Increasing Retirement Age is Inherent to Ensuring Sustainability of Pension System in Ukraine, Says EU/UNDP Report

The Report provides rich in data justification for putting the pension reform on Government’s policy agenda and explains to civil society why increasing the retirement age is the best if not the only solution.

Ms. Laura Garagnani, Head of Operations of the Delegation to the European Union said: «The reform of the pension system requires a wide public dialogue and a joint understanding of the challenges and what is needed to address them. Taking into account the economic and demographic situation as well as the EU experience, the new pension system in Ukraine should develop incentives for working longer, promote supplementary pensions and develop stronger links between contributions and benefits».

Mr. Olivier Adam, Resident Representative of the United Nations Development Programme in Ukraine said: «Presidential programme defines pension system reform as one of the priorities for Ukraine. But all politicians and experts realize that many sustainable and efficient reform options are unpopular at the beginning. Therefore, this BRAAC report aims not only to provide in-depth assessment of the increasing of the retirement age, but also explain to wider public, why it is the best, if not the only way to prevent the pension system from collapse».

Ukrainehas one of the largest percentages of pension expenditures as a share of the GDP in Europe - over 18% in 2009. Pension expenditures for 2010 are forecasted at 17% of GDP. Pension increases are chaotic, ungrounded, and unpredictable in nature due to election campaigns. Pension expenditures outstrip inflation and the growth in wages even though the economic capacity to ensure such growth is insufficient.

Demographics versus pension system

With the aging population, today Ukraine has 4 retirement age people (over 60/55) for every 10 working age people. By 2050 this ratio will reach 8 to 10 proportion. The situation is aggravated by a widening of informal employment shown by the fact that only 75% of the total number of employed persons actually pays pension contributions. Currently there are 9 pensioners for every 10 contributors.

With these trends the number of contributors and the number of pensioners will be equal in 2025 and by 2050 the number of pensioners will exceed the number of contributors by 25%. The increases in the number of pensioners and a decrease in the number of contributors will bring additional pressure to bear on the Pension Fund budget and on the State Budget of Ukraine.

Research shows that if there are no changes to the system the deficit in the Pension Fund’s revenues, arising solely from contributions, will amount to 12% in 2025 and to 30% in 2050. It will be impossible to retain the size of pensions and other pension system indicators at their current level. Therefore, Ukrainian society is facing a tough choice in the ways of supporting the pension system’s financial capacity.

Increasing retirement age is the best solution

The options available to ensure sustainability of the pension system are the increase of the pension contribution size for employees and/or employers; the increase of the subsidies from the budget or establish additional taxes; the decrease of the pension size when compared to incomes of the working population, and the increase of the retirement age.

Increasing the contribution rate for all contribution payers is impossible, since it is currently already very high (even compared with other countries of the world). Increasing subsidies from the budget is impossible, since they will then preclude other programs of economic and social development: healthcare, education, infrastructure, security, etc. The existing ratio of pensions to wages will have to decrease from 40% in 2009 to 28% in 2050, if the size of contributions or subsidies is not to be increased.

Meanwhile, the results of the study show that increasing the retirement age allows for a reduction in the demographic pressure on the pension system for a long period of time. The effect of the reduction is notable immediately once it is implemented and that is why its implementation is especially important during a crisis. Simplicity of implementation and a minimum of organizational support form a distinctive feature of the increased retirement option when compared to other measures.

The increase of the retirement age may be done in a variety of ways, but the so called “crisis reduction” scenario for increasing the retirement age (simultaneous increase in the retirement age for women and men to 65 years of age starting from 2011 by six months per annum) is the most efficient among all the scenarios. The load on the contributors will decrease in 2011-2020 to 77% by 2020 against a current 88%. It will grow to 80% in 2020-2030 but the system will return to its current value only in 2043.

In the case of a two-step process to increase retirement age to 65 years of age, the effect is much lower in 2011-2030 but during the next period the effects of both scenarios become even.

Women work a shorter period of time in Ukraine than women in other countries while they stay retired longer. Ukrainian women hold the world record in correlation between the length of retirement and the labor period needed to obtain a pension: 7.1 years of staying retired for every 10 years of labor, while in other countries the ratio is: England – 5.8, Hungary – 4.9, Germany – 4.6, Italy – 6.2, and Poland – 5.5.

But increasing retirement age solely for women by 5 years will allow maintenance of the load of pensioners on contribution payers at the existing level (87%) only till 2021. Therefore, increasing retirement age for both genders to 65 years of age, as has been done by many other countries around the world, is the most rational option for maintaining the system’s stability and preventing its bankruptcy.

Mr. Marcin Swiecicki, BRAAC Director said: «Pension system is already in crisis and due to demographic trends situation will only deteriorate every year. In 2025 the number of pensioners will exceed the number of contributors to pension fund.  We support the gradual increase of the retirement age that will protect present and future pensioners against the collapse of the pension system».

In the European countries the most common age of moving from work to retirement is 62-65 years. On average, the majority of the Post-Socialist countries raised retirement age by 1.5-5 years during 1989-2006. Only Belarus, the Russian Federation, Uzbekistan, and Ukraine among the CIS countries left retirement age unchanged (55 years for females and 60 for males).

Low indicators of life expectancy and worsening of the situation in the labor market are usually voiced as the major concern when speaking of increasing of the retirement age in Ukraine. However, according to the Report, the increased retirement age will not cause any significant increase in unemployment, and prolonged employment period of the elderly people will have no significant influence on employment opportunities for youth.

Although significantly lower in Ukraine, when compared to European countries, life expectancy indicators do not justify the existing retirement age. Further delaying of the suggested pension reform will be costly and devastating for upcoming generations of Ukrainians, argues the Report. 

For media inquiries, please contact Andriy Zayika, Communication Officer, BRAAC, tel.: +380 44 253 58 66, e-mail: andriy.zayika@undp.org.ua