Georgi Vuldjev: The State Pension Fund is de facto bankrupt

Original publication of the interview: Frognews.bg

- Mr. Vuldjev, everyone has heard about the hole in the pension insurance system in Bulgaria. How big is this hole actually today and what does this mean?

-The budget of the National Social Insurance Institute for 2018 includes a deficit of nearly 4 billion leva for the Pension Fund, which is almost as much as the entire income of the fund from social security contributions. That is, pension expenses are twice as high as income from social security contributions. This means that the state pension fund is insolvent and de facto bankrupt. The only thing that supports it are the annual financial transfers it receives from the republican budget.

The fact that the amount of required transfers is almost as much as the fund's income means that every working citizen pays twice for state pension insurance. And for what? With current demographic trends, the financial condition of the Pension Fund is doomed to continue to deteriorate in the long term. In the last decade alone, the deficit in the fund has jumped by 262%. Given that the population is expected to continue to age, this growth in the deficit will continue. Thus, the state Pension Fund will become an ever greater burden on the treasury until the entire system collapses and a fiscal crisis occurs. In short, there is no money.

The problem is that the state pillar of the pension system relies on the so-called "cost-covering" financing mechanism, through which current workers pay the pensions of current retirees. It is obvious that such a system is extremely unsustainable in the conditions of an ever-increasing number of retirees relative to an ever-decreasing number of workers, due to demographic trends. Imagine how every working Bulgarian will be able to feed himself, his family, and at least one retiree with his salary? It is impossible, and we are already very close to this level. Again, in short - there is no money and there will be none. In such a situation, either the worker or the retiree will be doomed to misery and poverty. Therefore, the system must be reformed.

- What are the possible solutions to overcome this crisis and what is the European experience in this regard?

-The only solution that would eliminate the problem entirely is the complete liquidation of state pension insurance and the transition to a completely free and market pension system. This would be a system in which each worker is insured in a fund of his choice where he saves money from his salary in an individual account. The money that he deposits into this account is accumulated and invested, thus accumulating long-term returns, from which the specific person will be able to benefit when his retirement comes. Thus, each insured person is insured individually and means that he will have money for a pension, and of course, the size of his insurance account depends on how much he has saved over the years. It is precisely the transition to such a system that we are proposing from EKIP and BLO as "Pension Reform for the Young".

European experience is actually very limited in this area. There is no country in Europe that has switched to a fully market-based form of pension insurance, but in some, private insurance (with a capital-based mechanism) is far more prevalent than in our country – for example, in Switzerland. But there are some pension systems outside Europe that come very close to what we are talking about. The example of Chile, of course, is proverbial, but so is Singapore, where a "social", i.e., cost-covering mechanism, is completely absent from their pension insurance system.

- Years ago, the state proposed and even recommended a transition from private pension funds to a state one. What were the results for citizens who accepted this advice?

-It is too early to talk about results, because the changes to the Social Security Code that you are talking about were introduced less than three years ago, in 2015. These changes allowed for the unilateral transfer of insurance contributions from mandatory private pension funds to the state Pensions Fund. This was an extremely vicious "reform" because it violated the fundamental principle on which our pension system should rest - the equality between the mandatory state and mandatory private pillars of pension insurance. These changes violated this equality, because the only pillar in which workers are obliged to contribute savings is now the state one - the private one is completely optional as long as you can opt out of it.

The "advice" of politicians back then was that if you transferred all your savings to the state fund you would have higher pensions. This is a blatant lie, for the reasons I have already listed. The state pillar of the pension system is insolvent and there is no guarantee that there will be money for your pension, especially if you are a young person. The only thing you are counting on is the imaginary promise of current politicians that future politicians who will take their place will somehow overcome the laws of mathematics and manage to eliminate the deficit. This cannot happen. Therefore, anyone who has decided to transfer all their social security contributions to the state fund is condemning themselves to poverty when his or her retirement comes.

The main goal of this transfer of contributions proposed by politicians was to drain the second pillar of the system in favor of the first and thus at least reduce the deficit a little. The problem is that this violates every principle of financial common sense, because in order to improve the financial condition of a fund that is insolvent due to its structural problems, funds that do not suffer from such problems and are solvent are drained. This destabilizes the entire system.

- If we have to accept the role of Devil's advocate - what risks does the transition from primarily state to more private pension insurance entail?

-The risks are mostly related to how exactly such a reform would be implemented. Bulgarian politicians are sometimes particularly talented at tarnishing otherwise very good reform ideas (such as privatization) by implementing them in an incompetent or downright corrupt manner. This is always a risk, but the situation of the system at the moment is so bad that even an incompetently implemented reform in the direction we propose is better than the current situation.

In the transition to a fully market-based pension insurance system, it is also very important to carry out a comprehensive regulatory reform in the field. The current regulations on private pension funds are completely inadequate for the financial and economic context in which we find ourselves. Also, workers should be allowed to insure themselves as they wish. That is, they should not be obliged to pour their savings into a limited list of universal and occupational pension funds, as is the case now, but should have a real and completely free choice. Everyone should be responsible only for their own insurance, but this means that they should also have full control over how this insurance is carried out.

- Your verdict – if inaction on this issue continues, when can we expect a collapse of the system?

-Such forecasts are always very difficult to make, because they depend on an extremely large number of variables, which in themselves are difficult to predict. But, in short - the collapse of the system will certainly come sooner than we expect. For example, the next economic crisis will lead to another major exacerbation of the deficit in the Pension Fund and will seriously burden the state treasury along this line, which is not ready to bear a higher burden from the pension system due to the irresponsible fiscal policy of the last governments (which I have spoken about before). Even during the next economic crisis, the question will most likely be raised about where the money will come from to cover the deficit in the state pension fund, and the risk of a fiscal crisis will be completely real.

By then, perhaps the ratio of pensioners and workers will have equalized to 1:1, after which there is no hope for the state pillar. According to the latest NSI data, in 2015 the ratio of workers to pensioners was 1:0.8. That is, this moment of equalizing the number of pensioners to the number of workers is not that far away. When this happens, the inevitable collapse of the system will become obvious, because there is no way that one worker can support one pensioner, and we can expect high salaries and pensions. Someone will be disadvantaged by a relatively miserable income, simply because two or more cannot eat from one portion and expect to be full. And in the long run, both groups will be disadvantaged (at least because every worker is also a future pensioner). This is the reality of state pension "insurance" at the moment - it condemns us to misery.

The interview was conducted by Mihail Krastev