Pension reform continues

Since 2000, Bulgaria has being undergoing a process of major pension reform. The latest stage came in July 2003 with the adoption of a new, unified Social Insurance Code, which brings together the legislation governing the various pillars of the pensions system. The new Code was based on lengthy discussions, which included the social partners, but there remain disagreements over the future course of pension reform.

In recent years, the Bulgarian social security system has been undergoing a process of profound reform, starting with implementation of a Code on Mandatory Pension Insurance at the beginning of 2000. The new system was based on the principles which govern pension schemes in western Europe, and the Bulgarian state pensions system covers all the contingencies listed in International Labour Organisation (ILO) Convention No. 102 on social security (minimum standards).

Access to Bulgaria's various pension schemes is determined by two main factors: achieving the minimum required age for acquisition of right to a pension; and having made contributions over a certain period. Until 2000, Bulgaria had very low pension age limits, at 55 years for women and 60 years for men. The Code on Mandatory Pension Insurance introduced a gradual increase in the pensionable age of six months per year, starting from 1 January 2000. The aim is that the pensionable age will reach 60 years for women and 63 years for men in 2009. At the same time, the period of employment and contributions required to attain a pension has been increased. A flexible system has been introduced for assessing a person's pension entitlement. This 'score system' takes into account both the age and contribution period of a person at the moment of retirement. In 2000 the 'score points' needed for entitlement to a full pension were 88 for women and 98 for men, rising to 94 for women and 100 for men in 2009.

The level of pension benefit under the 'first pillar' state 'pay-as-you-go' pension scheme is determined on the basis of a universal formula applied to all insured people. According to this formula, the pension is equal to the insured income (on which the pension is calculated) multiplied by one percent for every year of the person's contribution period. The insured income itself is calculated on the basis of the person's entire contribution period, and not on the basis of a particular period towards the end of the career.

First years of implementation

In mid-2003, some three and a half years after the start of the radical reform of the pensions system, nearly 2 million people are insured under the mandatory scheme and voluntary pension funds (ie the 'second' and 'third' pillars represented by supplementary occupational and individual pensions respectively). The pension funds have accumulated around BGN 350 million and are among the biggest national investors.

The implementation of the new pension model, though successful, faced a number of problems. On the economic front, problems with implications for pensions included:

  • the expansion of 'non-typical' forms of employment, including working without employment contracts;
  • the widespread practice of employers paying social insurance contributions on the basis not of the employees' actual wage but of the (much lower) national minimum wage (BG0307101F);
  • an increasing tendency towards so-called 'company internal self crediting', whereby employers delay or fail to pay social insurance contributions due in respect of employees. This could cause a 'bulge' of non-insured people reaching retirement age in 20-25 years' time; and
  • a major migration of people of working age out of Bulgaria, amounting to more than 700,000 over the past decade.

In the political arena, problems included:

  • support in some quarters for restoration of certain features of the old pension system, such as early retirement;
  • perceived conflicts between the first pillar of 'state' pension insurance and the other two pillars of 'private' pension insurance; and
  • a growing tendency to expand the presence of the state in pension insurance systems.

New Social Insurance Code

In autumn 2001, the government launched a new stage of pensions reform, notably involving the codification of the various items of pensions legislation. The aim was to unite the legislation regulating the first, second and third pillars in one common Social Insurance Code. This approach was supported by employers, trade unions and political parties. The government stated that the changes it proposed resulted from National Social Security Institute (NSSI) practice in the period since 1999, and from numerous proposals made by institutions and individuals.

Debate over the new unified Social Insurance Code was difficult and complex and lasted for 22 months. During the discussions, major differences emerged between the positions of participants in the process. A number of old conflicts were renewed and new ones arose: between the representative trade unions and employers' organisations; between the private pension insurance funds and the Ministry of Labour and Social Policy (MLSP); among pension funds themselves (especially between smaller and larger ones); and among the various parliamentary parties, which introduced a political element into the pension reform debate. A final conflict came when the President of the Republic vetoed some paragraphs of the new Social Insurance Code. When the Code was again referred to parliament, the veto was over-ruled by a considerable majority of MPs -154 out of 240. Their conclusion was that the changes to the social insurance were to the benefit of insured people and future pensioners.

Finally, at the end of July 2003 the new Code was agreed and approved. However, there appears to be growing tension and resistance in society over future pension reform moves. It is thought by some commentators that this growing potential conflict is partially due to the fact that the draft of the new Code was not based on a strategic long-term action programme developed and agreed with all stakeholders and reflecting the reform principles adopted in 1999 – such as anticipation, transparency and public control. One of the objectives of the pension reform was to provide alternative possibilities and allow people to make their own choices. From this point of view, the changes made have arguably not sufficiently taken into account pension funds’ proposals to implement different pension schedules. Another important unanswered question is how the amount of funding for the second pillar of occupational pensions will be fixed during the coming years. It is very difficult at the moment for pension funds to plan their activities because the funding for the second pillar is to be defined each year by the National Social Security Institute.

Commentary

It is widely believed by Bulgarian and foreign experts that Bulgaria has made a successful start to the invariably painful process of pension reform, and that this success is based on a common will and readiness among all main stakeholders to unite their efforts and interests. This approach should also be implemented in future in order to reach a common position on further development of the pension reform. This requires that all proposals for changes in the pension insurance legislation should follow a set of principles. These are that changes:

  • should be directed to the development of the pension model, and not necessarily to changing it;
  • should guarantee better organisation of the insurance system but without growing bureaucracy;
  • should not make access to state first pillar pensions easier, as this threatens financial stability;
  • should not disturb the balance between the three pillars of pension provision, but encourage the development of the second and third pillars as the country's largest investor;
  • guarantee the target fixed in the strategy that by 2007-9 the first pillar should have a nil deficit and gradually growing funds;
  • increase motivation for participation in pension insurance; and
  • result from the common efforts of all the parties which have an interest in pension reform.

(Ivan Neykov, Balkan Institute for Labour and Social Policy)

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