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men. There were also generous special provisions for disabilities and selected occupations, which reduced the average effective retirement age to about 57 for men and 53 for women (Fox, 1994). In most of these countries, this continues to be the case.

The main economic effect of this generous system was to inflate artificially the dependency burden on the working population. Indeed, this is the root cause of the pension problem facing these countries today (Fox, 1994). Under central planning, the high value of nonmarket time to the household (e.g., of having a nonworking family member available for queuing and child care) may have corrected for this dependency in terms of overall income to the household. High payroll taxes and the resulting low wages were also not such a problem, when the shops were mostly empty anyway. Younger families pooled resources with pensioners in order to survive, with each contributing resources to the common household budget. In this situation, the pension system appeared sustainable. However, the combination of declining gross domestic product (GDP) and market-determined wages and prices made the system unsustainable as the transition progressed. The true cost of the system to the working generation also became clear.1

Despite recent declines in health indicators, the average postretirement life span in most post-communist countries still exceeds that in most OECD countries. In other words, the post-communist states of Central and Eastern Europe and the New Independent States, with much lower incomes and tax collection capabilities, have promised higher benefits (in relation to their resources) than some of the richest countries in the world, many of which are now finding their generous welfare systems unaffordable. As Table 14-1 shows, while demography accounts for some of the high pension spending, many Western countries—with the same share of their population over 60 and longer life expectancies—spend less on pensions as a share of GDP than do the post-communist states, owing largely to the higher age of eligibility. The size of the prematurely retired group makes the situation of the latter countries unique in the world, and complicates any solution. Moreover, health indicators are expected to rebound over the next decade, exacerbating the problem further. This situation has both economic and social costs.

The Economic Cost

In most of the post-communist states, pensions as a share of GDP increased in the initial years of the transition. Today in Eastern Europe, pension expenditures are frequently the largest single item in the government budget, accounting for about 15 percent of GDP in Poland and Slovenia and 10 per-

1  

Disney (1996) discusses the inevitability of generational conflict in countries with pay-as-you-go pension systems as societies age.



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