Pension System Reforms: Addressing Sustainability Challenges

Determinants of Pension Expenditure

Several factors influence pension expenditure. A lower cost can be achieved by decreasing the ratio of pensioners to the working-age population, increasing the unemployment rate, and decreasing the ratio of expenditure on pensions to productivity. Factors such as a low fertility rate and increased life expectancy contribute to this challenge. While immigration may offer a temporary solution, a conscious increase in expenditure seems inevitable in the future. The effects on spending depend on the listing rules and rules for calculating pensions based on contributions. Since the 1990s, two growing trends have emerged: employment records with higher prices and minimum pensions increasing productivity several times over.

Projection of Pension Expenditure

Projections of pension expenditures are based on assumptions about demographic trends (fertility, immigration, life expectancy), institutional factors (pension calculation), and economic factors (activity and employment rates, productivity, wages, interest rates). These projections are made by all governments and the EU.

Pension Reform of 2011

The 2011 reform included gradually increasing the retirement age to 67 years by 2027. To collect 100% of the pension at age 67, 37 years of contributions are required (except for those who have contributed 38.5 years, who can retire at 65 with 100%). The basis of the pension contribution is calculated on the last 25 years. Periods as trainees and disruptions of working life to care for children count as time of contribution. The reform also included a hardening of early retirement and a special allocation from the Government reserve fund in 2010.

Pension Reform: Addressing Sustainability

Sustainability issues can be partially relieved if employment and productivity show a favorable outcome (necessitating structural reforms in several areas). However, it is inevitable to reform the current pension system in most countries, addressing both the expenditure and revenue sides.

Expenditure Side Reforms

• Increase Retirement Age: This is a powerful measure as it increases the population of contributors and reduces pension expenditure.
• Increase the Number of Years Used to Calculate the Pension: Currently, the last 15 years of work are considered.
• Increase the Number of Contribution Years to Collect 100% of the Pension: Currently, 35 years are required.
• Increase the Number of Years of Contribution to be Entitled to a Contributory Pension: Currently, a minimum contribution period of 15 years is required.

Revenue Side Reforms

• Increase Contribution Rate: This increases revenue without increasing costs (as the calculation of the pension does not depend on the type of contribution). However, it may have negative effects on employment.
• Delete Maximum and Minimum Salary Cap for the Calculation of Pension: Contributions would grow with increased wages, but this would also increase spending on pensions due to existing rules and regulations.
• Increase Allocations from the Reserve Fund: This involves investing surplus in Social Security in financial assets (public debt) to accumulate resources to help finance pension expenditure.
• Increase Contributions from the State to the Fund: This would help finance non-contributory pensions.

In addition, there is a need to increase contributions through additional resources from the State or increased contributions.