Transcript the PAYG dependency ratio

Pension Systems in Times of
Financial Crises: Serbia
Ministry of Finance
Republic of Serbia
Pension System before Reforms
• Based on the PAYG scheme only (where current
workers pay out current pensioners)
• Very generous and fiscally unsustainable
– valorization and indexation rules:
• only 10 best years relevant for calculating pension at retirement,
• pensions fully indexed to wages
– Very early retirement age (50 years for women and 55 for men)
– Generous disability retirement rules, corruption-ridden
• Since 1991, the pension fund has generated debt;
uncertain timing of pension payments, in arrears for 2
months on average
Pension Reforms in Serbia Started
in the Early 2000’s
• Significant parametric and systemic reforms to
the public PAYG system (Pillar 1)
• Introduction of tax-preferred FF voluntary private
pension funds (Pillar 3)
• Serbia did not introduce FF mandatory private
pension funds (Pillar 2); Is this a good decision?
Reasoning against Introduction of
Pillar 2 Prevailed in Serbia
• High transition cost: for 7% contributions,
transition cost would last for 40 years and
average 1.2% of GDP per year!
• Undeveloped capital markets
• High administrative and operational costs
• Risky strategy … as we can all appreciate during
days of Global Financial Crisis
Basic PAYG Statistics
• 2.6 million contributors (1.9 employees, 0.2 self-employed,
0.5 farmers)
• 1.6 million pensioners (1.4 employee and self-employed,
0.2 farmers)
• Challenging economic indicators: high
unemployment (15%), a low employment rate
(50%), significant shadow economy, weak
compliance from farmer contributors
• Deteriorating (rising) old-age dependency ratio:
from 25% in 2005 to 34% in 2035
PAYG Parametric Reforms
• Retirement age increased by 5 years
– 65 for men and 60 for women (by end of 2010)
• Disability retirement rules tightened
– Number of disability pensioners decreased by 15%,
another 15% drop expected in coming years
• Pension Indexation Changes
– From full indexation to wages, to the Swiss formula (50%
wages 50% inflation), finally to full indexation to inflation
PAYG Systemic Reform
• Based on a change of the pension formula in
order to enforce the link between contributions
and benefits
– All years of service relevant for calculating pension at
the retirement age
PAYG Reform Savings
• Increased retirement age + tightened disability eligibility
=> improved the PAYG dependency ratio in the mediumto-long run
• Indexation formula less reliant on wage growth => fiscal
savings in the short-to-medium term
• Systemic and parametric reforms started producing
savings => pension spending totaled 12.1% of GDP in
2006 and 11.8% of GDP in 2007
Two Steps Back:
Reasons behind Increased Public
Pension Spending Share in GDP
• Major reason: a politically motivated ad-hoc pension
increase in 2008
– Moving from the Swiss formula to inflation indexation was socially
unpopular, resulting in the formation of the Pensioner Party which was the
key factor in forming the Government
– Carry-over effects of the ad-hoc pension increase in 2008 will be felt for 2 to
3 years
• Minor reason: a decline in productivity due to the
economic crisis (we increased pensions at a very unfortune
moment)
Basic Pensioners’ Standard of
Living Statistics
• Lots of jokes, but in Serbia ...
– Average pension / average wage ratio was 71% in March 2009
– Just like distribution of employees according to wages, distribution of
pensioners according to pension benefits, is “left skewed” – 60% of
pensioners are receiving pension benefits below the average
– The poverty rate of pensioners, according to the Living Standards
Survey, is lower compared to the population as a whole (5.3% against
6.6%)
– The net old-age pension/net wage ratio is 80%! Only 55% are old-age
pensioners, 25% disability, 20% survivor and only 17% of pensioners have full-career
service!
– The net full career pension/net wage ratio is 90%!
• Although the pension contibution rate is 22% (11% on behalf of
employees and 11% on behalf of employers), budget subsidies
account for 40% of pension spending!
Lorenz curve - wages
120.0%
100.0%
% wage bill
% employees % wage bill
10%
2.0%
20%
5.4%
30%
9.8%
40%
15.1%
50%
21.8%
60%
30.2%
70%
40.6%
80%
53.2%
90%
69.1%
100%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
7
8
9
10
% employees
Lorenz curve - Pensions
120.0%
100.0%
% pension bill
% pensioners % pension bill
10%
3.6%
20%
8.8%
30%
15.1%
40%
22.5%
50%
30.9%
60%
40.4%
70%
51.2%
80%
63.7%
90%
78.5%
100%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
1
2
3
4
5
6
% pensioners
Serbia’s Response to Financial Crisis
• Nominal freeze of public pensions for 2 years (2009
& 2010), inflation indexation afterwards
Public Pension Spending, %of GDP
•
Year
2009 & 2010 freeze
No freeze
2008
12.6%
12.6%
2009
13.6%
14.2%
2010
12.7%
14.4%
2011
12.2%
14.0%
2012
11.8%
13.5%
2013
11.1%
12.7%
Increased pension spending + decline in contribution revenue growth =>
pressure on public finances requiring additional budget subsidies
Voluntary Private Pension Funds
and Financial Crisis
• 9 pensions funds in operation, 6% of employees
contribute, accumulated funds only 0.15% of GDP
• In 2008, the Belgrade Stock Exchange tumbled by
75%, but pension funds lost only 7%
• Restrictive investment regulations and undeveloped
capital markets resulted in conservative portfolios
– 50% money deposits, 30% government
bonds, only 15% equity
Financial Crisis Impact on Pension
System in Serbia
• Not very significant, due to the dominance of PAYG
financing
• The major adverse effect is a relative decline in
contributions due to economic recession
• Voluntary pension funds operating for only 2 years with
conservative portfolios and insignificant accumulations
Planned Future Changes to
Pension System in Serbia
•
•
Further PAYG parametric reforms
– Further increases in the retirement age
– Tightening accelerated service and early retirement provisions
– Introducing the automatic stabilizers (automatic change in the
contribution rate and/or in the retirement age as a reaction to the
replacement rate – the financial position of the pension fund)
– Developing an appropriate valorization and indexation formula that will
be fiscally sustainable and socially acceptable (in a way, to keep pace
with collected contributions)
Expansion of FF voluntary retirement saving
– Possibly extending a tax-preferred treatment to a broader range of (less
risky) saving vehicles, such as long-term bank savings and life
insurance contracts