Ministers did not consider double burden effect in pension reform in Ukraine

Author : Olexandr Honcharov

Source : 112 Ukraine

Yes, the officials didn’t take into account that they still have to pay pensions to current pensioners and save up pension assets for those who work now. And in this case, the double burden effect inevitably arises, when it is necessary to simultaneously pay pensions and form pension savings
22:38, 18 December 2018

Open source

Staring from January 1, 2019, the Cabinet of Ministers plans to launch the second cumulative level of the Ukrainian pension system. It was stupulated that all employees who are currently less than 35 years old, should pay pension contributions in the amount of 2% from their earnings (in subsequent years, these contributions should increase to a maximum of 7%). At the same time, the Ukrainian Parliament was to adopt a series of changes and additions to certain laws of Ukraine in order to increase the functions and tasks of state regulators, in terms of expanding and restructuring their powers in the non-state pension system.

However, there's one last plenary week remaining in 2018, and the Ukrainian parliament is unlikely to show a striking performance. In addition, without legislators, there are still many intractable problems for launching the funded pensions. And first of all, I would like to note that we have already reached the “point”: now there are 11 pensioners for 10 employees in Ukraine. These figures were recently voiced by the new head of the Pension Fund of Ukraine Yevhen Kapinus. Why did such alarming statistics suddenly come up? And it started from the failed pension reform. Back then, when former Deputy Prime Minister Serhiy Tihipko, unsuccessfully and unprofessionally tried to move from a distribution mechanism to a funded pension system. Finally, in recent years, acting Deputy Prime Minister Pavlo Rozenko and Minister of Social Policy Andriy Reva encountered violent resistance.

And what really happened? When the authorities said, there was one joint system, and from January 1, 2019 we want to introduce another cumulative level, here those who have a few years left until retirement began to ask: "Where is my pension, we have been working dozens of years, and we have no savings? " Yes, the officials didn’t take into account that at the same time they have to pay pensions to current pensioners and save up pension assets for those who work now. And in this case, the double burden effect inevitably arises, when it is necessary to simultaneously pay pensions and form pension savings. According to the calculations of leading analysts, this double burden effect will last about 50 years and will reach its maximum 22 years after the start of the introduction of the second cumulative level of our 3-tier pension system, namely in 2041.

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And now the main question arises: “Is it worth it to take up the pension reform according to the Ukrainian scenario seeing the the effect of the double burden?” By the way, there is a group of experts who argues that it is mathematically proven. Another group of experts suggests that core ministers were simply obliged not to touch the system of special pensions, not to cancel pension coverage for judges, prosecutors, people's deputies, ministers, customs officers, tax officials, and so on. Still others express legitimate concerns, they say, we still do not have effective ways to prevent abuse and pension savings fraud, and therefore pension money can simply be stolen.

There is a fourth group of experts, which is also skeptical about the possibilities of launching the second level of the pension system from January 1, 2019, because of the volatility and the apparent weakness of the hryvnia. We still have high inflation and constant expectations of its further growth. So, as practice shows, the social obligations of the Cabinet of Ministers quickly depreciate, which greatly complicates the investment process for specialists of asset management companies working with pension contributions. In short, while these problems are solved "gently", due to exchange rate fluctuations. But already in the next 2019, such approaches can play a cruel joke, and it seems that in our country the real, not the virtual economy, began to determine social policy and, of course, the funded part of pensions less.

But if we see such deplorable results, then why do not the Cabinet of Ministers and the Verkhovna Rada refuse from inefficient social and economic decisions that turned out to be a mistake or a gross miscalculation? Is that why now all the old men have the same worrying question in the head - where are the guarantees for the further payment of pensions? After all, a huge, scary to think, almost 140 billion "hole" in the Pension Fund has not been declining for several years in a row; on the contrary, it is growing. Yes, and in 2018 pensions were not indexed, although for the next 2019 it is provided. In this regard, Deputy Minister of Social Policy Mykola Shambir said: “The formula for indexing pensions is provided by law. A pension calculated in accordance with the law on compulsory pension insurance is increased by 50% from the growth of the average salary for the previous year, plus 50% from inflation for the previous year. Taking into account that 10.2 million pensioners received an increase in pensions in October 2017, almost all of them fall under the indexation of pensions in 2019. "

I think that if in the coming 2019 they do not launch the cumulative level of the pension system, then soon people's deputies may pass a law that the state budget of the country will become an annex to the Pension Fund. And this is not a joke, now our pensioners are very sad. After all, in the state budget for 2019, there is a deficit of the Pension Fund at the level of 167 billion hryvnias, and taking into account the planned pension allowances, it will need another 20% - about 400 billion hryvnias! Finally, are there any guarantees that in 5, 10 or 15 years our pension legislation will not drastically change? Are there any government guarantees that the new pension system will live for so many years?

Yes, our authorities are only trying to push the trouble aside. And the illusion that my state is responsible for my decent retirement, vanished. Therefore, together with your employers, you must take care of your prosperous old age and your decent pension. To do this, constantly ask questions, how is my future pension being formed and where my pension savings are being invested?

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