An alternative solution for the fate of the second pension pillar

Six years ago, on a pre-holiday December evening, hundreds of Bulgarian citizens protested in the center of Sofia against the nationalization of the second pillar of the pension system. A group of enthusiasts organized this happening under the slogan "Hands off pensions" to protect the private, real savings of every working citizen. At that time, in the distant 2014, the government was trying to pass a bill at the twelfth hour, so that with a quick vote before the National Assembly recess, they could close the personal savings accounts of workers and pour them into the expanding black hole of the first, state pillar of the pension system.

Then the public pressure worked, the aggressive bill was withdrawn and a phase of slow and semi-hidden undermining of the pension reform of 2000 entered. For example, after the failure of the direct attack on private funds, in 2015 the Minister of Finance Vladislav Goranov initiated a restructuring of the system, which led to the possibility of transferring accounts from the second pillar to the National Social Security Institute, but not vice versa. Subsequently, the use of this one-way loophole was fueled by various public campaigns against the mandatory pension insurance funds. At the same time, Krasen Stanchev’s appeal from 2009 – I am giving up my pension, don’t take my insurance – remained unheard in the corridors of power.

However, there is a reason for it, especially if one becomes familiar with the financial condition of the Pension Fund and the planned measures to address the deficits in the state part of the pension system. In 2020 alone, the National Social Security Institute published two alarming reports on the state of the State Social Security, which, however, fell on deaf ears. After the second such report in October, the government not only did not take action to address the aforementioned cases, but on the contrary, announced an increase in pensions, outside the established norms and rules. This move widened the hole in the first pillar by as much as 50%, considering that over the past ten years it has fluctuated around 40-60% of the amount of payments. Roughly speaking, pension contributions under the first pillar only cover about half of the costs.

A large part of the workers do not realize that the design of the pension system, and more specifically the state Pension Fund, is designed to rely on a cost-covering financing model. A larger number of young workers support a smaller number of pensioners in a growing economy. There is no saving and investing of funds. When the demographic picture in our country is deteriorating, and the age dependency ratio is expected to almost double in the next 30-40 years - from 34.30 in 2020 to almost 60 in 2055 - the only ways to compensate for the deficits are an increase in the retirement age and an increase in pension insurance. Defenders of the system are already dropping a sentence or two that the retirement age should be closer to 70 years than to 60. And with the latest move by the Borisov cabinet in the field, it is unlikely that the next government will begin preparations for another increase in pension insurance.

In this context, it is no wonder that the informed part of the working population is looking for ways not to participate in such a system, in which a significant part of the monthly income is countered by political promises of some kind of pension at the age of around 70. That is why, with my fellow economists in the EKIP, we called in 2018 for a broad discussion on the topic and a smooth transition to personal savings accounts - in practice, to expand the role of the second and third pillars of the system. An opportunity for younger workers not to fall into the trap of our parents, grandparents.

Unfortunately, the public debate is moving in a very different direction, with the focus entirely on the less problematic second pillar of the pension system. Specifically, the debates have once again been brought to claims that private pension funds should be closed. The disputes are about the profitability of Bulgarian funds, their portfolios, the fees they collect, the way they are managed and even their very model of operation. A commentator from the unions even called them “financial pyramids”. A comparison that, despite the many possible criticisms of private pension funds, is much more appropriate for the state pillar of the pension system, where workers do not have personal accounts or data on profitability, simply because not a single lev has been saved. For a state pension, we will rely on politicians from 2070.

As in 2014, private pension funds themselves continue to be particularly incompetent in protecting their state-guaranteed business and in protecting our savings from political encroachment. Instead of conducting a serious public campaign, engaging in a structured debate with their critics, and proving their role as guardians of the past for all Bulgarian citizens, they chose another path. They turned to the prosecutor's office, which quickly turned the enemies of private savings into martyrs for free speech and gave them an even higher platform for attacks. I continue to argue that the greatest threat to the second pillar is its clumsy protection.

Given that protection is unlikely to improve, and given the growing negative sentiment against private funds, I would like to propose an alternative option for their closure, so that workers can benefit as much as possible from such a negative development. The proposal is divided into four points:

1. Transfer of the insured's personal accounts to their personal bank accounts – no automatic transfer of funds to the National Social Insurance Fund
2. Conducting a campaign by the National Social Security Institute, voluntary third pillar funds, and perhaps even reformatted second pillar funds in competition to attract the savings of Bulgarian citizens
3. Reducing social security payments (the quasi-tax burden) for every Bulgarian worker by 5 percentage points - the funds currently going to private pension funds from the mandatory pillar
4. An explanatory campaign by the state about the real state of the pension system and the effect of the reduction of social security contributions on future pensions. The idea is to stimulate the personal savings of every working Bulgarian, based on their personal choice - whether they will trust a fund, whether they will trust the state or maybe even their own initiative.

The described approach has several advantages. First, it will place at least part of the responsibility for future retirement where it should have been in the first place – in the hands of the workers themselves. Second, the funds themselves will lose their main structural deficit, the fact that their business is guaranteed by legislation and, accordingly, do not exist in a real competitive environment. After the change, they will be able to offer more diverse products to their clients and compete in a real market, where they can show a completely different profitability. Last but not least, we cannot fail to take into account the positive effect on real wages for workers and on the tax burden for Bulgarian employers as a result of the reduced insurance burden.

The main problem, including for the proposal presented here, remains the tendency of politicians to take from Ivan to give to Dragan, which is not only morally reprehensible, but also creates incentives to destroy any system that relies on personal responsibility to secure the future.

The article was originally published in the newspaper "Trud".

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