EKIP– Expert Club for Economics and Politics A Different Opinion
Earlier this week, the new actuarial report of the National Social Security Institute (NSI) was released, with calculations and long-term forecasts for the state pillar of the pension system. To some extent, this report stirred up the spirits in the domestic media because it shows a serious deterioration in the financial condition of the state social security. Unfortunately, however, the comments from politicians and experts on the topic remained extremely superficial and even disinterested. It seems that there is no reason to panic and the pension system can continue to operate almost in the same way as before. The truth, however, is completely different. The need for fundamental pension reform is more obvious than ever.
What does the NSI actuarial report tell us?
The actuarial report shows that the financial condition of the state social security system has deteriorated significantly since the last such analysis, prepared in 2019. At that time, it was predicted that the deficit in the state social security funds would be equal to 3.0% of GDP in 2024, while now it is actually 5.5%. Moreover, the forecast for the coming decades is also worse. The deficit will be 5.2% of GDP in 2070, compared to 4.8% in the previous forecast. Currently, the shortfall in funds in the state social security system is so large that 45% of the costs must be financed with transfers from the state budget.
The National Social Security Institute expects this situation to remain broadly unchanged until 2070, assuming unchanged pension policy. This means that in order for the state social security system to be financed by pension insurance completely independently, their burden must become 37.5% in the next few years. Currently, the average actual amount of pension insurance contributions is 16.3%. This calculation shows us what the real burden of state social security is on workers. Ultimately, the money in the state budget also comes from our pockets, and since the state social security system has not yet gone bankrupt, it means that in one way or another, taxpayers finance 100% of pension costs. Accordingly, these 37.5% for maintaining state pensions are still paid by workers now, simply indirectly. Not only through insurance, which is enough for about half of the costs, but also through other taxes that they pay.
The situation is actually even worse.
Keep in mind that the calculations and projections of the actuarial report rather present an optimistic picture. They do not take into account political variables, but simply extrapolate demographic and economic trends, assuming that pension policy remains unchanged. But this is clearly unrealistic, as the differences between the actuarial reports of the National Social Security Institute itself demonstrate. The deterioration of the financial condition of the pension system beyond what the National Social Security Institute predicted in its previous report from 2019 is entirely due to a change in pension policy. The new report emphasizes that the policy of sharply increasing the amount of pensions, significantly exceeding the modernization that would be achieved through a neutral application of the Swiss rule, leads to a significant swelling of the deficit of the Pension Fund.
Of course, the impact of political risk cannot be calculated with precision. But it is good to take it into account. Politicians in our country have recently been increasingly fond of raising pension costs, which is essentially trying to buy the votes of pensioners in conditions of deep political instability. This instability is unlikely to end soon, so similar episodes such as the shock increase in pensions, as between 2021 and 2023, are very likely to be repeated. Accordingly, we must take into account that in the future we will most likely witness further significant deviations from actuarial estimates. And in a negative direction.
All this emphasizes the need for an urgent pension reform that would solve the problem of the fundamental financial unsustainability of the state pillar of the pension system. We have been talking about the need for such a reform for almost a decade now, and in 2018 we published a detailed analysis and proposal in this direction. Alas, no one from the political class listened to us, on the contrary, and now the state of the system, as we see, is even worse. By “reform” we do not mean superficial measures, such as, unfortunately, are proposed in the actuarial report of the National Social Security Institute. Neither raising insurance contributions by a few percentage points (the National Social Security Institute proposes 5), nor the idea of modernizing pensions by less, are enough to fill the hole in the Social Security Fund, let alone provide decent pensions, especially if we think in the perspective of the young and yet unborn generations. Such is the grim reality, even if we assume that these two measures will be implemented simultaneously - something that is politically impossible.
A fundamental reform of the pension model is needed
The fundamental problem with the first pillar of the pension system is that it does not accumulate, but only redistributes money. Insured persons are told that they are “saving” through the system, but in practice what kind of saving can we talk about when the insurance contributions of workers are used to pay the current pensions of retirees? By the way, this is a system that can only be sustainable in the conditions of a growing working (and insured) population in combination with a growing economy. If the working population falls, especially in its ratio to the retired, the system becomes unprofitable. Even if we raise the retirement age by a few years, this will not solve the problem.
In 2018, we proposed increasing the role of the second pillar of the pension system in the immediate future and, in the longer term, a complete transition to a funded model. This is a model in which money is not redistributed, but accumulated in individual accounts for each insured person. Real, not fictitious savings that accumulate in personal accounts in pension funds, which in turn invest this money with support for their purchasing power and its increase by generating some profitability. This is how the second, private, pillar of the pension system currently functions, which, unfortunately, remains neglected by politicians, except when they need to make some transfer of finances to the state pillar, as happened in 2015.
Don't get me wrong, the second pillar of our pension system also has serious problems. The profitability of private pension funds is often disappointing, even from the point of view of the most conservative financial standards. That is why it also needs reform in terms of the regulatory framework that frames the activities of private pension funds. But at a fundamental level, its financial condition is many times better. For the simple reason that it does not redistribute money from workers to pensioners and, accordingly, negative demographic trends cannot affect it.
The current system is not only unstable, but also unfair.
Moving to a fully funded pension model is the only way to solve the problem of the financial instability of the pension system once and for all. This is also the only way to guarantee fairness in the pension system. At the moment, this is impossible, because if you are insured on real income, when you retire in a few decades, the system will not be able to pay pensions that correspond to your real contributions. For the simple reason that the working population has decreased. On the other hand, if, realizing this, current workers do not insure themselves on real income, the victims are current pensioners. When we draw the line, we clearly see that with the current system, when you insure yourself, you pay too much, and when you retire, you receive too little. What kind of fairness can we talk about at all?
Moreover, the transition to a fully-funded model could stimulate the country's economic development. If the money currently going into the state Pension Fund for redistribution were instead invested by pension funds on our capital market, this would seriously stimulate its development and support domestic business. In Bulgaria, there are many examples of young innovative high-tech companies that are unable to find sufficient local financing. We could change this, support and accelerate the development of such companies and keep more of them in our country. This means faster economic growth and faster income growth. In short, more prosperity for everyone - workers and pensioners. The NSSI report clearly shows that instead of more prosperity, the current pension system guarantees only more misery. Which would you choose?
