Cause and Effect in European Politics and Law

Pensions threaten the budgets of the new EU members

Ralitsa Kovacheva, June 16, 2011

Fiscal consolidation is the main task of the new EU members, while maintaining growth-enhancing expenditure. This is one of the main recommendations of the European Commission to the new member states, based on the review of their National Reform Programmes and Convergence Programmes (or Stability Programmes for the eurozone countries). It is also needed pension reforms to be conducted.


Poland came out of the crisis relatively “dry”, but with an excessive deficit which should be corrected to the limit of 3% of GDP by 2012. The Commission warns that the cost reduction should not hinder growth and endanger the co-financing of EU funds. Under the Euro Plus Pact Poland has committed to introduce new regulations limiting deficit ratios of local governments and a permanent expenditure rule.

Poland is the only country among the new EU member states where the risk for long-term sustainability of public finances, resulting from aging, is assessed as medium (in the others it is above the EU average). Although the country has abolished early retirement schemes for most beneficiaries, those for uniformed services and miners remained in place, as well as different statutory retirement age for women and men, which means that the effective retirement age is still low, the Commission notes. Therefore the country should not only increase the mandatory retirement age, but to link it with life expectancy.

Moreover, the very heavily subsidised farmers’ social security fund (KRUS) provides little incentive for farmers to leave the sector, slowing economic restructuring and hampering productivity growth.” The Commission recommends Poland to introduce a timetable “to amend the rules for farmers’ contributions to the social security fund (KRUS) to better reflect individual incomes.”

In view of competitiveness, Poland has committed to invest massively in infrastructure, science and R&D, as well as to improve business environment. There are no significant problems in labour market, except for the difficult entry of mothers with young children. The reason is the lack of childcare, for which many young families can rely for help only on their relatives, the Commission notes. The recommendation to provide adequate child care, so that parents can go back to work, is one of the most common ones, not only for new member states.


Fiscal consolidation is the biggest challenge Hungary is facing. At first glance the situation of public finances in Budapest does not seem dramatic, but the Commission notes that this is a temporary effect of last year’s decision to abolish the mandatory private pension pillar. This measure “increases the long-term liabilities and so may deteriorate the long-term fiscal sustainability,” the recommendation states.

Overall, the Commission is not satisfied with the lack of ambition in Hungary to deal with the excessive deficit. The government has committed to correct the deficit to the limit of 3% of GDP by 2012 and to reduce the debt to 64% of GDP by 2015. However, the Commission notes that the pace of implementation of this targets is not in line with the Council's recommendations from 2009 and there is a risk the 3% limit to be surpassed in 2012, if additional measures are not provided.

In the recently adopted Hungarian constitution a debt brake is set at 50% of GDP, as well as the right of the so-called Fiscal Council to veto the annual budget - a step appreciated by the Commission. However, there is a lack of important details such as what measures will be taken until debt is lowered below 50%. The Commission expects concrete measures to be designed and implemented.

Hungary has a serious problem with employment – its level is one of the lowest in the EU (60.4%). One of the reasons is the Roma minority, which is poorly educated, suffers from high unemployment and the biggest part of it lives below the poverty line. How important this factor is we can see from the data for another country from the former socialist camp -


Although it was hardly hit by the crisis as the economy contracted by nearly 5%, Slovakia has achieved a growth of 4.1% in 2010. Still, however, the country is unable to restore sustainability of its public finances (the budget deficit jumped from 2% in 2008 to 8% in 2009-10), and unemployment remains one of the highest in the EU - 14.4%. Although still below the limit of 60%, the public debt has increased by 15 percentage points to 41% in 2010.

Bratislava's commitment to reduce the deficit to 3% in 2013 appears feasible, but “the challenge for Slovakia is to ensure that consolidation safeguards and even increases expenditure in growth-enhancing items, such as education and transport infrastructure.” In order to increase revenues, the European Commission recommends increasing efficiency of tax collection and especially VAT collection.

Although the reform in 2005, introducing multi-annual planning, programme budgeting and fiscal rules, the country still has a problem with its public finances. The reason is well known in our country too: “the fiscal targets for the outer years can be easily amended and do not therefore serve the purpose of anchoring the budgetary process in the years ahead.”

Therefore, the Commission recommends Slovakia to adopt binding multi-annual expenditure ceilings for the central government and the social security system and create an independent fiscal council to participate in budget planning and monitoring.

A major risk to long-term sustainability of public finances are the pensions, despite the reforms, having been undertaken a few years ago. The reason is that the reform does not reflect the projected increase of life expectancy. (A similar remark could also be found in the recommendation to Bulgaria).

Along with pension reform, Slovakia has to cope with unemployment, before it becomes structural. The share of long-term unemployed workers - 9.2% - is the highest in the EU and is particularly high among low-skilled workers. Like Hungary, one of the reasons for persistent high unemployment is the uneducated “marginalised” Roma minority.

In addition to bringing the “marginalised” Roma children in school, Slovakia has set the ambitious goal to increase the proportion of people with higher education from the current 17.6% to 40% in 2020. Meanwhile, the country is carrying out educational, vocational education and training reforms.

Under the Euro Plus Pact Slovakia has committed to reduce the administrative burden, fight corruption, increase transparency of public procurement and the judiciary and to increase the efficiency of the tax system – “diseases”, more or less typical for the former socialist countries.

The Czech Republic

The situation in the Czech Republic is quite similar to that in Slovakia. The country is also rapidly recovering and has all chances to meet its target to correct the excessive deficit by 2013. Prague should be careful too, not to allow consolidation to be at the expense of growth and should increase collection of VAT.

The Czech Republic also needs to urgently solve the problems in the pension system. At this stage the government has adopted a package of measures which has yet to be approved by Parliament this autumn. It provides until 2041 the retirement age for men and women to reach 67 years. However, according to the Commission, a more rapid increase of the retirement age is needed. The introduction of a voluntary second private pillar in 2013 is also being considered. According to the Commission that would be efficient only if there are incentives for broad participation in the scheme and if it is ensured that the pension funds will keep their administrative costs low and transparent.

Although the overall unemployment is firmly below the EU average, the long-term unemployment is growing, especially among the 20-29 years old. It is most difficult for low-educated workers to find jobs. The Czech Republic must also provide an adequate child care to enable women to work.


Slovenia has to reduce its deficit from 5.6% in 2010 below 3% until 2013, mainly by cutting costs. The Commission is very critical to Ljubljana for not providing specific measures and details how the objectives will be achieved.

The big problem the country is facing right now, however, is that the pension reform has been rejected in a recent referendum. Increasing retirement age was crucial, given that the impact of aging on the budget in the long run is significantly higher than the EU average. Employment among older workers is much lower than the EU average - 35% vs. 46.3%, mainly because of low retirement age and insufficient incentives for “active aging”. Despite the outcome of the referendum, the Commission recommends the retirement age to be increased and incentives for later retirement to be introduced.

A specific problem for the Slovenian labour market is the so called “student labour” which, according to the Commission “constitutes a sizeable, largely unregulated, tax-advantageous, parallel labour market.”

Meanwhile, the state continues to have a high degree of participation in the economy and “certain segments of the services sector are sheltered from competitive pressures and are characterised by high mark-ups and high concentration, raising costs throughout the economy”. Slovenia is planning to accelerate the implementation of the Services Directive and to identify state capital investments suitable for sale, but there are no specific details on this issue, the Commission notes.

The conclusion

is that "catching up" with the old members cannot happen without implementing fundamental reforms and bad habits from the past are abandoned by the new EU members. As you see from above, this is happening with varying degrees of success and at different speeds. It is especially difficult for countries with large Roma minorities (including Bulgaria), as is clear from the quoted data. This shows once again that the Roma issue should not simply be used as a pretext for closing borders but must be placed at European level and dealt with consistently and persistently.