BEFORE
MR SIMEON DIANKOV
DEPUTY PRIME MINISTER
MINISTER OF FINANCE
AND CHAIRMAN
OF THE NATIONAL COUNCIL
FOR TRIPARITE COOPERATION
SUBJECT: Draft Measures to ensure long-term financial stability
of the Bulgarian pension system and improving the adequacy of
pensions / Proposal of the Pension Consultative Council
reform to the Minister of Labor and Social Policy/
DEAR MR DIANKOV,
Taking into account the challenge faced by the pension system in Bulgaria as a result of: negative demographic growth, aging of the population, emigration of persons of working age, increase in unemployment, low rate of replacement of the insurance income with a pension, leads to uncertainty regarding the pensions of insured persons, loss of confidence in the pension model and outflow from the system.
Revising the strategy of the pension model is of utmost importance to stabilize the system and restore confidence in it. Increasing people's motivation to pay insurance contributions and reach a replacement insurance income of the order of 70-80%, as it is in the EU member states, is one of the main goals of the model. The degree of solidarity in the system has been brought to utter absurdity. The high degree of redistribution in the solidarity pillar effectively turns insurance into a typical tax burden, reluctance to participate in the current pension model and an effort to avoid paying insurance. The system places the most decent citizens in the most unequal position. It is difficult to explain the fact that almost the same rights are enjoyed by people who make a significant contribution to the system and people who have never worked, do not have sufficient insurance experience, and have made symbolic insurance. The current moment of crisis is extremely suitable for making decisive changes and achieving support and consensus in society for carrying out reforms in the pension model.
In this regard, it is extremely imperative to make the necessary calculations so that the combination of joint and several liability with the individual contribution of the insured persons and the binding of the insurance contribution and the amount of the received pension are leading in the development of the model. The combination of the two sources of income, based on insurance contributions and budget funds, will additionally create a guarantee for a better standard of living of retired persons and the receipt of adequate pensions. To achieve these goals, it is necessary to take measures aimed at:
· equality of insured persons,
limiting the number of privileged groups for early retirement,
· preservation of participation in the solidarity pillar,
· increasing the size of the personal contribution of the insured persons in the capital pillar,
· creation of wider investment opportunities for private pension funds and limitation of their costs,
· creation of additional incentives for insurance in voluntary funds,
In this regard, the specific measures to be taken are related to:
1. Overcoming adverse demographic changes by gradually increasing the minimum retirement age, such as the insurance burden should be shared jointly by all persons, and not be transferred primarily to those insured from the third labor category. The offered options for retirement practically mainly burden the insured persons of the third category of work at the expense of certain privileged groups of military personnel, the Ministry of the Interior, the Ministry of Defense and other special departments, those working in the first and second category of work, etc.
2. Restoration of the fund principle of budgeting of the state social insurance, which would create an opportunity for the accumulation of funds in separate funds and the application of various mechanisms for investing and financing the shortfall in the system in the long term.
3. Preservation of the amount of insurance contributions in the solidarity pillar and funding sources – country, employer and insured person.
4. Over the years, access to the mode of early retirement, not only was it not restricted and smoothly reduced, but it was expanding and easing. The existence of a large group of insured persons who can retire earlier than the standard retirement age and at the same time receive higher pensions, unrelated to their contribution to the system and the period of receiving the pension, is contrary to the insurance principles of the pension model. Maintaining an unrealistically low amount of social security contributions that the state budget transfers for military personnel, employees of the Ministry of Internal Affairs, the Ministry of Defense and other special departments, the lack of adequacy between the amount of contributions and the drastically earlier retirement of this group of persons leads to about a third of the deficit of LLC.
· It is necessary to limit as much as possible early retirement in the first and second categories of work and increasing age for retirement of persons;
· Increasing the required total number of years of service and the required actual insurance service for early retirement under Article 69 of the Social Security Act, as well as introducing a minimum retirement age the employees under the Law on Defense and the Armed Forces of the Republic of Bulgaria, the Law on the Ministry of Internal Affairs, the Law on the Judiciary and other employees from special departments;
· Update of the amount of the insurance contribution for those working in the first and second labor categories and for those enjoying early retirement rights under Art. 69 CSR, based on actuarial calculations, taking into account the duration of participation in the insurance and the period of receiving a pension;
· Overview of the professions included in the privileged groups of persons for those working in the first and second labor categories and for those enjoying early retirement rights under Art. 69 CSR and their reassessment.
5. Introduction of differentiated approach in determining the minimum insurance income for self-insured persons by separate groups of professions and introduction of a new approachwhen determining the minimum insurance income for registered agricultural producers and tobacco producers, to guarantee at least a minimum/average pension for length of service and age. The existing model places certain groups of insured persons in a more advantageous position compared to other insured persons.
6. The transition period for early retirement of a preferential group of insured persons provided for in §4 from the HRD of CSR not to be extended. The extension of the preferences scheduled to operate until the end of the year for a certain group of persons without the necessary contribution to the pension system will be of extreme burden for the solidarity pillar - given the amount and duration of the pension they receive. The inadequacy of the amount of contributions and the significant early retirement of this group of persons leads to draining the system and taking the burden mainly on the insured persons for the third category of work. In order to limit the possibilities of draining the "ceiling" system for the old pensions, it is necessary to preserve it.
7. Unloading the system from all improper payments.From the "Pension" fund, only the pensions for labor activity should be paid in their actual amount, all other additional payments should be taken over by the relevant institutions on the basis of an income test.
· It is necessary to distinguish between occupational pensions and social pensions, with social payments being transferred to social support.
· Transfer to the NHIF of sickness benefits, supplementary payment for disability pensions for recognized length of service and medical examination bodies for working capacity, so that the control over the issuing of sick leave and decision-making on disability is carried out by the body that has the funds to pay for benefits.
8. Increasing the amount of the personal insurance contribution in the UPF, which will allow the formed additional pension to play a sensitive role in the total amount of the final pension. The insurance contribution in the amount in which it is determined is not sufficient to achieve such an amount of accumulation on the individual items of the insured persons in the UPF on the basis of which, upon retirement, these persons will receive a satisfactory additional pension, which will reach the replacement ratio of the order of the strategically set goal – 20%.
9. There is no connection between the life cycle of the persons insured in the second and third pillars and the investment of their funds. The need for a different investment approach to the funds of the insured persons and the provision of different alternatives for risk and profitability related to the life cycle of the insured persons is becoming more and more acute. Achieving a significant reduction in the risk of the funds of the insured persons who are of pre-retirement age, and vice versa – an increased risk of those entering the labor market. Creation of a more effective investment activity, meeting the interests of the insured persons, which will strengthen the competition between the pension companies and guarantee a minimum yield in the additional mandatory pension funds.
10. Optimizing the price of the service in the mandatory supplementary pension insurance through the gradual reduction of the fees and deductions collected in favor of the companies, in parallel with the increase of the insurance contribution, with the aim of increasing the funds in the individual lots of the insured persons and increasing the replacement ratio.
11. Legal regulation of the phase of payment of term pensions – this is one of the problems requiring the most urgent legislative solutions, since the time is approaching when the first pensions from the funds of the Social Security Administration will have to be paid. Fixed-term pensions are paid until the funds in the individual lots are exhausted. In these cases, the payment of the pension is stopped, but this creates a risk that some PPF pensioners will be deprived of income at a certain point until they reach the age and service pension age.
Sofia, June 4, 2010
With respect,
Ivo Prokopiev
Chairman
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