Either pension reform, or collapse of social security system in 10 years in Ukraine

Author : Olexandr Honcharov

Source : 112 Ukraine

Despite the implementation of a number of regulations to improve the current pension system and the development of non-state pension provision, the reform of Ukraine’s 3-level pension system has not yet provided a sufficient degree of satisfaction of the needs of pensioners
21:47, 20 March 2019

Open source

It should be honestly admitted that our share of the cost of pensions in the budget revenues of 2018 was the highest in the world and accounted for just over 18% of Ukraine’s GDP. This year, budget spending on pensions has increased by another 27.2 billion UAH (1 billion USD) compared to last year, reaching 166.5 billion UAH (6 billion USD).

We are also among the leaders in terms of the highest percentage of contributions to the Pension Fund in Europe, which is equal to 35% of total wages. And if we do not reform our pension system, the situation will only get worse.

In addition, the launch of the second level of pension insurance from January 1, 2019 remains only the promise of Prime Minister Volodymyr Groysman.

But, despite the implementation of a number of regulations to improve the solidary pension system and the development of non-state pension provision, the reform of Ukraine’s 3-level pension system has not yet provided a sufficient degree of satisfaction of the needs of pensioners.

This is all clear and obvious. However, the government and the Verkhovna Rada do not activate reforms in the economic and social spheres, taking into account national and international experience and the socio-economic situation in the country.

Accordingly, in the current year the minimum pension remains at the same low level: from January 2019 - UAH 1497, from July 2019 - 1564, and from 1 December 2019 - UAH 1638 (or $ 55.7).

Experts believe that these figures are more or less optimistic. Judge for yourself. Thus, according to analysts, from 2014 to 2018, 700 thousand people more reached the retirement age than people who reached working age.

In turn, in the period from 2019 to 2023, we have even more disappointing forecasts with a difference of as much as 1 500 thousand people. Thus, there will be more pensioners in Ukraine than people who pay pension contributions. What can this mean?

For example, that the real incomes of those currently working, who will retire in 10 years, may even be less than the meager pensions of today's retirees.

What could happen next? The pension fund, and the state budget could collapse. The state will not be able to contain such a large number of retired citizens. And such a reality is unlikely to change for the better if you do not start massively attracting migrants to the country, as recently Poland and other western European countries have done.

That is why in Ukraine there is an urgent need for comprehensive pension reform. And it is not needed to increase pensions for current retirees, and not even to eliminate the current huge deficit of the Pension Fund.

Reform is needed in order to minimize the risk of the collapse of the social security system in Ukraine in a decade.

Let's honestly say that all previous years, our average citizen was sure that the state would give him a pension (regardless of where and how this person worked, and whether he worked at all). Until recently, Ukrainian legislation fully confirmed this thesis.

A pensioner with minimal experience and meager pension taxes could claim a normal pension. In short, for the sake of retirement it was not worth overworking all my life. But now the Cabinet of Ministers Groysman has destroyed these illusions: without a minimum work experience, without paying the minimum payments to the Pension Fund, the pensioner will not be entitled to receive even a minimum pension.

Moreover, not all pensioners can count on the established minimum salary, but only those who have the necessary insurance experience: 35 years for men, 30 years for women.

True, there is a bonus. From January 1 this year, upon reaching the work experience and the age of 65, the minimum pension will rise to UAH 1,669 ($ 56.7), or 40% of the minimum wage.

It is clear that there is practically nothing to rejoice, especially if we take into account World Bank indicators, which analysts consider the extreme poverty line to be $ 1.9 per person per day, and the poverty line to be $ 3.2. Compare these figures with the abovementioned, is that clear?

And although millions of Ukrainians in 2019 are still waiting for the recalculation of pensions due to changes in the size of the subsistence minimum for citizens, however, one should not expect significant increases from these recalculations, since the subsistence minimum will increase this year by only $ 5: from July 1 2019th by 67 UAH, and from 1 December 2019th - by 74.

Well, given the fact that by the end of 2019, the dollar exchange rate will be 29.4 UAH / USD, the cost of living will not rise above the extreme poverty line by the end of this year.

The situation is aggravated because, according to experts, a third of the country's working population (about 6 million people) work without documents, without paying taxes and pension contributions. This includes guest workers in Europe and Russia, and market traders, and seasonal agricultural workers.

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The same number of workers receive a fictitious salary, that is, the minimum wage, and another part of it is in an envelope. In a word, more than half of those working in Ukraine somehow fail to pay contributions to the Pension Fund.

And a lot of experts consider the existing joint pension system as the reason for the widespread evasion of pension contributions payment and receipt of salaries in envelopes.

At the same time, the overwhelming majority of the working population does not save money for retirement.

Unfortunately, the current principle of the Pension Fund of Ukraine is to only raise money for the payment of pensions from the respective contributions, accumulate them and immediately, without investing, pay to today's pensioners.

That is, those who work today must provide those who are retired. At the same time, an ordinary employee who is not entitled to a special pension does not even have a theoretical opportunity to earn a decent pension.

What to do with it? It is possible to destroy this part of the shadow economy only by introducing compulsory accumulative pension insurance, when an employee sends part of the pension contributions to the joint system, and part to his own accumulative pension account.

Subsequently, these funds will be invested in the country's economy and, on reaching the retirement age, are paid as an additive to the state pension.

Also, the employee will be able to independently regulate the amount of his pension: pay more contributions, invest more - there will be bigger pension; pay less contributions - smaller pension.

And only after the introduction of the accumulative level of the pension system, the motives for paying salaries in an envelope will quickly disappear, and the Ukrainian economy will receive a huge investment resource.

Of course, there will be a complex and unpopular pension reform, but there is no other way. Alas, this has not yet been realized in the Cabinet of Ministers.

Yes, pension reform is the longest-lasting reform. It will be implemented not for several years, but for decades.

If this reform would be started in 2019, it can end only in 25-30 years, when the last university graduate, who began working under the current pension system, will retire.

And the target audience of the reform is twenty to thirty-year-old young people who are about to start working.

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