Will the funded pension system become poverty insurance

Ekaterina Zhiriy
15:40, 24 June 2020
Economy
280 0
Opinion

The shift to the second stage of pension system – compulsory funded pensions – has sparked wide debate. This is due to the government’s intention to introduce the funded system, which is recorded in the Cabinet's revised  action program and the relevant bill, yet to be considered, as early as in 2021.

The main argument for the move is a disappointing short-term forecast regarding pensions: the World Bank believes only 40% of Ukrainian pensioners will meet the minimum insurance experience by 2030 and receive pensions in line with their salaries, while the rest will only be able to receive a minimum pension according to the existing joint system. The UN in turn says Ukraine is among the world's TOP 15 countries with the fastest aging population. The number of pensioners is growing, while the working-age population is on decline amid increasing labor migration. Meanwhile, those employed abroad pay no single social contribution and thus fail to contribute to pension accumulation.

Ukraine is among the world's TOP 15 countries with the fastest aging population

The Pension Fund, subsidized from the state budget, this year saw its deficit over UAH 170 billion. So today's youths who diligently pay their taxes have lower chances of gaining a full-fledged pension once they reach the retirement age.

The mandatory funded pension system is designed to regulate the process. According to the initiative proposed, employers and employees will have to equally deduct a certain percentage of an employee's salary to have these funds amassed in the individual cumulative account of a future pensioner – something widely practiced in many developed economies. Supporters of such a system are sure that this will provide decent payments to retirees by accumulating funds for additional payments to the standard pension under the joint system.

Prime Minister Denys Shmyhal says government plans to gradually implement pension reform, which provides for the development of a funded pension system. According to him, this will give Ukrainians the opportunity to actually manage their retirement benefits in the future. And many young Ukrainians support this idea, starting to think about the future – the current situation where elderly Ukrainians get scanty pensions inspires no optimism among young people who want to have a more decent golden age.

Taught by the bitter experience of various financial pyramids, Ukrainians are highly suspicious of any long-term financial injections. But not everyone supports the innovation – many experts speak out sharply against the initiative. One of the arguments voiced by the opponents of the new system is the lack of confidence in the government's ability to control the fate of such a volume of funds for many years.

Taught by the bitter experience of various financial pyramids, Ukrainians are highly suspicious of any long-term financial injections

There is also an increase in the tax burden on the wage fund coming with the introduction of such deductions, which, in turn, could stimulate businesses to move further into the shadow, which is already a huge issue in Ukraine. Employers might move into the shadows not to pay even more taxes. The negative aspects of the funded system include ambiguity regarding the investment of accumulated funds – it is not yet clear where citizens' savings will be invested.

The arguments of both parties have the right to life and will lead to further discussions with the aim of developing a correct and effective pension strategy for Ukrainians. After all, the need to change or at least supplement the existing system has long been overdue. The deficit of the Pension Fund, its dependence on budgetary subsidies, along with crisis in the economy, as well as disappointing demographic forecasts – all this requires decisive action by those in power so that diligent taxpayers don't become hostage to the government's inability to provide decent pensions.

Kateryna Zhyriy

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