The Bulgarian Pension Model
http://www.austriancenter.com BSSB.BE 12.02.2015
Just before Christmas, it became clear that the prime minister and the two major labor unions had signed a memorandum which not only prevents raising the retirement age, but also fundamentally changes the pension model of Bulgaria.
Noteworthy, the main agents behind this decision were the same people who in 2010 decided to steal 100 million leva from professional pension funds, thus breaking the Constitution. Later, the Constitutional Court decided in favor of the professional pension funds, but the money was already gone and it has never been recovered. Now they want to seize private savings for retirement again.
The planned increase in the retirement age, which was to follow a clear path, was “postponed” until it gathers wider support and is better thought out. At the same time, a thorough change in the existing pension model was voted overnight. The latter was never discussed, and was rushed through Parliament within just a couple of days without any public consultation. Why the hurry? Because stealing, by definition, must be quick, before anybody notices.
The changes, in brief, give “a choice” to individuals whether to redirect their current pension savings with private pension funds to the state pay-as-you-go system (the National Social Security Institute, NSSI)1. Yet the catch is that the new legal text does not give the reverse choice, namely to shift back one’s pension savings from NSSI to private funds if one changes his/her mind. By the way, the stealing of private pensions in Hungary started the exact same way.
Every Bulgarian that chooses to move his/her pension savings to NSSI, will have not only the future pension contributions payments redirected, but all the money accumulated so far moved to the state social insurance institute. Moreover, if new entrants to the labour market do not make his/her choice on a private pension fund within the legally predefined period, their entire pension contribution will be automatically directed to the state pay-as-you-go system.
In other words, the legal changes increase NSSI’s cash flow and decrease its deficit – basically, this is the goal. The interesting thing is what happens to the money. Right now they belong to the insured people (by a decision of the Constitutional Court) and can be inherited, but when they “return” to the NSSI they are put in a big pile of insurance money and they are spent immediately. In exchange, citizens get only a generous promise by the state that it will take care of them when they retire. For those who missed it – the NSSI deficit is in the billions and is roughly 60% of its expenditure (60%!).
We can imagine how “the choice” is going to happen. Think of the state employees, working in state companies, as well as all those working under collective labour contracts – for example the thousands working for the Bulgarian State Railways.
Think of all these workers that are dependent on politicians and are likely to be surprisingly active in their “free choice” to return to the NSSI. Afterwards, one can easily picture a state campaign under the motto “Come to NSSI, buy a promise”. When the goal is clear – namely, to take the money from private pension funds and cover the deficit – the mechanism is also predictable.
Following the wide-spread criticism, including by one of the junior partners in the ruling coalition, the Reformist Bloc, the senior ruling GERB started to step back on its initial plan. Draft amendments to the just-voted texts foresee that new entrants to the labour market will not be automatically directed to the state pension system (if they do not make their choice in time), but instead, will be automatically directed to one of the private pension funds.
Separately, those who have decided to move their personal pension savings from private funds to NSSI, will have their money set aside in the so-called Silver Fund of the state. The latter is a part of the fiscal reserve and was established a few years ago with the aim to support financially the state pension system.
Yet, all future pension contributions (from the moment of the shift back to NSSI onward) will not be accumulated in individual accounts and will be spent right away on the payment of pensions to current retirees.
Moreover, private pension savings that are moved to the Silver Fund will not be invested (i.e. actively managed) and so will not carry any yield. So, if one decided to get back from the state pension system to a private pension fund in a few years’ time, all his/her pension contributions in the meantime will be lost, and his/fer potential yield on the former savings with a private fund will be foregone, too.
Clearly, a lousy deal, but one that may be accepted by less economically and financially knowledgeable people (or those who are put under political pressure).
In any case, the abovementioned draft amendments to the Christmas changes in the Social Security Code are only being discussed and have not been voted in the Parliament yet. This means that the covert stealing of private pensions is still the legal status quo. Hopefully, Bulgaria will not follow in the steps of Hungary and the like and will embark on more fundamental pension reforms instead.
Photo: Image by © Dreamstime
Authors : Petar Ganev and Desislava Nikolova
Petar Ganev and Desislava Nikolova
Austrian Economic Center