EKIP– Expert Club for Economics and Politics A Different Opinion
At the end of last year, the ruling coalition, led by the right-wing (in words) GERB party, introduced changes to the pension insurance law that are not just not a step in the right direction, but a leap in the exact opposite. Due to the great economic importance of the negative reform, it is important to highlight some of the effects of the voted changes.
The changes
Since the beginning of the year, the state has violated one of the most important (and perhaps among the few positive) rules in the existing pension system. This was the impossibility of funds from private pension funds flowing into the National Social Security Institute. Such a precedent already exists – individuals can once and without the right of refusal transfer their savings from the private fund under the second pillar to the Pensions Fund to the National Social Security Institute. The reverse action – exemption from paying funds to the state and insurance only in a private pension fund – is completely impossible. In the event of a decision to insure only in the National Social Security Institute, individuals lose their individual accounts and all money accumulated so far in their personal accounts will be transferred to the Pensions Fund.
Another change is the one-time right granted to employees to decide where to insure themselves. Individuals who start their professional careers in 2015 have the right to decide within one year whether they will save money in a private company or rely solely on the state. The “choice” is by default the Pensions Fund of the National Social Security Institute.
Some of the effects
On the part of the state, the most obvious expected effect and reason for the introduction of this reform is filling at least part of the deficit in the Pension Fund. According to the State Social Security Budget Act for 2015, the planned revenues in the fund amount to a total of 6,191,503.2 thousand BGN, and the expenses - to 8,009,533.3 thousand BGN; i.e. it is evident that even according to the expectations of the institution itself, it will realize a deficit of 2 billion BGN. Moreover - with a double larger flow of people who have declared that they will retire this year. For 2013 and 2014, the planned deficit amounted to 1.7 billion BGN, and given the current demographic situation (increasing the number of pensioners) we can only expect this deficit to grow.
But this poorly concealed intention on the part of the ruling coalition will have many other effects on the economy. First of all, as economist from the Institute for Market Economics Petar Ganev reminds us, this loophole for transferring funds from one fund to another is completely identical to the first step that the nationalist government of Hungarian Prime Minister Viktor Orbán took on the path to the complete nationalization of private funds in the country. This is a potential threat to the existence of individual pension accounts in general.
Elementary mathematical calculations show us that as the financial hole in the Pension Fund grows, the impact of filling it with funds accumulated in private pension funds will be a one-time or will be felt – with an increasingly fading force – for only a few years. Then the funds collected in them will run out, and the state will have nothing more to nationalize (even indirectly). In other words, the benefits for the institution will be short-term, and the damage to the economy – long-term.
Individuals who decide to transfer their money to the National Social Security Fund will receive lower pensions than they would otherwise have, because the funds transferred from private organizations will be directed to retirees today. Those who contribute now will have to rely on the state fund finding more nationalization funds in years to fill future budget holes and pay their pensions.
The transfer of funds from private funds to the National Social Security Institute will expose the accounts of private funds, which currently have about 8 billion leva. Unlike the Pension Fund, for which it does not matter whether there are funds to pay out pensions, private companies must increase their profitability by investing the funds invested in them wisely. It is easy to assume that a reduction in funds in the funds will lead to less investment funds in the country. As we know from economic theory, it is precisely production, for which it is necessary to invest funds, that is the way to achieve material well-being. The change in the law that has come into force will further reduce the volumes of the already anemic trading on the Bulgarian Stock Exchange, as well as the highly investment-dependent production in the conditions of low FDI. In short, less money in the funds is equivalent to lower investments and a decline in well-being, compared to what we would have if they had not been touched. [1]
The right to transfer funds from private pension funds to the state insurance is not providing a real “choice” for consumers, as Prime Minister Borisov has repeatedly reiterated. It is a move introduced to fill the ever-widening hole in the Pension Fund budget. But as we have seen, this effect may only be short-term; in return, a mine is being laid which, if detonated by transferring large volumes of funds from private funds to the National Social Security Institution, will have highly negative effects on both future pensioners and the economy today.
[1] Of course, this also depends on the willingness of individuals to transfer their funds to the NSSI, as well as on the willingness of those starting work to declare whether they want to be insured in a private fund.
