Reforms

10 Things You Should Know About Ukraine’s Pension Reform

On 3 October, Ukraine’s Verkhovna Rada has voted for legislation to overhaul an outdated pension system. It was supported by 288 out of 450 Ukrainian MPs. Moreover, Ukraine’s President Petro Poroshenko has already signed the law on 8 October. Pension reform has been anticipated by Ukrainian society for a long time. It was in focus of international donors—EU, IMF and World Bank.

Here is what you need to know about the reform.

  1. Ukrainian pension holders are extremely poor. At the moment, there are approximately 12 millions of Ukrainians who receive pensions. However, 8 million of them receive a minimal pension worth 1312 UAH (42 EUR), while the medium pension nationwide is 1886 UAH (60 EUR).
  2. Meanwhile, the “consumer’s basket” in Ukraine is worth 2550 UAH (81 EUR). Prices for the most important products skyrocketed since 2014. For instance, 1 kilogram of beef costs 110 UAH (3,5 EUR), 1 liter of milk is worth 20 UAH (0,6 EUR), and the cheapest loaf of bread costs 10 UAH (0,3 EUR). As a result, most Ukrainian pension holders live beyond the poverty threshold. The reform was expected to improve this situation, but a big question remains if it will achieve this goal.
  3. Ukraine’s Pension Fund experiences a massive deficit. In 2017, Ukraine had to cover 141.3 billion UAH (4,71 billion euro) deficit of the Pension Fund from the state budget. This figure amounts to half of all the pensions. Therefore, if this situation is not fixed, the Ukrainian authorities can face huge problems with payment of pensions. Ukrainian government expects to plug this hole over the next 7-10 years, as Andriy Reva, Ukraine’s social policy minister, stated. Deficit of the Pension fund leads to policy of cutting expenses, but the dramatic social situation of the pensioners leads, in contrast, to thinking about more social allowances for those who retired. This is a key contradiction of Ukrainian pension problem.
  4. The reform has been developed and promoted by Volodymyr Groysman, Ukraine’s PM. Cabinet of Ministers has presented a first iteration of the reform on 17 May 2017. Since then, Groysman has been talking about the reform a lot. He even vowed to resign if the reform would not be enabled. The government has launched the website dedicated to the reform which does not miss a chance to underline Groysman’s role. Pensions have always played a huge role for electoral campaigns, so there was no surprise Groysman pushed it so hard. 12 millions of pension holders in a 40-million-country are an important electoral base.
  5. The reform foresees “modernization” of pensions. Ukrainian pensions are based on the established minimal wage. While official estimation of minimal wage rises every year, similar increase of pensions did not take place since 2012. Even then, the pensions were counted based on the minimal wage for 2007. As a result, a situation emerged when those who retired 10 years ago receive smaller pensions than the ones who retired recently. Therefore, the government is set to re-calculate pensions for more than 5 million citizens—more than 50% of pension holders—since October 2017. Pensions will increase by 700 UAH (22 EUR) on average, so the “modernization” will cost Ukraine’s budget approximately 12 billion UAH (383 million EUR), Hromadske writes.
  6. Automatic indexation of pensions will be introduced. This measure is planned in order to avoid the situation when people who have equal track record, but receive different pensions due to the rise of minimal wage. However, it will be an additional hit to Ukraine’s state budget.
  7. Social pensions will rise. Work record plays an important role: in order to qualify for a full pension, men and women had to work at least 15 years officially. Those who did not have such a record or worked unofficially received a so-called social pension worth 949 UAH (30 EUR). Pension reform foresees that this social payment will rise to 1373 UAH (44 EUR) for those who do not have sufficient work record and 1452 UAH (46 EUR) for those who do.
  8. The role of pension insurance record will grow. It will effectively become the most important indicator of for the age when a citizen can qualify for pension and it will influence its size as well. Since 2018, “reaching retirement age” and “getting a pension” cease to be identical concepts. The reform enables rise of minimal work experience for getting a pension from 15 years to 25 years. This number will even grow to 35 years by 2028. If a citizen does not have sufficient pension insurance record, s/he will have to become 63 years old to qualify for a pension.
  9. Donors vs citizens: the government tried to find a compromise. The reform has been one of IMF’s key demands for Ukraine to receive the 1.5 billion USD tranche as a part of its 17.5 billion USD loan program, Kyiv Post reports. However, not all the demands were fulfilled. For instance, IMF wanted Ukrainian government to raise the retirement age to 63 years in order to cut the expenses, but the new law leaves the age requirement as it was before (at 60 for men and 58 for women). Social pensions have also been questioned, as approximately 1 million of Ukrainians qualify for them. IMF and World Bank have also voiced concerns about indexation of pensions in 2018. However, Ukrainian government declined to go for such unpopular measures as raising the retirement age or avoiding indexation. As a result, only few recommendations of donors were implemented (for instance, the rise of minimal work experience). Nevertheless, 49% of Ukrainians says they do not support the pensions reform.
  10. Opponents criticize the reform for lack of real changes. Olena Sotnyk, Ukrainian MP from “Samopomich” fraction, says that “it’s not a reform,” but a “mechanical modernization of pensions.” Taras Kozak, Ukrainian financial expert, notes that the current system is still outdated and does not take the demographic crisis into account. Kozak points out that even now there are more pension holders that those who are working—and this divide will be even bigger in future. Oleksandr Tkach, deputy director of the Pension-Actuary Consultant company, has even suggested that the government “should stop delaying the introduction of a funded pension system.”

Prepared by Vitalii Rybak for UkraineWorld group (ukraineworld.org)

 

 

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