Anticipating Pension Reform

The question of when Ukrainians should receive their official status as pensioners has long been discussed in this country. There are a lot views on this problem, with arguments both for and against raising the retirement age. According to sociologists’ findings, Ukrainians themselves do not have a strong desire to work longer than usual, i.e. till 55 years for women and 60 years for men. And this is so despite the fact that such norms were established as early as 1930s, and most European countries (which we see as examples for us), have long ago raised the retirement age to 62-65 years. But the question is not whether we want it or not — we can no longer avoid it due to demographic and economic pressures. If after 20-25 years we want both ourselves and our children to receive a normal salary and enjoy a decent quality of life, then raising the retirement age is inevitable. Such is the conviction of the experts at the Blue Ribbon Analytical and Advisory Centre (established by UNDP and EU), as well as their colleagues at the Institute of Demography and Social Research (the NAS of Ukraine), who jointly prepared the report on Demographic and Financial Pre­re­quisites of Pension Reform in Ukraine: Outlook 2050.

As stated in the report, Ukraine now has a ratio of ten people of working age to four retired ones. When taking into account the fact that not all working-age people are formally employed, then Ukraine has ten contribution-payers for nine pensioners. By 2050 the number of pensioners will increase by a quarter, and the burden of financing the pension system will rest on the shoulders of the working population. According to experts, in a few decades pension contributions will not be 35 percent of income, as it is now, but whooping 50 percent.

Experts do not deny that pension reform is unpopular, and not only in Ukraine. It was not approved by the public in many European countries that are already past this phase. Therefore, experts believe that Ukrainians should be given explanations why such a reform is needed, and the consequences for the average person in terms of benefits, as well as for society and the economy in general. The government, on the other hand, was given several scenarios of raising the retirement age: for women only by five years in a decade, or for women and men simultaneously in seven and two years respectively; these scenarios were identified by experts from the UNDP/EU, working in cooperation with the Institute of Demography and Social Research. Another option includes raising the age by ten years for women and by five years for men.

“The best and most radical, in our view, is the scenario which envisages increasing the retirement age for both men and women to 65 years, gradually — by six months every year. Thus, the number of new pensioners would be almost halved in the years 2011-21. Also, it would allow to balance the pension fund and the state budget. Current retirees would be positively affected, as the probability of preserving or raising their benefits would increase significantly” told us the Director of the Blue Ribbon Analytical and Advisory Centre Marcin Swiecicki.

Facts are stubborn things, but people who are already close to retiring can hardly be won over, even by the best arguments. On the one hand, their motives are understandable — nobody wants to work more years in low-paid jobs, especially when the said job requires significant physical activity. On the other hand, we have a lot of retirees continuing to work after entering retirement. According to the report, the employment rate of people above working age in Ukraine is 25 percent.

“Given this situation, an increase of the retirement age would lead to an increase in labour supply in the labour market as well as an increase in the number of employed. Thus, raising the age to 65 years increases the labour force by one million persons, while the total number of pensioners decreases by almost 2.5 million. At the same time, there is no reason to believe that this will lead to higher unemployment,” said a leading researcher at the Institute of Demography and Social Research Lidia Tkachenko. We used to be scared of raising the retirement age, even though it has many advantages, particularly in social terms. We should not consider work as some heavy duty to society as it was in the Soviet times. We can not force people to work, but we can motivate them. When a person retires, even if he is still working at his job, he just loses his position quicker. Career growth becomes something beyond ones wildest dreams. And if we are speaking of the social role of public employment, then what should a person do, if not work? It is a way to participate in public life and the opportunity to realize ourselves. So we have to forget the idea that a low retirement age is a great social benefit.

As recently stated by Vice Prime Minister Serhii Tihipko, in September Ukraine will present the International Monetary Fund with a plan for pension reform, explaining how to raise the retirement age. But more political will from MPs is needed, if they really dare to implement this unpopular reform.