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PENSION REFORM IN BULGARIA – STAGES, GROUNDS AND PHYLOSOPHY Dr. Hassan Ademov Chairman of the Labor and Social Policy Commission of Bulgarian Parliament. PENSION REFORM IN BULGARIA: STAGES. STAGE OF CAUTIOUS PARTIAL REFORMS ( BACKGROUND TO RADICAL REFORMS ) – 1990 – 1999

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PENSION REFORM IN BULGARIA – STAGES, GROUNDS AND PHYLOSOPHY Dr. Hassan AdemovChairman of the Labor and Social Policy Commission of Bulgarian Parliament

pension reform in bulgaria stages
PENSION REFORM IN BULGARIA: STAGES
  • STAGE OF CAUTIOUS PARTIAL REFORMS (BACKGROUND TO RADICAL REFORMS) – 1990 – 1999
  • STAGE OF RADICAL REFORMS PER SE – 1999 – 2010
  • STAGE OF PROMOTING IDEAS FOR REVISION OR RADICALIZATION OF THE REFORM – 2003 - ?
pension reform background
PENSION REFORM: BACKGROUND
  • 1990 – 1991 – Generous early retirement schemes;
  • 1992 – updating pensions and discussing reform possibilities, incl. implementation of the Chilean model;
  • 1993 – 1994 – “White Book” – reforms in the public pension provision system;
  • 1994 – Introduction of voluntary pension provision based on the fully funded principle – without regulation;
  • 1996 – Autonomous pension provision funds and social security institution (NSSI) managed based on the tripartite principle;
  • 1996 – Pension rate is linked to the social security contribution throughout active life.
radical pension reform motives
RADICAL PENSION REFORM: MOTIVES
  • Low and almost flat pension size – income replacement rate of 25 – 27 per cent;
  • Increasing social contributions/ decreasing collection rates;
  • Low motivation for participation in the public social security system and escape in the shadow economy;
  • Growing future liabilities and estimated enormous financial deficits.
grounds for successful pension reform
GROUNDS FOR SUCCESSFUL PENSION REFORM
  • Political will and commitment backed with widest possible support.
  • Favorable macro-economic environment.
  • Favorable social environment.
  • Institutional capacity, incl. developed IT and communication systems. Actuarial team.
  • Bridge between the academia and reformers.
  • Technical and financial support from international institutions.
  • ActivePR.
pension reform philosophy
PENSION REFORM: PHILOSOPHY

Based on the World Bank’s concept for a multipillar social protection system taking into consideration the national traditions and specifics:

  • Preserving the core role of the solidarity pension system while changing its parameters;
  • New paradigm – building a well-regulated supplementary privately managed funded pension schemes – both mandatory and voluntary.
contents of the parametric reforms in solidarity ist pillar
Contents of the parametric reforms in solidarity Ist pillar
  • Universalization: covers all economically active persons and encourages labor mobility;
  • Supplemented by non-contributory pensions (social, occupational and others) – pillar 0;
  • Structured in funds – Pensions Fund and Non-Participatory Pensions Fund
  • Gradually moving early retirement out and into the second pillar;
  • Stricter pension eligibility rules.
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Outcomes of the parametric reforms in the first pillar

  • Improvement of the dependency ratio – from 104 pensioners to 100 insured in 1999 to 82 pensioners to 100 insured in 2007
  • Early retirement is shifted from first to second pillar (transitional period to 2010)
  • Enlargement of the coverage and the tax basis of the social insurance, including due to the incentives of participation in the second pillar
  • Improvement of the replacement rate - from 34% in 1999 to 43 in 2007
  • Widening of the pension differentiation – from 1 : 3 in 1999 to 1 : 5.5 in 2007
contents of the pension reform s systematic part
CONTENTS OF THE PENSION REFORM’S SYSTEMATIC PART
  • Introducing a fully-funded mandatory second pillar with two types of pension funds:
    • Occupational – for early retirement of people working under arduous labor conditions, funded by the employer;
    • Universal – for all persons born after 31.12.1959, providing a second life pension, funded through employer and personal contributions;
  • Regulation of voluntary pension provision (funded IIIrd pillar) with personal or employer contributions. Tax incentives;
  • Building a regulatory government body – integrated supervision over the non-banking financial sector;
  • Codifying the social security issues into one single regulatory act – Social Security Code;
  • Good public-private partnership.
social and economic impact of the systematic pension reform through 31 12 2006
SOCIAL AND ECONOMIC IMPACT OF THE SYSTEMATIC PENSION REFORM (THROUGH 31.12.2006)

1 Participation in UPF is mandatory for all persons born after 31.12.1959 (a person may participate simultaneously in all three types of PF)

2 At the end of 2006 pension assets(savings) form 6.4% of the Bulgarian population’s financial wealth.

adequacy of the reformed pension system
ADEQUACY OF THE REFORMED PENSION SYSTEM
  • Access to pension eligibility – almost full coverage of the population. Bottlenecks – high unemployment rate in preretirement age;

Income replacement rate from the three pillars (ultimate goal of the reform) – 70 - 80 percent, incl.

    • From the solidarity Іst pillar – 40 percent;
    • From the funded IInd pillar – 20 percent;
    • From the funded IIIrd pillar – 10 – 20 percent.
  • Current dissatisfaction with the pension levels. Very thrifty pension indexation formula;
  • Individual accounts, good participation incentives and opportunities for personal choice in the IInd and IIIrd pillar.
pension reform s sustainability to the challenges of time
Pension reform’s sustainability to the challenges of time

Risks relating to the solidarity pillar

  • Economic risk- negative growth, decline in employment and income rates, real sector bankruptcies, large share of shadow economy;
  • Demographic risk – worse than projected natural growth rates, new emigration wave and others;
  • Management risk– simultaneous implementation of reforms – structural, health, military, etc;
  • Political risk – decisions resulting in new deficits.
pension reform s sustainability to the challenges of time1
Pension reform’s sustainability to the challenges of time

Risks regarding the fully-funded pillars

  • Financial destabilization, bankruptcies and undermining the confidence in the reform;
  • Bad pension assets management and low rates of return;
  • Political risk – stopping the reform and regression to the old system;
  • Institutional risks.
alternatives to the present pension model
Alternatives to the present pension model

Two alternatives are discussed publicly:

  • Absolutizing the solidarity pillar and restricting the funded schemes only to the voluntary pension savings;
  • Full privatization of the pension system – Chilean model.
why the solidarity pension system should not be absolutized
Why the solidarity pension system should not be absolutized
  • Ageing and emigration put the pensions of the current young generations at a great risk;
  • No opportunities for personal choice;
  • Disincentives for participation of young generations;
  • No assets capitalization.
why the solidarity system should not be closed down
Why the solidarity system should not be closed down
  • It is core in almost all developed countries;
  • The social security contributionof the current generation of workers cannot be annulled;
  • Issues related to double cost and transition cost;
  • Bulgaria has signed international agreements for transfer of social security rights. EU Directive 1408;
  • Social protection of the elderly population cannot become prisoner to the whims of the emerging capital markets.
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