Transcript Pension funds in Slovakia

Pension Funds in Slovakia –
Consequences for the Economy
Peter Golias
INEKO - Institute for Economic and Social Reforms
Economic Forum – Krynica, Poland
September 2005
Overview of pension funds
• Voluntary pension funds (3rd pillar)
- since 1995, popular thanks to tax relieves
- approx. 1% GDP, 0.62 mil. clients
• Mandatory pension funds (2nd pillar)
- since 2005
- 9% of gross wage (biggest in Europe)
- 0.8% of GDP in 2005, 160% GDP in 2080
- 1.4 mil. clients in 2006 (expected)
Krynica, September 2005
Impact on future pensions
Replacement rates (%) if entering the 2nd pillar, working period: 2005 - 2052
a – real average yearly net appreciation of assets in 2nd pillar (%)
w – average yearly real wage growth (%), Demography held constant
a\w
-2
0
2
4
-2
47.33
39.88
35.80
33.42
0
68.63
51.57
42.72
37.83
2
115.89
76.03
56.28
45.91
4
194.00
113.75
75.51
56.28
Note: Red color shows when FF outperforms PAYG. Source: INEKO
Impact is unclear - it is impossible to
predict a/w 40 years from now!
Krynica, September 2005
Mitigating demography risk
There are predictions, that demography would get worsen in Slovakia:
Dependency ratio in %
Expectations in Dependency Ratio Development
80
60
40
20
0
2005
2010
2015
2020
Retirement age 65
2030
2040
2050
Retirement age 62
Source: Demographic Research Centre in the SR
Note: Dependency ratio equals the number of people above the retirement age
divided by the number of people between 18 and retirement age.
Mitigating demography risk
Price of Stocks and Demography Crisis
12
Price
10
Supply (t)
8
Demand (t)
6
Supply (T)
4
Demand (T)
2
0
Quantity
Supply shifts right - more pensioners are willing to sell their shares.
Demand shifts left - fewer workers are willing to buy shares.
Demography crisis decreases the rate of return on capital!
Krynica, September 2005
Mitigating demography risk
Country with negative demography
expectations can avoid possible downturn
in pensions (i.e. replacement rates) by
exporting capital to the economy with
stable or positive demography changes.
Krynica, September 2005
Public finance deficit
0
% of GDP
-1
-2
2004
2005
-3,3
-3,4
2006
-2,9
2007
-1,6
-1,4
-3
-4
-0,8
-1,3
-5
Without 2nd pillar
2nd pillar
Source: Ministry of finance of the SR
Note: Slovakia plans to launch “euro” since 2009
Krynica, September 2005
2008
-1,3
-1,4
Public finance deficit
• Sources for financing transition costs:
- privatization revenues (€1.75 billion)
- taxes
- state loans
• 2nd pillar should have neutral direct effect
on domestic consumption
Krynica, September 2005
Work incentives
• Half of the old-age pension contributions
were diverted into private, inheritable
accounts managed by private funds
• Contribution-benefit link got stronger:
- The highest-to-lowest pension ratio rises from 1.8 to 5.8
- All redistribution was taken out of pensions and
transferred to the welfare system
• Reform motivates to work legally and pay
contributions!!!
Krynica, September 2005
Conclusions
Pension funds:
• Are popular in Slovakia
• Do not guarantee higher pensions
• Allow for mitigating demography risk
• Transfer from PAYG to mandatory funds
burdens public finance, but has no effect
on domestic consumption
• Help to improve legal work incentives
Krynica, September 2005