Ukrainian pension reform is symbol of ignorant economic policy

Author : Olexandr Honcharov

Source : 112 Ukraine

There is not enough money in the first joint level of our pension system; Ukrainian pensioners will receive less and less (now they receive only an average of 89 USD on a monthly basis). Yes, and we must admit that 56% of all pensioners (6.5 million people) receive pensions in an even smaller amount - up to 71 USD per month.
22:30, 23 October 2018

Open source

Andriy Reva, Ukraine’s Minister of Social Policy, noted with pride: "Our pension reform is know-how invented in Ukraine." What does it mean? After all, a perfect three-tier pension system was never created here. Will the authorities even be able to launch the second mandatory cumulative level in the next 2019? Will they be able to reduce the huge deficit of Pension Fund, the total amount of which exceeds 5 billion US dollars? Although, at present the deficit of pension funds is not only Ukrainian problem.

Indeed, in Europe, the share of social spending in gross domestic product has already exceeded 20%. After 40-45 years, this share will increase to thirty per cent, including due to the growth of pensions. However, paying such money becomes difficult for most European countries. Accordingly, if the current legislation is not changed, then, according to forecasts of leading European Union analysts, one European resident will make contributions for 2.75 pensioners. And this will happen in the next 40 years!

And in Ukraine, especially in recent years, our labor resources are declining quite quickly. The population is aging, and the Pension Fund with enormous difficulties is able to maintain efficient 683 offices in Ukraine. Of course, there is not enough money in the first joint level of our pension system; Ukrainian pensioners will receive less and less (now they receive only an average of 89 USD on a monthly basis). Yes, and we must bitterly admit that 56% of all pensioners (6.5 million people) receive pensions in an even smaller amount - up to 71 USD per month.

In such an extremely difficult situation, what do our citizens know about their pension? It seems to me that the correct answer is nothing, or rather, the pensioner knows only the figure that the pension fund employee told him. But the old man has no opportunity to check this actuarial calculation. Therefore, it is hardly possible today, following the example of Minister Andriy Reva, to call the Ukrainian pension reform innovative. In my opinion, such a system will inevitably be doomed, it will have to be organized in a completely different way: not to impede the formation of pension savings and their subsequent investment, but, on the contrary, to do everything possible to make the Pension Fund of Ukraine profitable. Here we have good examples in the modern world.

For example, in the first half of last year, the Norwegian State Pension Fund earned 499 billion kroons from investments, which was equivalent to 63.2 billion US dollars at the then exchange rate. The assets of the Japanese GPI (Government Pension Investment), which is owned by the state, at the end of 2014 were estimated at almost 1.3 trillion US dollars. In this regard, it should also be noted that the total assets of the five largest pension funds in the world are 30 times (!) higher than our state budget, and their expenses for administration and personalized accounting are much less than ours in percentage terms. Well, I think everyone in the government has long forgotten the fact that the Pension Fund of Ukraine should be profitable and bring investment income on pension assets annually.

Look: if the Pension Fund deficit in 2012 was 640 millionUSD, then in the current 2018 it exceeded 5 billion USD. To this we need to add that the current administration system in Ukraine, in which most of the expenditures of the pension fund also goes to the maintenance of the Fund itself, is worthless and requires speedy improvement. For comparison: if the largest US pension fund charges less than 0.5% per annum of its total pension savings for its own maintenance, then we have the costs of administrators of non-state pension funds limited to 5%, but for Pension Fund we have no norms at all. All this, of course, decreases our confidence in the future. And, alas, we still do not trust our state. Apparently, the biggest problem is hidden here.

But the worst thing is that almost no one from the younger generation believes in fair retirement or in the “innovative” pension reform. Nobody knows what another reformist choice in the near future will be made by the government and, respectively, who, apart from people's deputies, judges and prosecutors, will have comfortable old age? Also, our financial power, unlike developed countries with high-quality economies, cannot create favorable conditions for non-state pension funds to invest their funds in reliable assets. We still do not have a link between pension contributions and the corresponding size of pensions, and instead of effective investment mechanisms in fact, we have non-transparent and difficult-to-check actuarial calculations. And the exchange rate of the hryvnia, frankly, is a big question and certainly not predictable in the medium and long term.

But in the EU countries and in the United States everything is clear and transparent. There, pension funds successfully invest their savings in reliable securities, precious metals, real estate, etc., and then professionally manage these assets. And what can you invest in without high risks in our country when the financial market is actually killed (I don’t even talk about the stock market)? No comments. Therefore, unlike the Ukrainian pensioner, for example, an American man understands that even if inflation grows up, his pension fund will still be able to professionally invest the accumulated funds in to obtain income above the inflation rate. And the purchasing power of the dollar, in contrast to the hryvnia, still remains the same after 10-15 years, as on the first day of the pension contribution transfer.

In developed countries, the real strategy of the middle class is, of course, not the state pension, but the help from the state in creating conditions in which a citizen of old age can afford to live well and comfortably. In this sense, macroeconomic conditions are no less important than a specific pension scheme. Therefore, today's pension programs in Ukraine, no matter how Minister Andriy Reva calls them, cannot be interesting for the small national middle class, since not a single level of our pension system implies a really high pension in the future.

Experts suggest that in the coming years, the citizens of Ukraine will increasingly develop their personal retirement strategies, whether they are investments in real estate, foreign currency or high-quality education of their own children abroad. That is why the Ukrainian pension system is not something innovative, it is simply not viable.

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