1. Pension Systems in Times of Financial Crises: Serbia
Ministry of Finance
Republic of Serbia

2. Pension System before Reforms
Based on the PAYG scheme only (where current workers pay out current pensioners)
Very generous and fiscally unsustainable
valorization and indexation rules:
only 10 best years relevant for calculating pension at retirement,
pensions fully indexed to wages
Very early retirement age (50 years for women and 55 for men)
Generous disability retirement rules, corruption-ridden
Since 1991, the pension fund has generated debt; uncertain timing of pension payments, in arrears for 2 months on average

3. Pension Reforms in Serbia Started in the Early 2000’s
Significant parametric and systemic reforms to the public PAYG system (Pillar 1)
Introduction of tax-preferred FF voluntary private pension funds (Pillar 3)
Serbia did not introduce FF mandatory private pension funds (Pillar 2); Is this a good decision?

4. Reasoning against Introduction of Pillar 2 Prevailed in Serbia
High transition cost: for 7% contributions, transition cost would last for 40 years and average 1.2% of GDP per year!
Undeveloped capital markets
High administrative and operational costs
Risky strategy … as we can all appreciate during days of Global Financial Crisis

5. Basic PAYG Statistics
2.6 million contributors (1.9 employees, 0.2 self-employed, 0.5 farmers)
1.6 million pensioners (1.4 employee and self-employed, 0.2 farmers)
Challenging economic indicators: high unemployment (15%), a low employment rate (50%), significant shadow economy, weak compliance from farmer contributors
Deteriorating (rising) old-age dependency ratio: from 25% in 2005 to 34% in 2035

6. PAYG Parametric Reforms
Retirement age increased by 5 years
65 for men and 60 for women (by end of 2010)
Disability retirement rules tightened
Number of disability pensioners decreased by 15%, another 15% drop expected in coming years
Pension Indexation Changes
From full indexation to wages, to the Swiss formula (50% wages 50% inflation), finally to full indexation to inflation

7. PAYG Systemic Reform
Based on a change of the pension formula in order to enforce the link between contributions and benefits
All years of service relevant for calculating pension at the retirement age

8. PAYG Reform Savings
Increased retirement age + tightened disability eligibility => improved the PAYG dependency ratio in the medium-to-long run
Indexation formula less reliant on wage growth => fiscal savings in the short-to-medium term
Systemic and parametric reforms started producing savings => pension spending totaled 12.1% of GDP in 2006 and 11.8% of GDP in 2007

9. Two Steps Back: Reasons behind Increased Public Pension Spending Share in GDP
Major reason: a politically motivated ad-hoc pension increase in 2008
Moving from the Swiss formula to inflation indexation was socially unpopular, resulting in the formation of the Pensioner Party which was the key factor in forming the Government
Carry-over effects of the ad-hoc pension increase in 2008 will be felt for 2 to 3 years
Minor reason: a decline in productivity due to the economic crisis (we increased pensions at a very unfortune moment)

10. Basic Pensioners’ Standard of Living Statistics
Lots of jokes, but in Serbia ...
Average pension / average wage ratio was 71% in March 2009
Just like distribution of employees according to wages, distribution of pensioners according to pension benefits, is “left skewed” – 60% of pensioners are receiving pension benefits below the average
The poverty rate of pensioners, according to the Living Standards Survey, is lower compared to the population as a whole (5.3% against 6.6%)
The net old-age pension/net wage ratio is 80%! Only 55% are old-age pensioners, 25% disability, 20% survivor and only 17% of pensioners have full-career service!
The net full career pension/net wage ratio is 90%!
Although the pension contibution rate is 22% (11% on behalf of employees and 11% on behalf of employers), budget subsidies account for 40% of pension spending!

12. Serbia’s Response to Financial Crisis
Nominal freeze of public pensions for 2 years (2009 & 2010), inflation indexation afterwards
Increased pension spending + decline in contribution revenue growth => pressure on public finances requiring additional budget subsidies

13. Voluntary Private Pension Funds and Financial Crisis
9 pensions funds in operation, 6% of employees contribute, accumulated funds only 0.15% of GDP
In 2008, the Belgrade Stock Exchange tumbled by 75%, but pension funds lost only 7%
Restrictive investment regulations and undeveloped capital markets resulted in conservative portfolios
50% money deposits, 30% government bonds, only 15% equity

14. Financial Crisis Impact on Pension System in Serbia
Not very significant, due to the dominance of PAYG financing
The major adverse effect is a relative decline in contributions due to economic recession
Voluntary pension funds operating for only 2 years with conservative portfolios and insignificant accumulations

15. Planned Future Changes to Pension System in Serbia
Further PAYG parametric reforms
Further increases in the retirement age
Tightening accelerated service and early retirement provisions
Introducing the automatic stabilizers (automatic change in the contribution rate and/or in the retirement age as a reaction to the replacement rate – the financial position of the pension fund)
Developing an appropriate valorization and indexation formula that will be fiscally sustainable and socially acceptable (in a way, to keep pace with collected contributions)
Expansion of FF voluntary retirement saving
Possibly extending a tax-preferred treatment to a broader range of (less risky) saving vehicles, such as long-term bank savings and life insurance contracts