Isn't it time to talk about Swiss-style pension contributions?

As you probably understood from the news, all pensions were increased by 5.7% today, and the ceiling of the maximum pension was raised from 910 to 1200 leva. In itself, for some, this increase is certainly a cause for joy. But in reality, it should be a cause for reflection. Because the government's recent actions in the pension sphere, of which this increase is a part, are symptoms of the lack of a clear long-term vision for the future of the pension system in Bulgaria. And there is an urgent need for one, because, as we have said before, the system is practically bankrupt. Without reform, at least at the level of pension contributions, one day the current young workers may find themselves without any financial security in their old age.

Patches for the failed system

It seems that politicians and the government are at least partially aware of this. The change in the pension formula that the government tried to introduce at the beginning of this year shows this. Alas, it turned out to be somewhat unsuccessful and its actual introduction was postponed by 4 years, mostly due to extremely inadequate public communication by the National Social Insurance Institution and the Ministry of Labor and Social Affairs. But the purpose of the change in the formula was clear - to close some loopholes in the system that allowed the draining of the first, state, pillar of the pension system. Because even though the deficit in the Pension Fund has not grown in the last three years, politicians are aware that this is only a temporary pause thanks to the favorable state of the economy on the one hand, and the constant increase in the insurance burden on the other.

However, this favorable situation is already coming to an end - the first signs of a slowdown in economic growth are present, the European Central Bank fears a recession in Europe. And the social security burden cannot rise indefinitely, because it suffocates business and consumption, pouring more and more money into a system that is doomed to permanent deficit due to its very fundamental structure. In conditions of demographic crisis and population aging, a system that depends solely on the young to support the old can doom both groups to bankruptcy.

To persist in maintaining such a system without reforming it is suicidal. In terms of the financial condition of the state, and in terms of the future of the entire people. This is not something that is pleasant to realize, but the increase in social pensions in the context of the current unreformed system is extremely dangerous. Because expenses, especially social, are extremely difficult to cut. And sometimes this is precisely what is necessary in times of crisis or slower economic growth. If incomes and employment shrink, and pension expenses remain the same, this leads to a swelling deficit and increases the fiscal burden of the state pension fund. Which is not good, because it leads to a swelling of the overall fiscal deficit. And chronic deficits can lead to bankruptcy.

Swiss rules? What about Swiss pension contributions?

In our country, we often talk about the so-called "golden Swiss rule", according to which pensions should increase by 50% of inflation and 50% of the increase in the average income in the country. Today's increase was actually largely justified by referring to this rule. Of course, it is obvious that any rule that concerns an increase in pensions will be popular. However, we have not even heard of the other aspects of the Swiss pension system. And we can find some useful ideas in them.

Do you know, for example, what the level of insurance is in Switzerland? The total insurance burden for the first pillar of the system is fixed at 8.4% of gross income compared to 14.8% in our country. The Swiss system has a structure similar to ours. Three pillars, the first of which is formed by a cost-covering state insurance system, the purpose of which, according to the description of the Swiss state, is to provide a minimum income. The second pillar is formed by private pension funds, to which contributions are mandatory, as in our country. Here, pension contributions vary according to the age of the insured person (respectively, they increase with increasing age). The variation is between 7% and 18% of gross income. In our country, this contribution is fixed at 5%. And the third pillar is the voluntary pillar of the system where workers can set aside additional savings if they wish.

Note the differences between our system and the Swiss one. In Switzerland, there is much greater emphasis on the second pillar of the system. This pillar, in which each insured person has their own account in a private pension fund, usually following the pension package offered by their employer. In our country, contributions to the second pillar are 3 times lower than to the first. There they start at approximately the same level and the older the insured person is, the more money is contributed to the second pillar, and so at the oldest age the difference becomes more than double.

Why don't we take another example from the Swiss system?

If we love to take the "Swiss rules" as an example so much, why not take their entire pension system as an example? That is, why not increase current pension contributions to the second pillar of the system and reduce those to the first? This would seriously improve the future financial security of current workers. Because whatever flaws the second pillar of the system may have, it is stable. The funds in the second pillar guarantee the payment of at least the nominal value of the contributions that enter them. This is a guarantee that the first pillar cannot provide due to its critical financial situation. There you rely entirely on a political promise.

If the contributions in our country were reversed – 5% for the first pillar and about 15% for the second – then the situation would be much better. Yes, due to demographic trends the first pillar would still be in deficit, but at least the significance of this deficit would not be so great, because the basic pension would come from the second. This is exactly how it is in Switzerland, and initially our pension system should have been similar – the contributions for the state and private pillars should have at least been equalized.

Alas, political greed prevailed and continues to prevail over common sense. Because state pensions are a very convenient tool for manipulating voters – those of retirement age or close to retirement. Politicians have no interest in these voters having stable and transparently collected personal savings, which are their private property. Because then they will not have direct power over their financial situation by determining the size of their pensions and, accordingly, they will not have as much power over their vote. Unfortunately, for the moment, there does not seem to be any prospect of this changing. The initiative will certainly not come from the politicians themselves.

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