EKIP– Expert Club for Economics and Politics A Different Opinion
A protest by a number of pensioner organizations, supported by President Rumen Radev, was held in front of the Council of Ministers today, with demands that generally converge towards one common one - an increase in pensions. In more detail, the main demands of the protesters are 5 - higher indexation of pensions, removal of the pension ceiling, creation of a law for the elderly, reform in determining the amount of disability pensions and fixing the amount of the minimum pension for length of service and age at 55% of the current minimum wage.
In this article, I will focus specifically on the two most significant demands – the proposal to increase the minimum pension for length of service and age by linking it to the MRP and the removal of the pension ceiling. These are the two demands that, if implemented, would have the most significant effect on the size of pensions in the country and, of course, on the financial situation of the state fund "Pensions" at the National Social Security Institute. Therefore, they deserve the most serious analysis of their potential consequences. And the problem with these two specific demands is that even if we accept them as reasonable from a social point of view, they are unfeasible from a purely financial point of view.
There is no money to increase pensions.
The reality is that the state simply does not have the financial capacity to push through such a reform, which would lead to a very large increase in the NSSI's spending on pensions. So large that the deficit in the Pension Fund would start growing again even despite the record income from insurance contributions and the increase in insurance rates and in the minimum and maximum insured income in recent years. Over the past two years, there has been a very fragile pause in its growth, which will certainly not last long-term and will break at the moment when the positive direction of the business cycle reverses.
It is an extremely dangerous illusion to think that because we have been in a good economic period for the last year or two, we can afford such an increase in pension spending as the one proposed above. Such a move would turn the deficit in the Pension Fund into an unbearable burden for the entire state treasury in the long term, especially in view of the negative demographic trends, in which fewer and fewer workers contribute to social security contributions, which pay pensions for more and more retirees. We have written in detail about the fundamental problems of the first pillar of our pension system, more about which you can read here.
One of the key reasons for the financial instability of the system
But even if we ignore the deep (for the time being hidden) problems and risks in our public pension system, the proposal cited above would still be an extremely bad idea. Even if our pension system did not suffer from major financial problems, increasing pensions based on seniority and age would create them. If we are looking for some financial stability and want to prevent the bankruptcy of the system, the size of pensions, even state pensions, should depend solely on the size of insurance contributions (which are practically taxes in state insurance). Otherwise, those insured have an incentive to "cheat" and insure themselves on the minimum, and not on their real income. Because the size of their pensions is not formed only on the basis of their contributions over the years, but also on their age (the base factor) and, more importantly, their seniority.
In fact, seniority as a determining factor for the size of the state pension is an extremely unfair and financially irresponsible element of our pension system. Because this way, people who have contributed less money to the system can receive higher pensions than those who have contributed more, simply because they have more seniority. This is extremely unfair and a recipe for creating a deficit, because it encourages absolutely everyone to provide for themselves at the minimum, so as not to end up in the group of fools who conscientiously provide for themselves on their real income over the years, but end up having the same or even lower pensions as those who have cheated.
The proposal is even more absurd in that it wants the minimum pension to be tied to the level of the minimum wage, which in our country is determined absolutely arbitrarily without any rules and even without real negotiations with business. The tripartite system practically does not work. If it is tied to the level of the minimum wage, the amount of the minimum pension is tied to the amount of an indicator that is determined too arbitrarily. This increases the risk of uncontrolled growth in pension costs and further ruining the financial situation of the National Social Security Institute and, consequently, the entire state.
Removing the ceiling on all pensions is too risky
This brings us to the other key demand of the protesters - the removal of the pension cap. In principle, in a financially stable pension system, there would be no need for such a cap. The problem is that, as I have already explained, our public pension system is not stable at all. The pension cap exists mainly to prevent the costs for a relatively smaller group of pensioners from getting too much out of control and thus harming the rest.
Ultimately, the idea of the state pension system is to be "solidarity". That is why there is no complete proportionality between the contributions paid over the years and the final pension received. Since such proportionality is missing, restrictions must be introduced to prevent excessive increases in pension costs. The ceiling is one of these restrictions. Recently, some experts have said that if there were no upper limit on pensions, there would be no way there would be a lower limit. This is largely true. If pensions for a certain smaller group of pensioners can grow indefinitely, this may leave too little resource for the rest. The upper and lower limits of pensions are intended to balance the interests of pensioners from these different groups (as far as possible).
The cap is currently set to be removed for pensions granted from 2019 onwards. Whether this is a good idea remains to be seen. Removing the cap in itself is unlikely to result in as large a one-off increase in pension spending as the increases that are requested and implemented each year. But the long-term consequences for the financial situation of the public pension system will certainly be significant and far from pleasant. Given the current critical financial situation of the Pension Fund and negative demographic trends, any additional long-term burdensome expenditure pushes it ever closer to the brink of financial collapse. Imagine then how risky it would be to remove the cap on absolutely all pensions.
Is there a way out of this situation?
Our pension system is in crisis. Pensions are low for several key reasons – on the one hand, the bankruptcy of Bulgaria's communist rule and the devastating hyperinflation that occurred in the mid-1990s, and on the other – the fundamental structural shortcomings of the "solidarity" state pension model. Current pensioners are unfortunately faced with the fait accompli that there is literally no money in the system. And even in the conditions of the economic boom in recent years, the deficit in the Pension Fund continues to be around 4 billion leva.
The pensions of current pensioners, unfortunately, cannot be saved. There is no way to simply come up with 4 billion leva in additional income from social security contributions just to cover the deficit. And then at least that much more to increase pensions to "more acceptable" levels for the pensioners themselves. Such, unfortunately, is the economic reality. So let's think about the future. For future pensioners, those who are currently working and studying. The younger generations, those who are your children and grandchildren. There is hope for their old age. But only if a reform is carried out in a way that ensures the long-term financial stability of our pension system. We need a pension reform for the young. Like the one we have already proposed.
