Cause and Effect in European Politics and Law

A reform with a well known outcome

Anghel Shoylev Juniour, Adelina Marini, August 18, 2010

On August 4 the Bulgarian government has approved a bill, amending the Social Insurance Code. The approved amendments, however, do not even hint of a long-awaited reform of the pension system. The retirement age remains unchanged - 60 years for women and 63 years for men. The period of social insurance length of service will be gradually increased to 37 years for women and 40 years for men by 2013. Those who are over 65 years of age will be able to retire if they have no less than 15 years of social insurance. Given the tightening of requirements for the social insurance length of service, the possibility to buy "years" remains, but the period is diminished from 5 to 2 years.

The bill also foresees amendments in the way the amount of pensions is being calculated and in Art. 328, P.1, point 10a of the Social Insurance Code, thus creating an opportunity the employer to end a contract with an individual who had reached retirement age, the social insurance length of service ceiling and has in fact retired.

And since the idea of the amendments is to reduce the deficit in the budget of the National Insurance Institute (NII), let us see whether this will happen. According to an analysis of the Institute for Market Economy (IME), the government should take a lesson in arithmetic. "According to the draft budget of the NII for 2010 the state's transfer (including the state's participation in financing the Pensions Fund by 12%) for this year will be 4.971 bn levs (2.549 bn euro)". Additionally, the money that the NII has still not collected for past years has reached 1.075 bn levs (0.55 bn euro), which automatically denies the thesis that the deficit is due to irregular payments of workers.

The calculations for an increased minimum insured length of service in the next three years show, accordingly - 80, 340 and 670 mn levs (41; 174.35; 343,58 mn euro)reduction of NII's deficit. From time to time an idea for an increase of social insurance contributions appears in public, but even such a measure will not help solve the problem with the deficit in the public pension system, the economists from IME say. In order pensions could be covered only by social insurance contributions, they should be increased to the unthinkable 50% of the income. If this would happen, it would cause a heavy blow to workers and the economy, a significant broadening of grey economy, increase of unemployment, decrease of income and, in general, a drop of economic growth.

Stabilising the pension system through an increase of social insurance contributions was tested in the 90s and did not lead to any positive result, on the contrary - the system collapsed. Since we have to undertake extreme measures like a constant increase of the insured length of service or the retirement age, then something in the entire system is wrong and/or it is not working the way we all would like it to. A structural reform of the pension model - this is the measure that has to be introduced, IME says.

The transition in Europe is characterized with reduction of the share of the state costs-covering pension systems towards an increase of the role of the additional, private, financed in advance schemes. To put it simpler - the ambition is to avoid the costs-covering model to the direction of private pension accounts. It is another issue, however, whether the economy of Bulgaria is ready to bear such radical changes and the speed, with which it could be introduced to cover all of us - starting with workers, then employers and finally to reach the pensioners.

If such a reform is to be introduced, it has to be realised very gradually in order to help generations adjust to it naturally - and not in the interest of some but at the expense of others. Furthermore, reforming the pension system should in all cases be accompanied by the economic visions of the government. This means the cabinet to make a thorough analysis of the condition and the potential of labour market, to plan measures to include as many as possible new workers who could contribute to the social insurance system. Such an analysis could help the government see other ways to relief the system.

In any case though, the current approach of talking about a public debate on this so serious and long-term issue, but instead to make discussions for the sake of appearance, would just not do any good. This could temporarily create a feeling that the government is trying to solve the problem, but actually it is only postponing it. A proof of this approach is a research of public opinion of the National Centre for Studying of Public Opinion, accompanying the bill.

The results show that 44% of the respondents have no wish to retire earlier, 49.4 per cent think that the social insurance contribution must be increased by at least 2-3%, and a more significant increase is supported by 15.3 per cent. The problem with this data, according to IME, is that the research is non-representative because the respondents were only 403 people, who attended 19 round tables, organised by the NII with regard to the reform. The arithmetic of the economists shows that this makes an average of 21 people per discussion, most of whom were invited by the NII.

Recently the European Commission has published a Green Book on Pension Reform, thus initiating a discussion on a European level about the changes needed in the Union. Although this area is a priority of national authorities, the Commission clearly states that the problem is very serious, imposing some common and, most of all, painful decisions. So, no matter how long the government would postpone such a decision, it will be forced to comply with the European policy on the issue and will finally start the pension reform.