The Pension Reform of Groysman turned a year these days. According to the plans of the government, the beginning of the next stage of the reform should start on January 1 of the next year, and the pace of change has significantly slowed down. Obviously, the current government does not have a ready-made solution to the “pension” problems of the state, like its predecessors, hoping that after the elections this burden will already be placed on other shoulders. But does Ukraine have time for such delays?
It is worth recalling that the so-called first stage of the reform could only be considered a reform. Because its main component ‒ pension rejuvenation ‒ is a norm that has long existed in the pension legislation, it has simply not been implemented by the authorities for years. And of course, welcoming the government’s commitment to regularly recalculate pensions, we are aware that even linking this recalculation to the inflation and the growth of average wages in the state does not guarantee that pensioners will have a decent life.
According to the Pension Fund of Ukraine (PFU), as of October 2018, more than 21.5% of pensioners receive payments up to 1,500 UAH, 32.5% ‒ up to 2,000 UAH, 22% ‒ up to 3,000 UAH. Only 15%, that is, slightly more than 1,500,000 pensioners, receive payments from 3,000 to 5,000 UAH. More or less acceptable pensions, from 5,000 to 10,000 UAH, receive only 6.6% of pensioners, while only 1.2%, who receive pensions over 10,000 UAH can be called really rich, and that is only 134,000 people.
The average pension payment is now 2,577 UAH, that is, less than 28.5% of the average salary in the country. According to the recommendations of the International Labor Organization, the size of the average pension should not be less than 40% of the average salary in the state, this ratio allows retirees to provide the minimum level of goods and services. In the EU countries, the average size of pension payments is usually more than 40% of average salaries, for example, in Poland, the average pension is 47% of the national average salary. But even in our neighbouring Belarus, which does not reach the ILO standard, the average pension is 38% of the average salary. Therefore, it is obvious that Groysman’s “modernizing” allowed pensioners to survive, but did not provide them with decent maintenance. This requires more radical methods, aimed at reforming the solidarity system as such.
The current solidarity level of the pension system is the world gold standard of pension provision. This system works perfectly, providing a decent old age for pensioners, but on condition that the demographics are upward and the number of employees is growing faster than the number of pensioners. Therefore, Ukraine is not the only country in the world, faced with the fact that the joint system has failed, as soon as demographic trends have changed. But, probably, we are the only country that decided not to notice this over the years. At present, there are about 12 million people of payers of the Single Social Contribution (SSC) in the state, which goes to the Pension Fund, and 11,5 million pensioners. Obviously, there is not enough money for everyone.
The Ministry of Social Policy stubbornly claims that the problem is in the shadow employment of citizens, at least 8 million Ukrainian, is working without paying the SSC. But what these statements are based on, it is difficult to understand. Ukraine, which should conduct a census of the population once a decade on the recommendation of the UN, held it only once ‒ in 2001. Since then, the census has already been postponed four times, most recently in 2015. Even according to optimistic hopes, before 2020 we will not receive reliable data on the population in the state. Up to this point, government statistics operate with rather dubious numbers, relying on their own assumptions, rather than on specific numbers. Considering the migration trends of the recent years, it can be assumed that the number of Ukrainian, who allegedly receive shadow earnings, is substantially less than 8 million, which the Ministry of Social Policy is talking about. In particular, according to the State Statistics Service, for example, half the number of Ukrainians work “in the shadow” ‒ 3,700,000.
The government’s bid on “unshadowing” is a real threat to the pension system since it generates proposals to reduce the tax burden on the wage fund, to provide benefits, to make the tax agent not an employer, but an employee, and so on. And we remember well how the government of Yatsenyuk, at the end of 2015, for the sake of the “unshadowing”, reduced the SSC by half, to 22%. The budget deficit of the PFU has reached unprecedented proportions since then ‒ 40% of its expenses are financed now from the State budget, but the success of the “unshadowing” was rather mediocre, and there is no reason to assert that the new payers of the SSC appeared only due to the “unshadowing”. As a result, employers simply put in their pockets the “saved” share of the SSC, thanking the reformers.
It is clear that the proposals to reduce the SSC even more, or to cancel it altogether, replacing, for example, with a real estate tax, can cause even greater harm to the solidarity system. And now it is the solidarity system, although not in the best way, but performs its main task ‒ the timely payment of the pensions.
There are several variants of the transformation of the solidarity system. There are also many experiences because not only Ukraine has problems with demography and ageing of the population. And, probably, first of all, what the government should take care of is the transformation of the solidarity system in such a way that to restore its viability. In particular, one should seriously think about how to eliminate the Pension Fund deficit, which next year, according to the Ministry of Finance forecasts, should exceed 160 billion UAH. Finally, it must be admitted that the reduction of the SSC was twice as wrong as the existing tax burden would never be able to provide retirees with decent payouts. It is clear that raising a tax, which was once lowered, nobody dares, but it is possible to redistribute taxes. In the end, the income tax, at the expense of which revenue grew in times of receipt in regional budgets, can partly go towards the financing of pensions, and not in the form of “regional deposits” in bank accounts. Then, finally, it is necessary to determine whether the PFU has to finance the payments of those Ukrainians, who actually have to receive not pensions, but social benefits for the poor. While these costs lie on the shoulders of the fund, although the responsibility for ensuring this category of citizens is not his direct responsibility. Finally, it is worth analyzing the expenses of the PFU itself on the administration of pensions, can we not optimize them in the era of high technology and the Internet?
Unfortunately, officials are convinced that the only way to revive Ukraine’s pension system is to enter the accumulation level. So, it will allow partial lifting of the solidarity level, but even if the reform starts from January of the next year, this unloading will occur no earlier than in 30 years, when people will start receiving the first “double” pensions ‒ with solidarity and accumulative levels.
At the same time, all these years, some part of the funds from the solidarity level will go to the accumulative (in the dynamics from 2% to 15%), gradually increasing the existing deficit and demanding the same increase in the tax burden on the wage fund. And in order for pension accumulations not to be “eaten” by the inflation, they need to be invested somewhere for these years, and with the guaranteed profit. Since it will be the state which does this, then it will invest pension accumulation most likely either in government securities, that is, finance state budget deficits, or state-owned enterprises, that is, to fund mainly chronically unprofitable facilities. How much will we earn? The risks of the functioning of the accumulation level are so high that the benefits that we can get from its introduction in 30 years, lose all attractiveness. And most importantly, the introduction of a cumulative system without solidarity reform will only deepen the unresolved problems of the first level, which the state will not be able to abandon for a long time.
Ukraine has the experience of the existence of non-state pension funds and it is very difficult to call it uniquely successful. So this experience tells us that over the past ten years, 30-40% of contributions were “eaten” only by administration costs. It is not too encouraging to recall that the PFU, which is already engaged in a solidarity level, is not considered by the government as an accumulative level administrator, for this, certain asset management companies, market and with market rates, will be chosen. That is, the creation of the accumulation level will also increase the budgetary costs. It is not for nothing that World Bank experts, for example, are urging the government to postpone the idea of introducing an accumulation level because it “can negatively affect contributions to the current system and create additional fiscal obligations”, and focus on the transformation of the solidarity system and the preparation of financial instruments that could provide both reliability, and profitability for the accumulative system.
And there are more willing to raise funds at the cumulative level. While the government is determined with further steps and is not going to submit the final version of the key stage of the pension reform, parliamentary bills grow as mushrooms in the parliament that offer various options for the functioning of the funded pension system, of course, with various funds managers and a bunch of interested people who would like to “accumulate” pensions of Ukrainians.
Two months before the start of the next stage of reform, the Ministry of Social Policy does not add clarity, it began to talk about the launch of the so-called professional pension system, which envisages the transition to the accumulative system of only preferential pensions. The relevant bill is promised to be submitted the other day. It will preliminarily provide that a person, working in hazardous conditions, will continue to retire earlier, but to compensate for the “early retirement” to the PFU will not be the employer, as now, but the accumulation system. This fundamentally changes not only the format of the discussion around reform but also its vision as a whole. And if the accumulative level touches only this part of pensioners, then it will not unload the solidarity level in the future, and in general, it will have no significant effect on pension statistics.
And, probably, the biggest risk of the next year is not that pension reform will not be implemented at all, but that some intermediate option will be adopted, which will not work in the end, but will allow the government to forget about the pension issue for several years without worrying too much both about the transformations at the solidarity level and the creation of an effective compulsory funded level.
Text by Valentyna Yushchenko