Op-ed of the Minister of Finance Sergii Marchenko on the transformation of the pension system (15.11.2021)
Minister of Finance of Ukraine Sergii Marchenko wrote about why Ukraine needs an accumulative pension system and what guarantees the stability that the state should provide.
Recently there has been a discussion about the transformation of the pension system. Citizens understand that the problem could not be ignored.
I heard a lot of opinions on the need to introduce the second level of the cumulative pension system from Ukrainians, politicians, experts, and our international partners.
The main reason why it is necessary to change the pension system is the global demographic trend. The birth rate is decreasing, the generation of baby boomers is retiring, and life expectancy is increasing at the same time.
According to demographers, in Ukraine, the share of the population over 65 years is about 16% of the active population and is constantly growing. This is quite a threatening trend, and it will only intensify in the future.
Let me illustrate the global trend by examples. In the United States or Germany, the situation is not different from ours: the population lives longer, the minority pays contributions, and there is a dilemma: either raise the retirement age (which is a very unpopular political decision) or increase the amount of pension savings.
In 2010, 40.3 million people over 65 were in the U.S., in 2019 - 54 million. By 2050 in the EU will be 130 million such people - more than a third of the population.
By 2033, China will have about 400 million older people, 150 million more than in 2020. One in three people in Japan will be over 65 before 2030. There is also a financial forecast by the World Bank for the world's economies until 2050: the deficit of pension systems will be USD 400 trillion.
The current pension systems are not provided with a resource. This means that pensioners, who fortunately now live longer, need to find resources for the payment of pensions. In Ukraine, it is replenished through the payment of a single social contribution by employees.
There are 11 million pensioners in Ukraine now, and only 9.7 million persons who pay a single social contribution. In the near future, there will be more and more pensioners per one employee. The situation will not magically improve. This issue needs serious public discussion, which we have intensified.
The world used to live according to the pension model defined benefit when the size of pensions was determined by a formula and depended on the level of wages and length of service. It was secured through the contributions made by those who were able to work.
Now it's time to change the approach and in parallel introduce a new system for Ukrainians defined contribution, according to which after retirement a person will receive as much as he or she was able to contribute during his or her working life.
The joint efforts of the Ministry of Finance, the Ministry of Social Policy, the profile committee of the Parliament, and regulators led to the drafting of laws on the introduction of a mandatory cumulative level of pensions.
Now, these laws are at the stage of discussion and I hope for their adoption by the Parliament in the near future.
This will allow the accumulation of funds in individual special accounts. In order to build confidence in the system, the state is supposed to play a more active role in the beginning, and at the next stages, the participants themselves will choose pension funds.
The Roadmap for the development of the pension savings system assumes two stages:
1. Introduction of the second level. The government is developing a Single Social Registry, which will be a center for the reliable storage of pension savings regardless of which institution a person will save for his or her pension.
2. Development of voluntary pension savings. Now there is a discussion about the range of participants in the mandatory accumulation level and sources of financing.
Participants in the funded system are proposed to pay the following contributions: 1% of salary in 2023, 1.5% in 2024, and 2% in 2025. This funding will be done by appropriate redistribution through the single social contribution for individuals participating in the new system.
In addition, the state will additionally fund contributions from the state budget: 1% in 2023, 1.5% in 2024, and 2% in 2025. Such programs are common in the world and help conduct a more flexible policy to encourage participation in the system.
Citizens will have individual savings accounts and will be incentivized to contribute a portion of their wages. The state would fund such contributions on a parity basis.
The Netherlands, Sweden, the United Kingdom, and Ireland have already set up a system that is heavily geared toward funded pensions. At the same time, the retirement age in the United Kingdom is soon to rise from 66 to 67.
Slovakia, one of the most "aging" countries in Europe, will increase the budget to solve the problem to levels not seen in any other EU country by 2070.
In the report of the G20 countries, one of the proposed solutions is an education reform that would help people work more years and allow them to study even at a respectable age to ensure that such workers have relevant competencies.
Longevity is certainly a positive trend. However, because of the declining birth rate and as the result declining working-age population, the challenge before our state and the world is how to provide for retirees with dignity. There is no universal solution, so each state goes its own way.
Now we are taking an important first step by talking about the existence of the problem and finding ways to solve it.