Pension reform finally a reality

A new pension insurance system came into force in Slovakia on 1 January 2004. The system of payment of contributions to old-age pension insurance, invalidity insurance and insurance against the death of the family 'breadwinner' has been changed. Other reforms include a new benefit calculation system, higher old-age pensions and benefits, and early retirement.

In Slovakia, the need for social security reform, particularly in relation to old-age and invalidity benefits and benefits for survivors in the event of the breadwinner’s death, has been under discussion since the 'velvet revolution' in 1989. Changes made in the former Czechoslovakia in 1988 and amended in 1994 by the Slovak Republic remained in force, with slight modifications, until the end of 2003. However, this system was unsatisfactory as it did not take into consideration negative demographic developments and was not based on need.

Moreover, the system was not adequately funded and the benefits provided beneficiaries with only a very modest standard of living. On three occasions - always during an election period - the Slovak government has tried to implement complex pension insurance reform. In 1996 the 'Social Security Transformation Programme of the Slovak Republic' was adopted. This highlighted the need for contribution-based social insurance benefits. The programme also stressed the principle of 'pay-as-you-go' financing, autonomy and unification of the compulsory social insurance system (including old-age insurance, invalidity insurance and survivor insurance). Act 274 on the Social Insurance Agency (1994) dealt with organisational matters in relation to implementation. The method of benefit calculation and the scope of social benefits remained almost the same, however.

Transformation of the pension system into a pension insurance scheme commenced in 1999 when the government prepared its 'Draft Concept of Social Insurance Reform' for public discussion. A survey (with 14,796 respondents) carried out by the Research Institute of Labour, Social Affairs and Family (Výskumný ústav práce, sociálnych vecí a rodiny, VÚPSVR) appeared to confirm Slovak citizens' willingness to participate more actively in providing for their old age and to receive benefits based on contributions. However, a survey published in Labour and Social Policy (No. 1-2/2000) found that citizens were not willing to renounce the existing system: two-thirds of respondents were against raising the retirement age.

In 2002, a social insurance act was adopted which took into account all the issues mentioned above, including a new method of benefit calculation and the same pensionable age for women and men (60 years of age). Contributions and benefit payments were modestly adjusted and no significant progress was made in comparison with the previous system. Although this act never came into force it paved the way for further reform. A public debate on the advantages and disadvantages of contribution-based pension insurance quickly followed this draft. Another strong impulse was the government's 'Pension System Reform Concept' in spring 2003. New legislation was adopted and came into force on 1 January 2004. Representative surveys carried out in summer 2003 by the Markant Agency (Agentúra Markant) confirmed that people considered current old-age pensions as inadequate. The main advantages of the new pension reform, according to the survey, are higher pensions and the possibility of inheriting savings accumulated on a personal pension account. As a result, a political decision was taken to improve the pay-as-you-go pension insurance system and to introduce a system of pension savings. This is the first mixed pension insurance system in Slovakia. Other features include supplementary pension insurance and commercial life insurance.

Situation hitherto

The previous system was based on compulsory insurance and pay-as-you-go financing of pension benefits. Pension system funding consisted of contributions paid by employers, employees and self-employed, the state and the National Labour Office (Národný úrad práce, NÚP). This covered the old-age pension, invalidity pension and survivor's pension. The contribution amount was determined via the assessment basis: employees contributed 6.4% of pay, employers 21.6% and self-employed persons 28%. For some social groups these contributions were paid by the state (university students, conscripted soldiers, disabled people and citizens caring for small or disabled children). The NÚP paid the necessary contributions for those entitled to unemployment benefit. Assessment base limits were a minimum SKK 4,000 and a maximum SKK 32,000 per month.

Old-age benefits were paid in the form of a full old-age pension to all those reaching pensionable age (60 for men and 53-57 for women, according to the number of children they cared for) and who had worked for at least 25 years. A partial pension was paid to those who had not achieved the compulsory 25 working years on reaching pensionable age. For certain occupations - eg pilots, dancers, professional soldiers and police officers - a pension based on years of service was provided. Old-age pension calculation took into account the length of the insurance period (length of employment), including compensatory periods (eg period of professional education, military service, invalidity) and the gross monthly earnings of the best five years during the relevant calculation period (usually the last 10 years of employment prior to retirement). Average earnings for these five years were calculated (although up to a monthly maximum of only SKK 10,000) and used as one component for calculating the benefit amount. The number of years' worked, including those beyond the statutory retirement age, was also taken into account in the pension calculation and provided a basis for higher pension payments. The maximum benefit amount for different categories of beneficiary was also determined.

As a consequence of rising average wages and limitation of the assessment basis to SKK 10,000, pension differentials significantly decreased and the absolute average benefit lagged behind the cost of living, reducing pensioners' living standards. The Social Insurance Agency (Sociálna poisťovňa) also had to pay invalidity benefits, widow’s/widower’s benefits, orphan benefits, social pension benefits and wife’s pension benefits. Annually, all pension benefits were adjusted by parliament.

New pension insurance system - first pillar

On 1 January 2004, Act 461 on Social Insurance (2003) came into force (SK0401101N). This act stipulates the function of the 'first pillar' of state pension insurance, which is embedded in a pay-as-you-go system. Administration of old-age pension insurance and invalidity pension insurance (including insurance in the event of the breadwinner’s death) will be further guaranteed by the Social Insurance Agency. In the event of insolvency, the state will provide reimbursable financial aid. Benefits are funded by compulsory insurance contributions, expressed as a percentage of the assessment basis: for employees this is 4% for the old-age pension insurance contribution and 3% for invalidity, while for employers the figures are 16% and 3% respectively; the self-employed pay a 20% old-age pension insurance contribution and 6% for invalidity. Another source of funding is contributions (again expressed as a percentage of the assessment basis) from voluntarily insured persons, who pay the same as the self-employed. Contributions are waived for those receiving maternity leave benefit, parental allowance and sickness benefit, as well as for those on compulsory or alternative military service. Contributions are again paid by the state: a 20% old-age pension insurance contribution and a 6% invalidity insurance contribution. In addition to conscript soldiers, people caring for small children up the age of six or seven years of age are also covered. The Social Insurance Agency pays a 20% old-age pension insurance contribution for those entitled to invalidity benefit until they reach pensionable age. Invalidity insurance contributions are not paid by employees whose working capacity has fallen by more than 70%, nor by those eligible for an old-age pension. Employers do not pay invalidity insurance for such people either.

Employers, the self-employed and voluntarily insured persons pay 2.75% (of the assessment basis) more to the reserve fund of the Social Insurance Agency in order to cover its deficit. Usually, earnings are taken as the assessment basis, although the law stipulates a ceiling. The lower limit of the assessment basis is the minimum wage (at present, SKK 6,080 a month) and the upper limit is three times the average monthly wage for that year as recorded by the Slovak Statistical Office (Štatistický úrad Slovenskej republiky, ŠÚ SR): in 2003, the average monthly wage was SKK 14,365.

In general, compulsory payments to the insurance system are only slightly higher than under the previous system; however, these changes were necessary especially in relation to increasing benefits. On the other hand, the calculation includes a 0.5% reduction in respect of employee old-age insurance contributions for each dependent child.

Pension benefits under the first pillar

Under the new legislation, the categories of old-age pension, invalidity pension, widow’s pension and orphan’s pension remain in place. Pension benefits for years of service and partial pension benefits have been abolished. The wife’s pension and social pension have also been abolished, but elderly people in need receive social assistance benefits (among others entitled to such benefits) rather than social insurance benefits. Within the framework of the new insurance system, the widower’s pension will now be calculated and payable on the same principle as the widow’s pension. Early old-age pensions have been reintroduced.

According to the new amendments, insured persons are entitled to an old-age pension if they have been insured for at least 10 years and have reached pensionable age (62 years of age). Previous rules required 25 years of pension insurance contributions (or employment) and were subject to gender differentiation as regards pensionable age (a maximum of 57 for women and 60 for men). Raising the pensionable age will be spread gradually over several years (eg women - hitherto entitled to an old-age pension at 53, depending on number of children - will be subject to a pensionable age of 62 only in 2014). The old-age pension will be calculated in a new way: the employee’s gross wage for at least 10 years before pension eligibility (however, up to a maximum of three times the average wage) and length of insurance contribution period are taken into consideration. The monthly old-age pension payment is calculated on the basis of: average personal earnings points accumulated; pension insurance period (years) up to the commencement of old-age pension eligibility; and current pension value. Average personal earnings points will be calculated as the ratio between the personal points accumulated during given calendar years (the calculation period) and the periods of pension insurance. Personal earnings points are calculated (in simple terms) as the ratio between the insured person's gross annual income and the average annual wage. Current pension value is 1.25% of the monthly average wage (SKK 183.58 in 2004 so far). Annual adjustment (on 1 January) of current pension value takes place on the basis of average gross earnings growth.

Benefit payments are limited indirectly; average personal wage points which exceed the value of 3 - ie three times the average wage - are not taken into account. For 2004, the value is 1.95, increasing to 3 by 2006. Higher pensions are possible for longer pension insurance contribution periods: for every month of contributions paid after pension eligibility is reached the pension is increased by 0.5% as long as the insured person has not yet begun to receive payment.

Early old-age pensions have been reintroduced, but subject to new conditions. Those persons are eligible who have been insured for at least 10 years and whose pension payment (calculated up to the day they apply for it) is higher than the official subsistence minimum multiplied by a coefficient of 1.2 (at present this is 1.2 x SKK 4,210, ie SKK 5,052). The benefit sum is calculated similarly to the old-age pension, but reduced by 0.5% for every month of missed contributions until pensionable age (62) is reached.

The new act also provides for adjustment of pension benefits: payments will increase annually (from 1 July) to take account of consumer prices and average wages. The Ministry of Labour, Social Affairs and Family (Ministerstvo práce, sociálnych vecí a rodiny Slovenskej republiky, MPSVR) will calculate the adjustment on the basis of Statistical Office data.

Commentary

The new Social Insurance Act is the core of Slovak pension insurance reform. However, a second important act on pension savings was passed in January 2004: this act creates the option of personal pension accounts on top of compulsory insurance (compulsory contributions are reduced accordingly for those who exercise this option). Broad agreement has yet to be reached on the pension insurance reforms outlined here. The act was passed by only a slim majority and the Speaker sent the act back to parliament for further debate, after which it again passed narrowly. Trade unions and opposition political parties have expressed their views on the first pay-as-you-go pillar of the pension insurance system. The Confederation of Trade Unions (Konfederácia odborových zväzov Slovenskej republiky, KOZ SR) has criticised the lack of social solidarity, and is generally opposed to any provisions which affect social security negatively: for example, it proposes that the state should pay compulsory insurance contributions for unemployed people so that periods of unemployment are included in the insurance period, and that the minimum pension should be at least equal to the subsistence minimum. The opposition SMER party demands that particular attention be paid to implementation of the 'capitalisation pillar': 'consistent restructuring of the pay-as-you-go pension system, including strong solidarity and transparency, with particular attention to need would be the best solution for Slovakia' (Noviny SMER, IV, No. 1/2003, p. 7).

In Slovakia, reform of the pension insurance system was inevitable, as the former system took no account of individual contributions to the social insurance fund in calculating benefit. Implementation of the second, capitalisation pillar is expected in the course of 2005 and its first fruits can be expected in 10-12 years. It is important that the first pay-as-you-go pillar works properly and it should be implemented even in the face of political change. (Rastislav Bednárik, Bratislava Centre for Work and Family Studies)

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