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Ukraine's govt to reduce pensions to 65 USD?

Author : Iryna Shostak

Source : 112 Ukraine

Ukraine’s Pension Fund (PFU) has been in bankruptcy for many years, and only state subsidies help to make ends meet from year to year. But it cannot last forever
11:21, 11 November 2020

Ukraine’s Pension Fund (PFU) has been in bankruptcy for many years, and only state subsidies help to make ends meet from year to year. But it cannot last forever. Prime Minister Shmygal threatened that in 15 years Ukraine would have no money for paying the pension. We tried to figure out what would happen if the budget of the Pension Fund is not enough for everyone, and whether pensioners can be left without money.

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Scanty pensions would get even smaller?

At least, this is what not so long ago, Prime Minister Shmyhal said about this, explaining that in 15 years, the state simply will not have enough resources for paying pensions.

"The nation is aging. There is a problem with human capital ... Ukraine, as a part of old Europe, does not recreate its population... This is common mathematics and economic demography," he said.

The Ministry of Social Policy also "pleased" with no less pessimistic forecasts, declaring, or rather warning Ukrainians, that without state support, the Pension Fund will only be able to provide pensions in the amount of UAH 1,850 (USD 65). Minister of Social Policy of Ukraine Maryna Lazebna announced this on the air of UA:Ukrainian Radio.

So what do we get here? Pensioners will slowly deny themselves food, until one day the treasury is so empty that only a loaf of bread will remain? Ukraine’s pension fund is indeed chronically deficient and has been in bankruptcy for many years. For example, in 2020, 7,2 billion USD will be allocated from the state budget to cover the deficit of the Pension Fund. In this regard, the statement of the head of the Ministry of Social Policy is fully justified, in contrast to the forecasts of the head of the Cabinet of Ministers, because it is the government that is responsible for preventing a pension default.

What is the problem? Ukraine has a solidary pension system: pension is paid to pensioners at the expense of monthly taxes that workers pay today.

That is, the future pensioner works all his life and pays taxes, from these taxes they pay pensions to current pensioners, and in the future, he himself retires and he receives payments according to the formula where the salary is multiplied by the coefficient of insurance experience.

Since today in Ukraine about 11.5 million pensioners and 11 million legally employed are officially employed and pay unified social tax (18.5% of salary), there is less than one worker per Ukrainian pensioner.

Thus, with the help of simple calculations, one can come to the conclusion that today every officially employed person pays an average of 65 USD to the Pension Fund monthly - the same 65 USD that the Ministry of Social Policy warned about.

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"This year, the average salary, on the basis of which we make calculations, is 330 USD, and next year it will be 350 USD. And the contribution to PFU is 18.5% of the salary. And if we take conditionally, then from the average salary of 350 USD 18.5% will amount to 65 USD," minister Labezna noted.

All other missing funds for higher payments are received by the PFU in the form of subsidies from the state budget. To illustrate: out of 11.5 million pensioners, about 5 million receive less than 2 thousand hryvnyas of pensions. That is, they practically hit the maximum that the Ministry of Social Policy outlined. But there are 6.5 million more pensioners who receive more than 70 USD. And the average pension in the country is now 112 USD. If there are no transfers from the state budget, there will be no money to pay these amounts, which means that 6.5 million people are under the threat of a reduction in pensions?

Why shouldn't you panic? Each of the Ukrainians has a constitutional right to their social benefits (Article 46 of the Constitution of Ukraine).

Moreover, speaking about such problems, the head of government must understand that their solution is entirely in his hands: from bringing shadow business to light to planning a stable economic strategy in which such deficits are excluded.

"When the Prime Minister says that in 15 years the state will not be able to pay pensions, he forgets one thing: he, the Prime Minister, is responsible for bringing the shadow business to light," economic expert Oleg Pendzin explains.

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The point is that today Ukraine has about 20 million working-age population, of which only 11 million work legally. According to the expert, the Cabinet of Ministers has all the powers to create an appropriate legislative initiative that will bring the economy out of the shadows.

Thus, the issue of introducing another type of pension provision is being considered – compulsory accumulative pension contributions. An option is being discussed whereby the employee himself will deduct 2% of the personal income tax to the accumulation system; another 2% from the unified social tax will be paid by the employer.

So sooner or later, but Ukraine will get off the ground, and by 2035 will definitely change the vector of the policy of pension payments.

What would happen to pensions in December?

In December, the third increase in social standards this year will take place – the subsistence minimum for all categories of the population to 78 USD (the last increase was on July 1 - to 75 USD). As the Ministry of Social Policy notes, after the increase in social standards, pensions from December 1 will be higher for about 3 million people, or 30% of pensioners, in particular, the minimum and maximum pensions will be increased.

Accordingly, from December 1, 2020, pensions will grow as follows:

  • minimum pension - from 61 to UAH 63;
  • the maximum pension is from UAH 609 to UAH 630.

In addition, the seniority bonus for pensioners will also grow - a monthly bonus for those who have more than 35 years of experience (men) and 30 years (women). Ukrainians who now have full experience (receive at least 75 USD) will not actually be affected by the increase in the minimum pension.

The indicator of the subsistence minimum will also increase from December 1 for various social and demographic groups of the population:

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  • for children under 6 years old: from 66 to 68 USD;
  • for children from 6 to 18 years old: from 82 to 85 USD;
  • for able-bodied persons: from 78 to 80 USD;
  • for persons who have lost the ability to work: from 60 to 62 USD.

More significant changes would take place in 2021 – the increase will affect about 10 million pensioners, while it will take place in five stages for different categories.

What changes will 2021 bring for retirees?

The Ministry of Social Policy has developed a special calendar, according to which increases will take place in January, March (indexation by 11%), April (automatic recalculation of working pensioners, taking into account wages during the period of work and acquired work experience), July (it is also planned to increase the living wage from 63 to 66 USD, which will also lead to an increase in allowances and an increase in pensions) and December (it is planned to increase the minimum pension from UAH 66 to 69 USD, as well as an increase in a number of allowances).

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Let's talk in more detail about the March indexation, because not all pensioners can count on it. As already noted, the indexation in March 2021 will average 11% and will affect about 10 million people.

As a result, most of the pensioners will receive a slight increase, and some will remain without it at all.

In particular, they might not count on an increase:

  • those who received a minimum or less than the average salary;
  • Ukrainians who have significant increases in pensions (for example, due to additional work experience);
  • those who received a pension under a special law (for example, security officials).

And at the same time, those who have a lot of experience with a small or average salary, due to the additional payment for the length of service, can receive more than after the possible modernization of the "bare" pension. Moreover, the additional payment for seniority in 2021 will become a kind of trend and will have a significant impact on the amounts that pensioners will receive.

The main reason why some Ukrainians will not be able to retire on time in 2021 is precisely the failure to meet the length of service requirement.

How to buy working experience?

From 2021, the minimum length of insurance required for the appointment of a pension will increase to 28 years (January 1, 2022 - up to 29 years, etc.). This will continue until 2028 when the minimum insurance experience (the number of years when a person paid a single social contribution is counted) reaches 35 years for both men and women.

"Such a veiled way to increase the retirement age: in order to retire at 60 years of age, with 35 years of experience, you, by and large, from the first day after graduating from a higher education institution must work legally and pay a single social contribution monthly," says economist Oleg Pendzin.

Due to the fact that Ukraine is a country in crisis and a person cannot always find timely employment legally (especially freelancers), it will be quite difficult to achieve these 35 years in 60 years. But, as noted in the Ministry of Social Policy, it is these pensioners who will be most protected and will receive payments and allowances at almost every stage of the recalculation of pensions.

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For example, already the first of five increases, which will take place in January, will concern pensioners with insurance experience:

  • at the age of 65 and with an insurance experience of 30/35 years or more (40% of the increased minimum wage from 178 to 213 USD) - from UAH 74 to 85 USD;
  • the program of additional payments for pensioners over 80 years old will continue (18 USD per month), plus if you have 20/25 years of insurance, the minimum pension payment is 92 USD. And for lonely pensioners of this age – 119 USD (including the care allowance).

And what to do if you do not have enough experience? Buy it?

***

Back in the last century, the International Labor Organization at one of the forums determined that the replacement rate (the ratio of the average salary to the average pension) cannot be less than 40%, because if a person retires with a coefficient below 40%, “the level of his suffering is very tall." Ukraine has ratified these provisions. But while in Europe the indicators start at 42% (the lowest European indicator is in the Baltic countries), in Ukraine it barely reaches 25%.

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"How do European countries achieve such a replacement rate? They have several levels of pension provision. The only level (solidarity system) cannot provide this replacement rate even in developed countries," economic expert Oleg Pendzin explains.

As the expert notes, the problem is that savings systems in weak economies tend to go bankrupt. For example, in 1996 they gave UAH 1.4 for 1 dollar, and today they give UAH 28.6. The hryvnia has fallen in price 25 times.

In reality, all the problems associated with the pension system are not problems of the Pension Fund, they are problems of the economy, problems of bringing the economy out of the shadows, problems of stability of the economy. Indeed, without a strategy, a program for its development, the question of the Ukrainian pensioner cannot be resolved.

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