PENSION REFORM IN BULGARIA – STAGES, GROUNDS AND PHYLOSOPHY Dr PENSION REFORM IN BULGARIA – STAGES, GROUNDS AND PHYLOSOPHY Dr. Hassan Ademov Chairman of the Labor and Social Policy Commission of Bulgarian Parliament

PENSION REFORM IN BULGARIA: STAGES STAGE OF CAUTIOUS PARTIAL REFORMS (BACKGROUND TO RADICAL REFORMS) – 1990 – 1999 STAGE OF RADICAL REFORMS PER SE – 1999 – 2010 STAGE OF PROMOTING IDEAS FOR REVISION OR RADICALIZATION OF THE REFORM – 2003 - ?

PENSION REFORM: BACKGROUND 1990 – 1991 – Generous early retirement schemes; 1992 – updating pensions and discussing reform possibilities, incl. implementation of the Chilean model; 1993 – 1994 – “White Book” – reforms in the public pension provision system; 1994 – Introduction of voluntary pension provision based on the fully funded principle – without regulation; 1996 – Autonomous pension provision funds and social security institution (NSSI) managed based on the tripartite principle; 1996 – Pension rate is linked to the social security contribution throughout active life.

RADICAL PENSION REFORM: MOTIVES Low and almost flat pension size – income replacement rate of 25 – 27 per cent; Increasing social contributions/ decreasing collection rates; Low motivation for participation in the public social security system and escape in the shadow economy; Growing future liabilities and estimated enormous financial deficits.

GROUNDS FOR SUCCESSFUL PENSION REFORM Political will and commitment backed with widest possible support. Favorable macro-economic environment. Favorable social environment. Institutional capacity, incl. developed IT and communication systems. Actuarial team. Bridge between the academia and reformers. Technical and financial support from international institutions. Active PR .

PENSION REFORM: PHILOSOPHY Based on the World Bank’s concept for a multipillar social protection system taking into consideration the national traditions and specifics: Preserving the core role of the solidarity pension system while changing its parameters; New paradigm – building a well-regulated supplementary privately managed funded pension schemes – both mandatory and voluntary.

Contents of the parametric reforms in solidarity Ist pillar Universalization: covers all economically active persons and encourages labor mobility; Supplemented by non-contributory pensions (social, occupational and others) – pillar 0; Structured in funds – Pensions Fund and Non-Participatory Pensions Fund Gradually moving early retirement out and into the second pillar; Stricter pension eligibility rules.

Outcomes of the parametric reforms in the first pillar Improvement of the dependency ratio – from 104 pensioners to 100 insured in 1999 to 82 pensioners to 100 insured in 2007 Early retirement is shifted from first to second pillar (transitional period to 2010) Enlargement of the coverage and the tax basis of the social insurance, including due to the incentives of participation in the second pillar Improvement of the replacement rate - from 34% in 1999 to 43 in 2007 Widening of the pension differentiation – from 1 : 3 in 1999 to 1 : 5.5 in 2007

CONTENTS OF THE PENSION REFORM’S SYSTEMATIC PART Introducing a fully-funded mandatory second pillar with two types of pension funds: Occupational – for early retirement of people working under arduous labor conditions, funded by the employer; Universal – for all persons born after 31.12.1959, providing a second life pension, funded through employer and personal contributions; Regulation of voluntary pension provision (funded IIIrd pillar) with personal or employer contributions. Tax incentives; Building a regulatory government body – integrated supervision over the non-banking financial sector; Codifying the social security issues into one single regulatory act – Social Security Code; Good public-private partnership.

SOCIAL AND ECONOMIC IMPACT OF THE SYSTEMATIC PENSION REFORM (THROUGH 31.12.2006) SPF: ІІnd pillar ІІІrd pillar Total: 1. Coverage rate of supplementary pension provision (PF participants to total active population)1 54,68% 11,74% 66,42% 2. Penetration rate (PF’s net assets to GDP)2 2,08% 1,01% 3,09% 3. Increasing role of PFs for the domestic capital market’s development (relative share of investment portfolio in securities traded on regulated markets) 37,49% 41,82% 38,92% 4. Contribution to the formation of current retirement income (1990 pensioners and BGN 51 million paid in benefits from SPF in 2006) 1 Participation in UPF is mandatory for all persons born after 31.12.1959 (a person may participate simultaneously in all three types of PF) 2 At the end of 2006 pension assets (savings) form 6.4% of the Bulgarian population’s financial wealth.

ADEQUACY OF THE REFORMED PENSION SYSTEM Access to pension eligibility – almost full coverage of the population. Bottlenecks – high unemployment rate in preretirement age; Income replacement rate from the three pillars (ultimate goal of the reform) – 70 - 80 percent, incl. From the solidarity Іst pillar – 40 percent; From the funded IInd pillar – 20 percent; From the funded IIIrd pillar – 10 – 20 percent. Current dissatisfaction with the pension levels. Very thrifty pension indexation formula; Individual accounts, good participation incentives and opportunities for personal choice in the IInd and IIIrd pillar.

Pension reform’s sustainability to the challenges of time Risks relating to the solidarity pillar Economic risk - negative growth, decline in employment and income rates, real sector bankruptcies, large share of shadow economy; Demographic risk – worse than projected natural growth rates, new emigration wave and others; Management risk – simultaneous implementation of reforms – structural, health, military, etc; Political risk – decisions resulting in new deficits.

Pension reform’s sustainability to the challenges of time Risks regarding the fully-funded pillars Financial destabilization, bankruptcies and undermining the confidence in the reform; Bad pension assets management and low rates of return; Political risk – stopping the reform and regression to the old system; Institutional risks.

Alternatives to the present pension model Two alternatives are discussed publicly: Absolutizing the solidarity pillar and restricting the funded schemes only to the voluntary pension savings; Full privatization of the pension system – Chilean model.

Why the solidarity pension system should not be absolutized Ageing and emigration put the pensions of the current young generations at a great risk; No opportunities for personal choice; Disincentives for participation of young generations; No assets capitalization.

Why the solidarity system should not be closed down It is core in almost all developed countries; The social security contribution of the current generation of workers cannot be annulled; Issues related to double cost and transition cost; Bulgaria has signed international agreements for transfer of social security rights. EU Directive 1408; Social protection of the elderly population cannot become prisoner to the whims of the emerging capital markets.

QUESTIONS