Doomed for 20 years: When would Ukrainians receive decent pension?

Author : Mykyta Sinitsyn

Source : 112 Ukraine

For many years the “retirement issue” has remained one of the most acute not only in the social field but also in the economic one
10:44, 11 November 2019

112 Agency

For many years the “retirement issue” has remained one of the most acute not only in the social field but also in the economic one. Payments made by legal entities and individuals in the form of a single social contribution are sorely lacking to finance pension payments to Ukrainian pensioners, forcing more than 10% of the state budget to annually send to cover the deficit of the Pension Fund of Ukraine (PFU).

In such a situation, the government has an option to increase the deficit of PFU, quite noticeably raising pensions, or to increase pension payments slightly, at the risk of causing discontent among pensioners, but maintaining a balance of expenses.

30% of pensions are covered by the state, so it increases the deficit

During the presentation of the revised state budget for next year, Prime Minister Oleksiy Honcharuk promised pensioners a slight increase in pensions due to their indexation. There are simply not enough economic resources for more, according to the head of the Cabinet of Ministers.

Speaking about the lack of resources for a noticeable increase in pensions, the Prime Minister did not disassemble, implying primarily the expenses of the state budget, which traditionally pays at least 30% of the expenses of the Pension Fund.

In January 2019, the Cabinet of Ministers then Volodymyr Groysman adopted the budget of the Pension Fund of Ukraine for the current year. Together with 6,8 billion USD from the state budget, total revenues exceeded expected expenses, amounting to 16,22 billion USD and 16,1 billion USD, respectively.

Related: Economy is slowly dying: How Ukraine preserves poverty

Officials then said that the funds should be enough for the indexation of pensions announced in March, within which pension payments for 8 million Ukrainian pensioners were to increase by 17-40%. However, already in May, Yevhen Kapinus, the deputy head of the Fund’s board, spoke of a 2019 deficit in the amount of 1,2 billion USD, saying that this is less than before and the pension system is stabilizing.

Similar expectations - stabilization of the financial condition of the Pension Fund, were expressed in 2016, predicting that the PFU deficit would remain at 5,7 billion USD in 2018-2020 with its subsequent decrease.

Minister of Economy of Ukraine Tymofiy Milovanov also added fuel to the fire, on his Facebook page proposing to abolish the unified social contribution - the main source of income for PFU.

Collecting, distributing, accumulating

Actually, the Ukrainian authorities recognize the need to solve the deficit of the Pension Fund, and there are two ways to solve it:

- preservation of the existing joint pension system with the payment of social security tax paid by working Ukrainians to current retirees through the growth of taxes and income of PFU;

- introduction of a funded pension system, in which each pensioner will be able to save for his own pension through the institution of private pension funds.

Related: Ukraine’s poverty and insecurity cannot be hidden

A bright representative of the first way to solve the problem was ex-Minister of Social Policy Фтвкшн Reva, who in November 2018 proposed a draft law on improving the functioning of the system of compulsory state social and pension insurance.

In the document, the minister proposed increasing the maximum base for the accrual of social security taxуі from 15 to 25 minimum wages, introducing a differentiated social security tax rate depending on the amount of wages from 20 to 5%, and tightening the liability for non-payment of a single social contribution and to give PFCs wide monitoring functions.

However, the ex-minister’s initiative did not go beyond the presentation at the Cabinet’s meeting, primarily because the solution to the issue through the introduction of a funded pension system was more popular.

It was decided to introduce the funded system in Ukraine in two stages. In the course of the first, the formula for calculating the pension was changed, which led to its growth, and the requirements for the length of service were established. So, for retirement at 60 years, at least 25 years of insurance experience will be required.

Since 2019, the second level of the funded pension system was supposed to be launched, suggesting the emergence of private pension funds, with which a working person could entrust funds. However, the second level has not been introduced since January 2019, but it was announced that this will happen a year later.

According to Oleksandr Goncharov, the founder of the Kyiv stock center, the delay in introducing the funded system may prove fatal for the pension system. Today, there are only 1.4 working Ukrainians per 1 pensioner, and this imbalance continues to grow.

2022-2023 were called the date of the start of the funded pension. The document provided for the transfer of the functions of the supervision and regulation of the system of non-state pension funds to the National Commission for Securities and Stock Market.

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

PFU should be eliminated, social security tax should be canceled, a funded pension system should be introduced - what will help Ukrainian pensioners?

The experts are unanimous in their assessment of the current situation as reflecting the systemic crisis in Ukraine’s pension provision and, on the whole, came out in support of the repeatedly announced but not yet completed pension reform in the country. But at the same time, they agreed that Ukraine’s "pension issue" will be completely eliminated no earlier than in 20-25 years.

According to some experts, the deficit of the Pension Fund, despite the generally negative role, sometimes plays the role of a certain “magic wand” for the authorities in justifying growth or simply maintaining the level of taxes.

"Talking about the deficit of PFU, it is often manipulated, justifying the reluctance to liberalize the business environment: if we have a shortage of funds to fulfill social obligations of the state, that is, we can’t talk about tax cuts. A shortage of funds forces us to increase revenues to cover expenses, and then the latter increases,” Danylo Monin, an expert at the Ukrainian Institute of the Future, explains the positive situation for the government from the lack of funds from PFU for the payment of pensions.

According to him, an alternative to this would be a direct transfer of the functions of PFU to pay pensions to the state budget completely at the expense of the budget.

Related: Pensions growth in Ukraine: Key trend of recent years

“Today, social security taxes go to PFU and three other social funds. If all the proceeds from PFU are sent immediately to the state treasury, pensioners will benefit from this, because paying them pensions will be socially protected articles that cannot be cut or not fulfilled,” he says on an alternative to a shortage of PFU.

According to Monin, in general, some positive trends are obvious - the desire of the government to reduce costs, the deficit of the Pension Fund of Ukraine in relation to GDP to less than 4% in 2020.

Oleksiy Kushch, expert from Growford Institute, also advocates the elimination of the unified social contribution and the Pension Fund of Ukraine as an undoubted bankrupt and replacing the joint pension system with a funded one.

“A joint pension system works successfully under a planned economy or in conditions of demographic growth. Under our conditions, a funded pension system will undoubtedly be more effective, but it will not be able to earn quickly. It needs a transition period in which the state must take over pension obligations of citizens," the expert said.

According to Kushch, the transition period might look like the liquidation of PFU, the abolition of unified social tax, and its replacement with some special tax that goes directly to the state budget, which will pay pensions.

According to economic expert Oleksandr Okhrimenko, a funded pension system is undoubtedly the best solution to the "pension" problem, but only those who have saved up for 25 years to experience all its advantages.

Related: New attempt of government to move away from distribution mechanism to cumulative pension system

“You can drastically raise the unified social tax to 50% from the current 22%, and then the income should theoretically be enough, but in practice, this will most likely only make the business go into the shadows. On the contrary, you can bring the shadow economy to the light and legalize salaries "in envelopes," but this is also a long hard way and without guarantees. And it turns out that the most reliable way to achieve a decent pension for a person is to save yourself a decent old age now," our sources assure.

Ukrainian pensioners’ payments in 2020

According to the draft state budget for 2020, in January Ukrainian pensioners entitled to a minimum pension will receive 67 USD guaranteed by the state, which will grow: from July 1 to 70 USD and from December 1 to 72 USD.

Related: How fast is Ukraine's pensions growth?

Halyna Tretyakova, MP from the Servant of the People, chairman of the social policy committee emphasized that the next indexation of pensions will be held in March, which should increase pension payments by about 12%. According to PFU, the average wage in Ukraine for the first 9 months amounted to 123 USD.

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