Problems with Pensions Continue

[01.01.2004, Peter Gonda and Martin Thomay, ECONOMIC POLICY AND PUBLIC FINANCE]

Pension reform in Slovakia is supposed to diversify the risks connected with the provision of pensions between the labour market and financial markets, and thus limit the domination of the public pillar based on pay-as-you-go (PAYG) funding. But it does not solve the fundamental problems of the current system in Slovakia linked with the excessive weight of the mandatory principle, and the suppression of personal responsibility and motivation to save.

The authors of the article „Problems with Pensions Continue“ focus on an analytical assessment of the changes which have occured during pension reform in Slovakia and also in outline on the presentation of an alternative solution to the problems of the pension system in (but not only) Slovakia.

They consider the excessive weight of the mandatory system, a high contribution burden, and the fact that no space has been created for the development of voluntary pension schemes, to be the main problems of this reform. The beginning of the reform was followed by an increase of the pension insurance rate of 0,75 per cent as well as by an increase in the maximum contribution base which is three times the amount of the average gross wage.The new system thus contributes to a rising of the fund contributions burden.

For the authors a consistent (though gradual) change in the current system into a system of dominant private and voluntary funding, a reform contrary to the reform implemented by the government, is a real reform. Personal responsibility for an individual for his or her future financial security (especially in old age) should not be forced. On the contrary, the dominant present PAYG public funding should change into a complementary pillar guaranting basic living minimum. The pillar should be funded from taxes, though it should grant the claims of all the current pensioners in the transitional period by also using mandatory public contributions if necessary. Later, it should be tailored to objectively proved needs of individuals only.

Peter Gonda is an economic analyst for the Conservative Institute of M. R. ©tefánik.

Martin Thomay works at the Institute for a Free Society.

The article was published in the magazine OS in 2003.

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