Cause and Effect in European Politics and Law

Individual accounts - secure pensions

Ralitsa Kovacheva, April 15, 2010

Personal accounts and not promises - this is the essence of the Independent Pension Reform Council's vision about the future of the pension model of Bulgaria. The Council comprises of prominent Bulgarian economic experts. According to them, "any reform without a clear vision and a target, in other words - without any clarity where we are headed to, is making the reform useless in itself, making it chaotic, inconsistent and most of all - without principles".

The vision of the economists for a working pension model is based on three principles: real savings and not transfers; independence, individual choice and responsibility; stability and sustainability.

In other words, whenever we are talking about a reform, this means radical change, because none of these three principles does not exist in the current pension model. "A working pension model is that model which gives people the opportunity to secure their own pensions and does not rely on promises and transfers, but rather on real savings for every person. A leading element here are individual savings and the state is supposed to play a complementary social role".

Such a model, according to the economic experts, can have two pillars: an individual capital pillar and a state solidarity one. Every worker will make savings from his salary in a personal pension account (the members of the Council recommend the share of the savings to be 10% of the salary), he will manage the money on his own and will decide how much to save and when to retire. The role of the state would be to regulate the system in order to prevent the appearance of unreasonable risks, to ensure transparency and awareness. Also to assist people who do not have enough money to retire.

euinside thinks that solidarity perceived like this is acceptable because workers do not become hostages of pensioners or of unemployed people, and the system, as a whole, is not a hostage of a demographic crisis. Currently in Bulgaria there is a second pillar but it is rather symbolic and there is no clear tendency that it could replace if not entirely, at least to some extent the first one - the solidarity pillar. Indeed the transformation from an expenditure covering model toward a capital one could be the difficult to realise and socially painful part of the reform, therefore making it politically risky.

This is why the economists logically note that while "in many countries the expenditure covering model is gradually being replaced by the capital model with individual accounts, giving the newcomers on the labour market the chance to insure themselves through personal accounts [...] Bulgaria is lagging behind the developed countries and also behind some of the fastest developing nations in Central and Eastern Europe like Slovakia, Poland, Lithuania, etc."

It is this approach that will be the main challenge in the work of the Independent Pension Reform Council, which will use the expertise of developed states like the Netherlands and Australia in order to propose a Bulgarian version for transition toward a model, where personal pension accounts will have a leading role.

euinside also joined the discussion by giving you the opportunity to follow not only the work of the Independent Council but also the experience of closer to Bulgarian indicators countries. We have already presented to you the experience of Poland and soon you will read about the pension reform in Slovakia.

The big question about Bulgaria however, is not a theoretical model or the practical foreign experience which our country could copy, it is not even in the specific percentages and terms of a possible reform. The biggest challenge, as we in euinside noted many times, is called political will.

One of the 60 anti crisis measures of the government envisages by the end of May new visions for pension and health reform to be developed. So far though, all indications the government is giving, show an intention to postpone reforms in order to keep the fragile social peace. But it is getting more and more clear that the public moods are growing in support of reforms and the circle of "happy" from the status quo people is constantly decreasing. This is why it is time the reform to start. And what is more important: to continue in an agreed direction, no matter of the change of governments and political situation.