GENEVA – While workers in EU member states took to the streets to protest against planned government reforms on pension funding and a rise in the retirement age, countries considering joining the Union face a different quandary: how to modernize pension systems to deal with the needs of workers in market economies, while making sure that those who need social benefits today will continue to enjoy an acceptable standard of living. The problem was on the agenda of a recent meeting of Labour Ministers from the 13 East European and Mediterranean states considering whether to join the European Union (EU) who met here during the 2003 International Labour conference.
The study * says a proposed shift from "pay-as-you-go" financing of national pension schemes to newer, mandatory, commercially-managed individual accounts, in which each worker saves for his or her own retirement, poses problems for the general population. Adopted by a number of Central European countries during the late 1990s, their early experience shows that these reforms are administratively burdensome and prone to high administrative charges and negative real returns on workers savings. What is more, they are not an effective means of stabilizing pension financing. "The shift from pay-as-you-go to advance funding does not avert the challenge of aging", concludes the study.
This is particularly worrying for East European countries. One group (Hungary, Poland, Bulgaria, Latvia and Estonia) is scaling down public, pay-as-you-go systems and bringing in parallel, commercially managed individual savings schemes - shifting risks that were previously borne by workers, employers, and governments collectively to workers alone. A second group, including the Czech Republic, Slovenia, Romania and Turkey, is combining adjustments to public pension systems with the development of voluntary supplemental retirement schemes.
The study argues that a shift in the funding of pensions alone will fail to tackle the demographic challenge: "both types of schemes are mechanisms for dividing current Gross Domestic Product (GDP) between workers and pensions", says the study. In either case, "the working generation must still support the retired through sharing part of the wealth it produces."
Moreover, over several decades, the cost of a transition to commercially managed accounts may cause a fiscal burden to society of some 0.5-2.5 per cent of GDP per year. This burden results from redirecting part of current contributions to the new private savings accounts, a diversion that creates a "hole" in the financing of the pay-as-you-go scheme over the next several decades.This magnifies the pension financing problems on the horizon, rather than alleviating them.
So if individual savings will not solve the pensions crisis, what will? "Solutions are in the labour market, not just in the pension system", says ILO social security specialist, Elaine Fultz. The study suggests as options more flexible labour market policies aimed at boosting employment, investments in training and technology to raise productivity, and pro-family and immigration policies to increase the working population, as well as pension reforms to motivate and enable older workers to remain in the workforce or retire gradually. In this way boosting productivity can "increase the size of the economic pie from which support for retired persons must come."
* Recent trends in Pension Reform and Implementation in the EU Accession Countries, by Elaine Fultz, International Labour Office, Geneva, May 2003.