REPAYING PENSION ARREARS: ANOTHER NATIONAL GAME

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Pensions are governed by the Constitution of Ukraine, international treaties, and 19 enactments. Apart from numerous laws, the situation is aggravated by staggering pension arrears. Despite the Cabinet’s recent active use of foreign loans (and this money will have to be repaid at an interest!), the Federation of Trade Unions of Ukraine says the situation has not improved. On the contrary, the arrears on pensions have increased from UAH 1.2 billion as of January 1, 1998, to UAH 1.61 billion. According to Pension Fund Chairman Borys Zaichuk, the period between January 1 and March 1 this year showed especially striking figures: a jump from UAH 1.97 to UAH 2.362 billion.

Viktor Yakubovych, an expert with the International Center for Policy Studies, attributes this lamentable situation to the government manipulating the Pension Fund. “Pension Fund money is composed of working people’s contributions and state and local budget returns. In fact, the Pension Fund pays pensions first and is compensated by the state afterward. Thus the existing system is designed to juggle Pension Fund money, channeling it not for pensions but other purposes. Over the past several years Pension Fund disbursements have not been timely compensated, and this has resulted in a Pension Fund deficit, which could have been avoided if the fund had been used for its designated purpose, paying pensions.”

Deputy Premier Serhiy Tyhypko, in turn, does not blame the Cabinet for pension money shortages. “The government is repaying debts to the Pension Fund budget. Over the past three months we have been regularly allocating certain amounts. We fully agree with those who speak of diverting financial flows, but there is also another problem: how is one to cope with Pension Fund payments (i.e., pensions payable from the state and local budgets —Author This must be answered jointly by the legislature and executive. We will pay what we must under the 1999 state budget program and there will be nothing left to juggle with,” he declared.

Problems with pensions also exist abroad, and the state is also blamed there. “In Canada, they had problems with certain pension funds,” says Jim Yakuta, director of the Canadian-Ukrainian Legislative Cooperation Project, “and one such problem was faced by Alberta teachers. At the time, pension fund accountants and auditors predicted that the fund would go bankrupt within the year, leaving a debt of several billion dollars. This happened because the government had certain liabilities that kept piling up for 20 years.”

Independent experts, however, analyzing Pension Fund official figures, all looking more than optimistic, refer to other reasons for such cheerful reports and inadequate social payments. Thus, they believe that the situation is caused by part of contributions being made to the fund in kind. Accordingly, part of the pensions is paid likewise, distorting actual costs, because products are accounted as Pension Fund contributions at prices higher than those at which they are paid the pensioners.

Official explanations mostly boil down to complaints about rising pensions, more people retiring earlier than usual, and a great many “categories of individuals receiving pensions on soft terms, lowering retirement age and raising pension rates.” According to the Labor and Social Policy Ministry, the number of people allowed to retire ahead of term in 1990-97 increased twofold.

Fund people mention yet another reason for the pension system’s imbalance: “today, one can choose very advantageous pension accrual terms, either for the last 24 months before retirement or any five years, in any decade of one’s uninterrupted employment record. By comparing the average pay for the length of service and that one proposes for one’s pension accrual (i.e., one’s chosen period), the latter is invariably higher by 20-25%. In other words, the Pension Fund receives less money than they expect from it in terms of payments.” @PZ WILL THERE BE “NEW PENSIONERS” AFTER REFORM?

The situation in Ukraine today is such that employees are paid twice: officially and in a separate envelope. This primarily makes the state suffer, meaning that there is a tax payment shortage. Naturally, this affects the extant solidarity pension system. The latter is no longer able to secure even current pension payments. And there is no sense trying to reform this system by taking measures like liquidating the Pension Fund deficit or imposing new innovative taxes, because none of this will ensure a linkage between pension contributions and payments.

Meanwhile, they made an experiment in Lviv oblast, personifying pension accounts. The gist of it was setting up an information system accumulating data relating to those still employed: place and type of work, length of service, amount received as pay, and Pension Fund contributions. The experiment resulted in increasing fund revenues by 19.8%. At present, this experiment is being extended to the rest of Ukraine.

Yet this does not solve the problem as such, so there are two options for change: the individualization of pensions and improvements in social insurance. The former envisages a quite radical pension reform, creating three pension levels. The exponents of social insurance propose to improve the existing system, without changing anything in principle (the pension individualization concept is embodied in a bill passing through the “coordination” phase).

The first (compulsory) level is the traditional solidarity pension system made up of current fund revenues (with all the employees making payments to finance pensions paid to present-day pensioners). In this case the Pension Fund receives money which is automatically accrued by the employer when paying wages and which in no way affects its amount. In this way a system of minimum pensions is formed and guaranteed by the state. The amount received by the pensioner depends on the duration of payments on account of pension and the amount of pay. This system is run by the state.

The second (compulsory) level is a system of individual pension accounts. Here contributions are planned on a step-by-step basis, rising from two to nine percent. Thus is it planned to establish a connection between contributions and payments; contributions accumulated this way and revenues made using them are the participants’ private property, and the total amount of contributions determines the amounts to be paid as future pensions. Savings thus accumulated will be managed by special companies authorized to handle the assets. It is further envisaged that the stock capital of such enterprises will total not less than 400,000 euros.

The third (voluntary) level is a system of supplemental voluntary individual pension savings. This is planned to involve “nongovernmental” pension funds, banks, insurance companies, and other financial institutions. However, these organizations will have to collect and store pension contributions only, while investment will be handled only by such asset-managing companies.

Pension reform as such is planned in three stages: (a) introduction of personified accounting (setting up the first level), which is already underway; (b) organization of “nongovernmental” pension funds (second level) and adjustment of the vehicles of investing money thus saved, and (c) introduction of the second compulsory level of social insurance. In the new compulsory insurance system (second level), between one and two percent of wages will be transferred to personal pension accounts, 2001-05, with a 1- 2% annual increment. In 2005, it is expected to reach a 5-9% rate of pension deductions.