EKIP– Expert Club for Economics and Politics A Different Opinion
The biggest threat to the integrity and the general meaning of the second pillar of pension insurance are the ideas to make it more "social" or "solidarity" on the model of the first (state) pillar. We must never forget that, according to the idea, the (supposedly) state and private pillars of mandatory pension insurance should complement each other. One should compensate for the shortcomings of the other. Forget for a moment the fact that the weaknesses of the state pillar are so fundamental that it is doomed to bankruptcy. Every time we from the EKIP mention this and say that for this reason we should switch to completely private insurance, some expert like Ivan Neykov appears to say that we should not oppose the two pillars. Both are needed because they complement each other.
Okay, let it be so, but obviously then it makes no sense to have two identical or even similar pillars, right? Why then is the Ministry of Social Affairs working in this direction in sync with the private funds themselves? The most current proposal for paying second pensions (from private funds) includes setting a "minimum" private pension similar to the minimum state pension, which is increasing to 250 leva next year. This is an extremely bad idea.
Why shouldn't there be a minimum pension in the second pillar?
In order for private funds to guarantee a "minimum", they will have to create some kind of common pool of reserves specifically for this purpose, which is formed from a part of the contributions of all those insured in them. Such a common pool can be formed by each fund independently or by all funds together. In practice, this means that the funds will have to redistribute money from people who have accumulated a lot of savings to those who have accumulated too little to be able to cover the minimum set by the state for a private lifelong pension. Thus, a redistribution mechanism is introduced in the second, supposedly private, pillar of the system, very similar to that in the first state pillar.
This would significantly defeat the point of mandatory private pension insurance. The whole idea is that the pension that a person can receive depends entirely on 1) the savings accumulated by him and 2) the return on these savings. In other words - in old age, everyone will reap what he has sown over the years with his savings. If he has insured himself regularly and on high incomes - he will get a lot. If he has insured himself irregularly and on low incomes - he will get a little. If a minimum threshold is set for the second pension, this pattern will be violated.
Violating this regularity renders the second pillar meaningless, because it is in it that its "complementary" and "alternative" characteristic to the first pillar is expressed. In the first state pillar, financial resources are redistributed from some to others in order to provide some minimum level of income at retirement age. This is the "social" element of the pension system, which, as is obvious, is not "fair". What pensions you will receive from the first pillar depends only partially on how much insurance you have contributed to the system. Many pensioners get more out of it than they have contributed, while others get less. It cannot be otherwise when the goal is "solidarity", i.e. from some to give to others in order to guarantee some minimum level of income for everyone.
It wouldn't make sense for the second pillar to work like the state one.
The philosophy of the second private pillar is fundamentally different. There, the "fairness" of the pension is a priority at the expense of "solidarity" (or at least it has been so until now). In the second pillar, everyone has their own insurance account, which is theirs personally, and accordingly, what kind of pension they will draw from it depends on how much money they have accumulated. The data shows that so far, private pension funds have managed to preserve the value of these savings (protect them from inflation) and add a very slight yield to them. In other words, the data shows that how much money a person will be able to withdraw in the form of a pension from their personal account in the second pillar depends on 90% of how much they have contributed themselves. How much you have saved - that's how much you get. What could be fairer than that?
You are probably starting to understand how the two pillars should complement each other in principle. One is solidarity, the other is fair. When the current system was created 20 years ago, the idea was that the combination of these two pillars would be able to guarantee financial stability and decent pensions. The fact that it fails to do so is another issue that we have commented on several times and which is why we are calling for pension reform. But what you need to remember is that the proposal to also have a "minimum" pension in the second pillar would in practice largely sabotage the current pension system. If we are worried about the size of the second pensions, we can very easily increase it if we raise the insurance contributions to the second pillar at the expense of those in the first. What, for example, is being done in Switzerland.
It would sabotage it because it would make private pension funds work in a similar way to the National Social Security Institute, introducing a "solidarity" element into their work, which would destroy the "fairness" of second pensions. What everyone should ask themselves is - why do we have two pillars that function in a similar way and have similar goals? This is completely pointless. The greater danger is that this could actually play the role of the first step towards the nationalization of the second pillar, i.e. its merger with the first. Something that the government tried to do 5 years ago, but fortunately they failed.
This would be catastrophic for the pension system in Bulgaria. To the extent that there is any hope that it will one day be financially stable and able to provide decent pensions, that hope lies in the second and third pillars, after the right reforms, of course. The state pillar is a huge black hole that will only grow. We absolutely must not allow the second pillar to be turned into one.
