The good news: Ukraine’s parliament on Oct. 3 approved a law intended to fix the country’s burdensome and unsustainable pension system.
The bad news: It probably won’t work.
The law’s main purpose is to lessen the catastrophic burden of pensions on the state budget: In 2017, 35 percent of Ukraine’s $40-billion budget will be spent on paying pensions.
To fix that, the new law cuts the numbers of new pension claimants by cutting back on early retirements.
But to soften the blow to the population, the government will delay full implementation of the law by 10 years, and sweeten the pill with an immediate rise in pensions – measures some believe could undermine the main purpose of the law.
“This is not a reform,” said Olena Sotnyk, a lawmaker with the opposition Samopomich party. “Current pensioners will win from it, but future ones will lose.”
IMF factor
Questions also remain over whether the new law complies with the demands of the International Monetary Fund and the World Bank, Ukraine’s biggest donors, who have made the reform a condition for doling out further cash.
Pension reform was one of the conditions to unlock the fifth tranche of the $17.5 billion loan that the IMF granted to Ukraine in 2015. The tranche, planned at $1.9 billion, was to have been disbursed over the summer, but has been held up by Ukraine’s foot-dragging on reforms.
Ukrainian officials have complained that the conditions for the fifth tranche were the most onerous so far. By various reports, they included cancelling the moratorium on the sale of farmland, establishing an anti-corruption court, and reforming the pension system.
But so far, the country’s leadership has only made progress on pension reform – and even that is questionable.
The IMF’s main requirement on pension reform was for Ukraine to increase the retirement age. Standing now at 60 for men and 58 for women, it is lower only in Russia.
However, the new law doesn’t increase the retirement age per se. Instead, it increases the number of years that one needs to work and pay a social tax before retirement from 15 to 25 years immediately, and foresees an annual increase of this threshold until it reaches 35 years by 2028.
It isn’t clear yet if this delayed effect, paired with the burden of an immediate rise in existing pensions, will satisfy the IMF and the World Bank. Both institutions are yet to give official reactions to the passing of the pension law.
The IMF will likely discuss the issue during an upcoming meeting on Oct. 9 with Ukraine’s Finance Minister Oleksandr Danyliuk. By that time, however, the law will have already been signed by President Petro Poroshenko.
Danyliuk himself isn’t too optimistic about cutting the pensions burden soon.
“The Pension Fund will be growing, while the deficit in absolute figures will not. Therefore, in percentage points, the deficit of the Pension Fund will be decreasing,” Danyliuk said in an interview with the Dzerkalo Tyzhnya news website. “One day, perhaps, we will achieve a deficit-free pension system, but this is definitely not a prospect for the next five years.”
What’s wrong?
If it functioned normally, the pension system in Ukraine would be self-sustaining and not require regular bailouts from the budget.
The money to pay pensions comes from the social tax that Ukrainian employers pay on behalf of their workers. The tax revenues flow to the Pension Fund, which then uses it to pay pensions to the country’s 12.3 million pensioners.
But the system can work only when the taxpaying workforce exceeds the number of pensioners. In Ukraine, the ratio has been 1:1 since 2014.
This creates a hole in the Pension Fund’s finances that has to be plugged by the state budget. In 2017, the fund needs nearly $11 billion to pay pensions, but expects to collect only half of that in taxes. The budget will have to pour in $5.7 billion to close this year’s gap.
Ukraine’s poor demographic outlook promises to aggravate the situation: the population is decreasing in size, and getting older.
The pension reform was supposed to provide a long-term solution.
How to fix it
To cut the inflow of new pensioners into the overburdened system, the new law increases the number of years that a person has to work before retirement.
Today, Ukrainian men can retire at 60 if they worked and paid the social tax for at least 15 years during their life. For women, the retirement age is 58, but the number of working years required is the same.
Starting next year, the threshold will be raised to 25 years, and it will grow by one year annually, until it reaches 35 in 2028.
In practice it means that the younger the person is now, the longer he or she will have to work until retirement.
However, some doubt if this fix be enough to eliminate the pension deficit.
“Such a system can’t exist within Ukraine’s demography,” says Volodymyr Dubrovskiy, senior economist at CASE Ukraine, an independent economic research non-profit public organization.
“It could only exist in a country where each successive generation is richer and larger than the previous one.”
Meagre increase
To soften the blow of the reform, the government made sure that the new law guarantees an immediate increase in payments to current pensioners.
Old-age poverty is prevalent in Ukraine. Eight million out of the country’s 12 million pensioners live on less than $50 a month – which puts them below the international poverty line of $1.90 a day.
The new law seeks to increase pensions by changing the way they are calculated.
Earlier, the size of the retirees’ pensions was linked to their average salary during their working lives, and inflation was ignored. So a pension assigned as recently as 2009 was worth peanuts by 2017.
The new law links pensions to the average salary over the past three years in Ukraine, which is $140. For those who made less than that while in the workforce, it will mean they get an immediate increase in their pension from October.
That sounds good, but in practice the increases will be small.
The government estimates that the poorest 1.1 million, or 10 percent of the country’s pensioners, will get an increase of $38 a month, bringing their pension from about $60 per month to just under $100.
Altogether, some 9 million pensioners could benefit from the new law, but some of them will get as little as $2 a month more.
Kyiv Post staff writer Toma Istomina contributed reporting for this story.
