Bulgaria’s system mirrors its neighbours

Bulgaria_campo A Bulgarian family works in an agricultural field on the outskirts of Sofia on 13 May, 2013. | AFP PHOTO / Dimitar Dilkoff

Bulgaria’s system mirrors its neighbours

By Peter Taberner | NewEurope, May 26, 2013

Pensions may not currently be a hot topic of conversation in Bulgaria as the current political impasse continues, where a government has yet to be formed following the 12 May elections, but there are many issues surrounding pensions that will need to be addressed when the new administration is in place.

Recently retirees protested in the streets in response to what they saw as meagre increases in their monthly pensions, that ranged from 9.8% for those who retired in 2009 to 2.2% for those who finished working in 2012. Banners were marched down the street of Sofia, with complaints about being hungry and poor.

The Bulgarian pension system mirrors the modern day three pillar apparatus of its neighbours in central and eastern Europe, with the first pillar traditionally pay-as-you-go, in keeping with the solidarity principle as a conservatively regulated defined benefit scheme.

In support of pay-as-you-go, is the mandatory second pillar supplementary pension where contributions are directed to privately managed accounts, and the third pillar is a voluntary scheme, where contributors can save up to 10% of salary in their accounts, that is tax deductible.

There have been fears that the second pillar may be rolled back to reduce the influence of private additional pensions, these concerns were voiced by pension industry figures, as critics of the second pillar grew and pointed to countries such as Hungary, believing that the market based way just didn’t work.

Part of the motivation for Hungary and also Poland to dismantle their second pillar pension systems, they have nationalised and reduced contributions for their second pillar respectively, was to deal with their mounting deficits, a problem that Bulgaria does not have.

Figures from Eurostat at end of 2012 show Bulgaria had the third lowest current deficit in the EU, alongside Luxembourg on 0.8%, and the second lowest debt ratio to GDP with public arrears of 18.5%, significantly lower that the EU average of 85.3%.

Across Europe the age retirement ceiling is being raised, and Bulgaria is no exception, reforms two years ago stipulated for men and women that pensions ages will increase by 4 months a year, until for men the retirement age reaches 65 and for women 62, leaving two more working years for both genders since the reforms began.

According to the Sofia based think tank the Institute of Market Economics (IME), the total social contribution rates for this year are set at 30.8%, when taking into account unemployment, health and workplace accidents benefits alongside pensions.

The contribution for pensions is 17.8%, with the state pension being allocated 12.8% in the first pillar with 7.1% arriving from the employer, and a further 5% from the second pillar funds, with the employer paying 2.8% and the employee 2.2%.

In 2009 there was also a significant cultural change in how social contributions were viewed, in that they were actually called contributions and therefore were seen as just that, as opposed to state subsidies or transfers, it was change in rhetoric that introduces a different complexion on having a social insurance scheme in place.

Petar Ganez, a senior economist for the IME, said: “There has not been too many debates about pensions during the recent election, but its more possible that there will be a shift towards private pensions rather than what has happened in Hungary. There may be a change of rhetoric on the public pension system over the next two years.”

“Out of all the political parties, pensions has not been a divisive issue, although all the parties understand the necessary solving of problems when it comes to pensions. The age reforms will mean there will be fewer people retiring early, and making more contributions to the pension system, although some groups are not convinced about the sustainability of the state fund. Currently the private sector accounts for 15-20% of the pension system, this should change to a 50/50 relationship with the public first pillar pension.”

The European Commission’s 2012 Aging Report concluded that Bulgaria’s future pension problems will not be severe ones, when compared to other countries in the European Union.  The report found that between 2010 and 2060, the increase of gross pension expenditure over that period as a proportion of GDP will be 1.1%, this is below the EU average of 1.5%.  With populations now getting older, all EU countries having to spend more on those pensioners who are over the age of 75, Bulgaria faces spending 6% of its GDP on that age group in 2060.

This is a rise of 5.6% from 2010, highlighting the increase in expense, but again its below the EU average of 7.1% of GDP to be spent on the over 75s in 2060.

Although the news is not so good on the working population, as the numbers between the ages of 15-64  is set to fall from just under 5.2 million in 2010 to a little over 2.9 million in 2060, with the pension replacement rate also falling by 3.3% over that time.

Whatever the new government decided to do when it is eventually formed, there will be major decisions needed on the pensions system, even though it’s a subject that is not a political football at the moment.

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