Transforming Post-Communist Political Economies (1998) / Chapter Skim
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14 Pension Reform in the Post-Communist Transition Economics
14 Pension Reform in the Post-Communist Transition Economics
Pages 370-384
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From page 370... ...
From an economic perspective, high and often growing pension expenditures have frustrated stabilization efforts and crowded out other needed government expenditures, such as new social and economic infrastructure (Barbone and Marchetti, 1994~. The payroll tax financing of these expenditures provides incentives for informalization of the labor force and lowers labor demand.
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From page 371... ...
. For the post-communist states of Central and Eastern Europe and the New Independent States, this means scaling back the public system while building up the funded, privately managed one to take the pressure off the pay-as-you-go system.
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From page 372... ...
The true cost of the system to the working generation also became clear.) Despite recent declines in health indicators, the average postretirement life span in most post-communist countries still exceeds that in most OECD countries.
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From page 373... ...
Nevertheless, most systems experienced financing crises, requiring additional financing from other sources of revenue or resulting in pension arrears. In many parts of the New Independent States, benefits have 2See Andrews and Rashid (1996)
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From page 374... ...
The Social Cost At a high fiscal cost, the pension systems of the post-communist states of Central and Eastern Europe and the New Independent States have kept most pensioners out of poverty. For the most part, the available evidence suggests that the social cost of the transition has not fallen disproportionately on pensioners.
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From page 375... ...
Pillar 2 a mandatory funded and privately managed pension system one whose current reserves are equal to or greater than the present value of all future pension payment liabilities, based on personal accounts (the Latin American approach) or occupational plans (the OECD approach)
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From page 376... ...
While Lithuania, the Czech Republic, and Estonia have been able to avoid the kinds of pension cost explosions faced by Poland, Bulgaria, and Slovenia, even the former three countries are experiencing steady growth in expenditures, as they have simply not reformed entitlements sufficiently. Estonia was able to implement a steady increase in retirement age, but left in place all the exemptions from the Soviet period, even adding a few.
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From page 377... ...
In the Czech Republic, where subsidies are offered as an alternative to tax concessions, roughly 20 percent of the labor force is now participating in these programs. Russia and the Baltic countries hope to follow their lead shortly.
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From page 378... ...
The second tier would be a mandatory, funded system of privately managed savings accounts. Participation would be limited to new entrants and the younger members of the current labor force.
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From page 379... ...
Transitory provisions in the new law gradually enforce the minimum retirement age of 60. Some politically sensitive exceptions remain, including a provision for early retirement at 55 for women and a few occupations (e.g., wind instrument players, ballet dancers)
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From page 380... ...
, contributions to the pension fund are made by the state budget in the form of budget transfers, using the minimum wage as the contribution wage for transfer purposes. The cost of these transfers to the state budget is estimated at roughly 17 million 1996 tats (0.3 percent of GDP)
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From page 381... ...
Pensions are also indexed to life expectancy, automatically adjusting to demographic changes. Finally, during the payment period, pensions are price indexed until 2002, and after that indexed to a mix of wages and prices; this will avoid rising liabilities during an economic downturn.
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From page 382... ...
Grafting a funded system, especially a defined contribution scheme, onto a defined benefit scheme can be expensive for those already covered by the existing scheme (as many Latin American countries have discovered) .7 With the notional defined contribution structure, benefits in either scheme depend solely on contributions.
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From page 383... ...
Under the new system, noninsurance redistnbutions, such as subsidies for maternity leave, require explicit contributions into an "account" (e.g., into the social insurance fund or the second tier)
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From page 384... ...
International Social Security Review, 49:3-20. World Bank 1994 Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth.
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