by Michael Cichon, Krzysztof Hagemejer, Markus Ruck
Full text
The societies and economies of Central and Eastern European countries (CEE countries) are going through a period of fundamental change touching on practically all aspects of life. These changes are having a number of effects on the functioning of existing social protection systems; indeed, social reform is one of the most important elements of the transformation process in these countries. This paper presents an overview of developments in the region's social protection systems over the course of the 1990s, with particular stress on problems concerning old-age, disability and survivors' pension provisions.
Early in the transformation process, the various CEE countries exhibited many similarities both in their economic and social environment as well as in their social protection systems. The past seven years, however, have seen increasing differentiation in both economic and social conditions and in the policy choices and institutional solutions found in each country.
All the countries of the region passed through a period of significant contraction of output, employment and incomes. All countries likewise experienced outbreaks of very high inflation. But now some of them - for example, most members of the Central European Free Trade Area (CEFTA) - have achieved relative stabilisation and resumed growth, while others are still coping with stagflation.
Income differentiation and poverty have significantly increased everywhere, but in CEFTA countries the incidence of poverty seems to be significantly lower than in other countries of the region. Moreover, new patterns of poverty have been emerging throughout the region: poverty incidence has grown particularly among families of the working age population, and within this category especially among unemployed and low-paid persons. Newly introduced programmes of unemployment benefits and social assistance seem not to have been very effective in alleviating poverty among these groups of the population, due both to the inadequacy of the resources allocated and to administrative deficiencies.
Extremely unfavourable developments on the labour market have included sharp increases in open and hidden unemployment, decreasing labour force participation - particularly among older workers - and increasing poverty. These developments have led to a situation in which much smaller numbers of contributors and taxpayers provide a narrower tax base, which in turn must finance social benefits for a growing number of potential beneficiaries: pensioners, the unemployed and those in poverty. Some countries have managed to keep public revenues at a level which enables more or less adequate financing of at least some social programmes (eg. pensions), but at the cost of squeezing resources necessary for the development of new poverty alleviation measures, such as unemployment benefits and social assistance. But in many other countries, social protection budgets are not always even able to maintain benefits at poverty levels.
The performance record of social protection systems in the region and their components differs greatly. Although in some cases there are delays in the payment of pensions and other social benefits, they are still delivering benefits despite their incredibly difficult economic, social and political environment. This is a success in itself, and shows a robustness in the present systems which should not be overlooked. Nevertheless, there remain some crucial deficiencies, among which the following should be mentioned:
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Lack of coherence and cohesion
in benefit systems. There is substantial evidence of a lack of
clear rules regarding cooperation and the distribution of work
between the various levels of government and parastatal administration
at the central, territorial and local levels.
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Managerial and administrative
deficiencies. The administrative structures of the region's social
protection systems are also struggling to meet the demands of a
modern economy. The financial problems of social protection in
CEE countries are in fact due in substantial part to managerial
and governance problems. The non-collection of contributions reaches
25-30% of total revenue collected in many countries. Part of this
amount can be attributed to administrative and managerial inefficiencies
within the tax and contribution collecting agencies.
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Problems of financing. Social
security contributions in the region are high. Nevertheless, a
number of measures could be introduced to create savings - not
through benefit cuts, but by improving the overall efficiency and
governance of the schemes, including benefit entitlements.
Many significant changes have already been introduced into various components of the region's social protection systems, and further changes as well as more fundamental reforms are currently under discussion. These include, of course, reforms in existing pension schemes, which consume a large part of social expenditure budgets everywhere. But pension reforms should not be discussed in isolation from the issues of the overall system of social protection - there are important inter-relationships between various components of the system with respect to design, coverage and financing.
The pace of the reform process in social protection systems, when compared with that of the dramatic changes that have been introduced into many other areas of economic, political and social life, rnay be seen as rather slow. However, it is difficult to make changes in the very fabric of the social protection system while the economy is in turmoil and standards of living are declining. In addition, there are several problems with the reform process itself: conceptual and prioritisation problems, the difficulty of achieving a necessary national consensus broader than any given parliamentary majority, in some cases a lack of proper financial and economic planning, and skills and methodology gaps.
The pension reforms which have been introduced thus far include, among other elements: the separation of pension funds from the state budget; the introduction of indexation mechanisms; the uniformisation of basic public pension schemes through the abolishment of privileges based on occupation; the extension of the period for which reference earnings are used to calculate pensions; increases in the retirement age; tightening of overly generous or lax eligibility conditions for disability pensions; and the introduction of regulations for voluntary supplementary pension provisions. All these changes have seemingly been politically difficult to introduce, and only few countries have actually managed to adopt the whole package.
While actuarial projections show that íf all the above changes were introduced, the present pay-as-you-go (PAYG) schemes could be made financially sustainable in the future, present discussions in many countries concentrate on issues of funding, particularly on the possible introduction of mandatory retirement savings schemes in place of the present PAYG schemes. Many other important aspects of the pension reforms - such as questions of minimum replacement rate guarantees, coverage, and governance - often seem to be neglected.
The ILO has been active in the reform process in Central and Eastern Europe since early 1990. The major recommendations made during these years concerning pension reform have included:
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Improvements in governance. A
very substantial part of the financial difficulties facing social
protection systems stems in reality from problems in governance
and management. Investments into the financial and administrative
infrastructure of these systems should not only involve fixed or
material improvements - investment in human capital is also needed.
An important element of the reform process is to build a sound,
transparent and democratic system of governance at the national,
institutional and local levels. Good governance of public institutions
is an important prerequisite for stability and public confidence.
The social partners and tripartite bodies have a major role to
play in this process.
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Retirement age. Most of the region's
pension systems have early de facto retirement ages, which should
be increased. Similarly, many other benefit programmes have unclear
and often overgenerous eligibility conditions, which should be
adjusted.
- Level of benefits. Public social security programmes - such as old-age, disability and survivors' pensions, sickness and
maternity benefits, or unemployment benefits should provide benefits
at least at the level required by the Social Security (Minimum
Standards) Convention No. 1
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