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Coverage gapsWho is excluded from the existing
systems?

• Rural populations (predominantly farmers)
• Urban informal economy workers
• Small- and medium- sized enterprises
• Part-time, casual and seasonal workers
• Migrant workers in overseas (86 million
  worldwide, many irregular status)

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Social security coverage for migrant workers

• The greater flow of workers across national
  boundaries and more diverse forms of migration
  are creating new challenges, including lack of
  social security.
• To ensure the equality of treatment in social
  security for migrant workers, there is an
  emerging need for international and regional
  coordination, by multilateral and bilateral
  agreements.
• ILO Conventions and Recommendations
• C.118 (1962), Equality of Treatment (Social
  Security)
• C.157 (1982), Maintenance of Social Security
  Rights (R. 167, 1983)
• C.165 (1987), Social Security (Seafarers)
  (Revised)
• C.19 (1925), Equality of Treatment (Accident
  Compensation)
• EU regulations
• Regulations 1408/71/EEC (1971), 574/72/EEC
• Regulation 859/2003/EC (2003) extends the
  provisions to third-country nationals

INTERNATIONAL LABOUR ORGANIZATION
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Percentage of population aged 65 years and over,
1950-2050, CEE countries
Source United Nations 2006
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Percentage of population aged 65 years and over,
1950-2050, CIS countries
Source United Nations 2006
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Types of pension schemes
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Pension privatization in CEE and CIS states

• Countries which introduced mandatory,
  privately-managed pensions
• Hungary, Poland(), Latvia(), Bulgaria,
  Estonia, Croatia, Slovak Republic, Romania,
  Ukraine
• Kazakhstan(), Russia, Azerbaijan,
  Kyrgyzstan(), Tajikistan(), Turkmenistan()
• Countries with PAYG pensions and considering
  reforms
• Albania, Bosnia and Herzegovina, Lithuania,
  Moldova, Serbia
• Armenia, Belarus, Georgia, Uzbekistan
• Countries which maintain PAYG pensions
• Czech Republic, Slovenia
• Notes () NDC, () Full privatization

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Problems with Pillar II system

• Unpredictability of the future benefit level
  facing the volatile financial market risk
• Limited redistribution results in more inequality
  (e.g. gender inequality)
• Difficulties in private market provision of
• Life annuities (adverse selection)
• Full indexation of benefits
• High administrative costs by private funds
• Transitional costs The gap in the financing of
  the Pillar I system created by diverting part of
  the contributions to the new Pillar II system
• Transition cost will increase government spending
  (borrowing) in short- to medium-term.

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How transition costs will occur?(per cent of
GDP)
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Replacement rates, Poland
Males
Females
Chlon, Agnieszka, "The Polish Pension Reform of
1999," in Fultz, E., Ed., Pension Reform in
Central and Eastern Europe, Vol. 1, ILO
Budapest, 2002.
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Effectiveness of multi-pillar pensions

• Are the objectives of the multi-pillar reform
  appropriate?
• Primary goals Protection against poverty in
  old-age
• Secondary goals Bolster economic growth through
  increased savings
• Did countries meet initial conditions on
  macroeconomic stability, financial market
  readiness, moderate indebtedness, and a low risk
  for corruption?
• Many countries had poor records at the time of
  reform.
• Have the reform considered options to expand the
  coverage to those outside the formal pension
  system?
• Have multi-pillar reforms achieved the intended
  macroeconomic impact such as risk diversification
  in investment portfolio, increased savings,
  capital markets development, better labour market
  incentives?
• These objectives remain largely unrealized.
• Fiscal deficits have grown in many countries.
• Misleading terminologies
• Parametric reforms versus paradigmatic reforms
• Single-pillar versus multi-pillar reforms

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Donor dependence CEE and CIS
Source Independent Evaluation Group World
bank, Pension Reform and the Development of
Pension Systems An Evaluation of World Bank
Assistance, 2006
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(Cf.) Donor dependence Latin America and the
Caribbean
Source Independent Evaluation Group World
bank, Pension Reform and the Development of
Pension Systems An Evaluation of World Bank
Assistance, 2006
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Indexation of pensions in payment

• Recently many countries have adopted change in
  the indexing of benefits
• 100 average wage growth
• 100 inflation
• Average of inflation and wage (Swiss method)
• Changing indexation from average wage to price
  would improve financial status in the long run
• However, the pension level relative to the
  average wage will decrease in the later stage of
  retirement life

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Dynamics of pensions transfer relative to
output/payroll

• The following formula holds
• ?(P/Y) (N D)/Y (i g) P/Y
• where
• Y Output (or total payroll)
• P Pensions payment
• N Pensions for the newly retired
• D Pensions for the deceased retired
• g Rate of growth of output (or total payroll)
• i Rate of indexation of pensions
• Hence, the condition for non-increasing P/Y is
• ?(P/Y) 0 ? i g (N D)/P

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Directions in Pension Reform

• The dilemma facing the CEE and CIS countries is
  to ensuring the long-term sustainability of the
  pension system in the face of rapidly ageing
  population, while at the same time meeting the
  minimum standards, such as the ILO Convention
  102, to ensure adequate level of income to the
  protected workers and their families.
• Public pension schemes can produce unfunded
  liabilities to be financed through the
  intergenerational transfer mechanism. Their
  sustainability critically depends on whether the
  working generation is committed to pay
  contributions for the elderly generation. The
  proposed reform should be supported by the future
  contributing generations.
• Based on the diagnosis of the current scheme, a
  wide range of policy options should be presented
  together with the assessment of their financial
  impacts. A well-informed and participatory policy
  dialogue lays the foundations for democratic
  process in the policy making, and assists in
  making rational decisions based on a broad
  consensus.
• Pension is a long-term system, and pension reform
  is a long-term process. A well-managed reform
  process supported by strong long-term commitment
  and continuous efforts of all the key
  stakeholders is critical for the successful
  implementation of the pension reform.

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information, please visit our webpage
atwww.ilo.org/secsocwww.ilo.org/budapest