What is "Pension Reform for the Young" and why is it needed?

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The state pillar of the pension system in Bulgaria is in a state of practical bankruptcy. The situation is so critical that working Bulgarians, who are currently in their 30s or 20s, most likely simply will not have the money to pay their pensions when they retire. Every year the deficit in the Pension Fund has to be filled with transfers from the central state budget. This means that every working Bulgarian citizen pays for the state pillar of the pension system twice – through social security contributions and through other taxes.

Every year, pension costs form the largest expenditure item in the state budget and the deficit in the first (state) pillar grows almost continuously. If this trend continues, in the absence of structural reform, in the long term the critical financial condition of the state pension pillar will lead to a fiscal crisis. More information about the state of the pension system and our proposal for reform can be read here.

In short, the facts about the state pillar of the system are as follows:

• "Insurance" is in practice not insurance. The money of working Bulgarians that falls into the state pension fund is not accumulated or saved, but is used to pay the pensions of current pensioners.
• The size of the deficit is colossal. From 1.5 billion leva in 2007, in 2018 the budget of the Pension Fund has a deficit of nearly 4 billion leva. This is a jump of 262% in just one decade.
• Pension spending is the largest expenditure item in the state budget. In 2016, pension spending accounted for 26.8% of all budget spending, which is equivalent to 9.4% of GDP.
• The condition of the Pension Fund is critical with a tendency towards constant deterioration due to the structural shortcomings of the cost-covering model followed by the state pension insurance and negative demographic trends.
• If the system is not reformed, the condition of the Pension Fund will continue to deteriorate, which in the long term seriously threatens the fiscal health of the state and could lead to a fiscal crisis.

Pension "insurance" is actually not insurance at all. Paying insurance assumes that it somehow secures you in the future, that it secures your old age. But in reality , the money that each of us is forced to pay to the Pension Fund disappears almost immediately after it gets there. The state pension system operates on the basis of a mechanism in which the contributions of current workers are used to pay the pensions of current pensioners. This means that at the moment they get into the Pension Fund, your money is not saved in some individual personal account of yours, but is poured into a common pool from which the pensions of current pensioners are paid. There is no saving, no accumulation. And therefore you practically have no "insurance" whatsoever.

The state insurance mechanism is absolutely unstable in the long term, especially in the context of current demographic conditions and trends. As you probably know, Bulgarians are an aging nation. The share of the population of retirement age is growing more and more with each passing year, while the share of the population of working age is getting smaller and smaller. The NSI forecast that this trend will continue and even worsen in the coming decades until 2055. This means that in the long term, the deficit in the pension fund will continue to grow, simply because fewer and fewer workers will have to pay the pensions of more and more pensioners.

To solve this problem and secure the retirement future of today's young workers, a fundamental structural reform of the current system is necessary. At EKIP and BLO , we propose full privatization and liberalization of the pension system in the long term. Private pension insurance does not suffer from the same structural shortcomings because it follows a different model, in which pension contributions are accumulated and invested on an individual basis, rather than spent on the pensions of current retirees.

In the short term, such a reform could be initiated with the following steps:

• Reducing the contribution to the first state pillar of the pension system by 4 percentage points and increasing the contribution to the second, private, pillar of the system by the same amount.
• In addition to the above step: repealing the 2015 reform, which allowed for a one-way transfer of money from the second to the first pillar, and introducing an option for insured persons to be able to transfer their contributions from the second pillar to alternative insurance programs at their discretion, but not to the first pillar.

You can read more information about the state of the pension system and our proposal for reform on this web page, as well as watch our short film on the topic.

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