The Slovakian government has changed the way workers pay into pension schemes as part of its budget deficit reduction measures. As of 1 September 2012, compulsory pension contributions of employees channelled towards private asset managers will be reduced, and increased contributions will go to their state-funded pension pot. The Slovakian Labour Ministry has estimated that the change will boost annual revenue of the state-run welfare system by about €500 million.
Background
Following the introduction of the new pension system in Slovakia in 2004 (SK0404102F), employees began to pay their contributions to the country’s pension insurance scheme in a different way (SK0507101F). The first pillar of the scheme, through the Social Insurance Agency (SP), required employees to pay 9% of their wages to the state-run public pension insurance fund. A further 9% went to private pension funds – the second pillar. The government promised the new system would mean that young people in particular would receive higher pensions at retirement.
As a result of these changes, over the past seven years the lower contributions (of only 9%) to the first pillar increased the SP’s deficit leaving the government to make up the shortfall from the state budget. Since 2009, due to the economic crisis, income from funds invested in the second pillar has also decreased. As a result, there has been a wide-ranging debate on the sustainability of the first pillar and the benefits of the second.
Since 2008, 23 changes have been implemented in this area. The first government led by Prime Minister Robert Fico twice encouraged contributors to leave the second pillar, and around 170,000 people did so in 2008–2009. However, approximately 1.5 million employees still pay into the second pillar.
The current Fico-led government has decided to implement another raft of changes to the pension system.
Reducing contributions to the second pillar
The first pension pillar is subsidised from the state budget by about €500 million a year. The government proposed a number of changes in the pension scheme, arguing that the changes were needed because the system was unsustainable and there was a need to decrease the budget deficit in 2012–2013.
The most significant change was the cancellation of the equal contribution of 9% to both pillars. From 1 September 2012, employees’ contributions to the first pillar were raised to 14% of their salary and contributions to the second pillar were cut to 4%. This measure is temporary and will expire at the end of 2016. It is estimated the change could boost the welfare system by €500 million a year.
From 2017, the 4% contributions to the second pillar will increase by a small percentage each year up to a maximum of 6% in 2024. Employees are allowed to make extra voluntary contributions to the second pillar, but they will only receive tax benefits for 2% of any extra contributions.
The government is again allowing contributors to leave the second pillar, this time between 1 September 2012 and the end of January 2013.
Proposed changes were approved by ministers on 30 July 2012, and the government asked parliament to discuss the bill via summary proceeding. The parliament approved amendments to the Act on social insurance on 10 August 2012. It is thought that the change will save about €160 million from the state budget in 2012.
Prime Minister Fico has said the changes will protect a huge number of people in Slovakia. The opposition has countered by saying interference in the second pillar is one of the worst measures of the government.
Higher contributions of other workers
Besides changes in the second pillar, contributions of other workers to the insurance funds will also increase. Self-employed people and those working externally on employment contracts will pay higher contributions to social and health insurance. As an example, in 2013 the minimum contribution paid by a self-employed person will increase from the current €160.24 to €185.30.
People working externally on employment contracts will pay the same contributions as internal employees, 13.4% from their wage with the employer paying a further 35.2%.
So far, only the employer is obliged to pay 0.8% of a worker’s wages in accident insurance, and a further 0.25% to the guarantee insurance fund (used in the case of the employer’s insolvency).
Higher contributions will be paid by internal employees with a monthly wage higher than €1,200.
Ludovít Cziria, Institute for Labour and Family Research