EKIP– Expert Club for Economics and Politics A Different Opinion
Last time before Christmas, this time before Easter, there seems to be some connection between the Ministry of Finance’s pension reforms and the biggest Christian holidays. A week before Good Friday, the Ministry of Finance published a bill for an extremely radical reform of the second pillar of pension insurance. According to Minister Goranov, this reform would solve the problem of serious deficits accumulated in (some of) private pension funds. However, as usual, the situation is actually much more complicated than what the Ministry of Finance presents to us – the devil is in the details. The problems in the second pillar of pension insurance that the state is trying to solve are in fact problems that it itself created.
What is reform?
The second pension consists of the individual savings of each worker, which supplement the first pension received from the National Social Security Institute. These savings, just like the savings that go to the National Social Security Institute, are mandatory and come from the insurance premiums that we pay. The National Revenue Agency deposits the saved funds into individual accounts in certain private insurance funds according to the choice of the individual citizen. The fund, in turn, invests the funds entrusted to it in certain assets, financial instruments, etc., so as to provide a sufficiently good return on them, so that after retirement the amount in the individual account is large enough to pay a full second pension for life.
With the new reform proposed by the Ministry of Finance, however, these individual accounts remain individual only during the savings period (i.e. work) and at the moment you retire, the money you saved under the second pillar goes into a common pool (the so-called "technical pool" or "technical reserve"), from which the second pensions of all pensioners are paid. That is, after the moment of retirement, these savings become common and therefore this reform practically resembles a quasi-nationalization. And of course, once this money enters the common "technical reserve", the right to inherit over them is lost. Specifically, according to the bill, the right to inherit is preserved only over the surplus that has accumulated in the individual account beyond the basic amount necessary for the full payment of a lifelong pension.
Minister Goranov explained that the main goal of the reform is to cover, as far as possible, the deficits in the second pillar of pension insurance. The problem is that currently many private pension funds do not have enough money in individual accounts to be able to pay full second pensions for life. The goal of the reform is to solve this problem by practically using the money that pensioners who died at an early age leave as a surplus to cover the payment of pensions to those pensioners who have "outlived" the amounts accumulated in their pension accounts.
Why should my savings cover foreign deficits?
The obvious question we should ask ourselves is, why should some people's second pensions be covered by the savings of others? This is more or less a purely ethical issue. If the personal accounts of certain people in certain insurance funds are not large enough to cover all their years as retirees, why should this be a problem for other retirees whose accounts are sufficient?
Let us not forget that when it comes to second pensions, each person should be responsible for these savings. If for one reason or another, after someone retires, the money in their individual account turns out to be insufficient to cover their needs for the rest of their life, the responsibility is theirs. They themselves have chosen to entrust their money to the fund in question, and by doing so, they have voluntarily assumed a certain investment risk. From then on, if the fund has failed to provide a sufficiently good return on their individual account, the responsibility for this should certainly not lie with the other clients of that fund.
There are fundamental structural contradictions in the second pillar of pension insurance
In truth, however, the real problem is purely structural and lies in the very foundation of mandatory private pension insurance. The Social Security Code requires each private fund to guarantee a minimum level of profitability on the savings of each client and in the event that the investment return is not high enough to cover this minimum level, the fund must have ready reserves with which to fill the resulting deficit. This is precisely why the introduction of such a reform is necessary, according to which these reserves will in practice be made up of the savings of the remaining clients of the specific fund. Minister Goranov is absolutely right when he says that without a common pool there is a danger that in some cases certain private funds will not be able to cover their full obligations, regulated according to the CSR.
However, here we must ask ourselves whether the requirements that the state imposes on private pension companies are profitable and necessary at all? Despite all kinds of bureaucratic regulations, private pension insurance always carries with it certain investment risks - the client of a fund cannot have 100% certainty that the return on his savings will be high enough to fully cover his needs as a pensioner, because in the real world no investment carries with it a guaranteed (risk-free) level of profitability. The pension fund invests the savings of its clients in certain financial instruments, which may or may not be sufficiently profitable - this depends on factors beyond the control of the fund itself (specifically, what financial instruments private funds invest in is also regulated in the CSR).
In short, the minimum profitability requirements that the CSR places on private funds are impossible to meet, and therefore situations arise in which the pensions that a private fund has the resources to pay and the pensions it must pay are different. This is how the deficits in question appear.
The reform attacks the distinctive characteristics of private insurance
The state is practically trying to push through a reform to solve problems created by its own regulations. And the solution seems to be the current reform, which abolishes the right of inheritance and requires pensions to be collected in a common pool for the payment period. However, this largely loses the main idea of private pension insurance, which is that each citizen individually has access to the money he has saved. It is in this respect that the second pillar should be an alternative to the first, which operates on a completely “social” basis and the insurance contributions paid by citizens to the National Social Security Institute are not their personal property and they cannot freely dispose of them.
If citizens cannot freely dispose of the full savings deposited in private funds, then these funds practically become a smaller version of the National Social Security Institution. Yes, even after this reform, private fund clients will have more freedom to dispose of their savings than they have within the first pillar of pension insurance, but compared to the current status quo, the reform is definitely a step back, towards the model of the National Social Security Institution. It is for these reasons that the changes proposed by the Ministry of Finance are a dangerous precedent and even seem like a first step towards nationalization.
A reform opposite to the proposed one is needed
Instead of requiring private funds to create common pools on some quasi-“social” model, the MoF should actually push through the reverse reform. The minimum level of profitability requirements that make the creation of a common pool necessary should be removed, or at least weakened. This would both solve the problem of deficits in the second pillar and preserve its distinctive features – the right of inheritance and the freedom of citizens to dispose of their full savings as they see fit.
The obvious criticism of this proposal is that in this way the guaranteed minimum yield on the accounts will be lost. This is true, but as already noted, the minimum yield requirement cannot be met anyway (or at least not permanently). Due to the very nature of the investment activities that pension funds engage in, sometimes the yield on certain accounts will be below, and in other cases above, the minimum threshold specified in the CSR. The reform proposed by the Ministry of Finance is, in fact, most likely the only way for these requirements to be at least somewhat met. But are we willing to pay the price for this? Here we are faced with a very important choice, which is:
Do we, as clients of private pension funds, agree to lose the right to freely dispose of our savings and for our children to lose the right to inherit them just to meet the minimum profitability requirements set out in the CSR?
If the answer is yes, then why do we need private insurance at all? The state insurance (NOI) offers exactly such conditions – guaranteed (at least by law) profitability, but almost no freedom to dispose of our savings. If we are ready to deprive ourselves of this freedom in private insurance as well, then what is it for us at all? Let's just insure ourselves only in the NOI, after the last pension reform of the current government we already have this choice anyway.
However, if we would like to preserve the second pillar of our pension system as an alternative and as an authentic complement, and not simply as a half-baked copy of the first, then we must oppose the reform proposed by the Ministry of Finance. We must demand not tightening regulations on private pension companies and thereby limiting the financial freedom of their clients, but the loosening and even complete elimination of the requirements and regulations in the CSR, which create the need for reforms, the consequence of which is the elimination of the most important and distinctive features of private insurance.
I agree with what was written, but the problem lies elsewhere.
,and I have explained - https://www.facebook.com/atanas.shalapatov/posts/1752811994997027
that due to the systemic crisis, the funded pension system will go bankrupt
I have provided links to the blog of Lyubomir Hristov, chairman of the Institute of Certified Financial Consultants, who explains well about pensions and how two pensions are less than one.
There is also a link to the wisdom of Assoc. Prof. Dr. Emil Harsev
Things are simple - everyone has a personal account in the National Social Security Institute and if they die before retirement, 50% is inherited, and after they retire and die early, up to 5 years there should be some inheritance, etc., and disability pensions go to the state budget.
According to orthodox economic belief, less regulation leads to a more perfect market. However, it is surprising how many people have failed to learn from the events of the last 10 years, the effect of deregulation and the inability (or unwillingness) of large private funds to properly assess risk.
For me, too, the second pillar in this form is extremely vicious. In "white" countries (for example, Germany and England), the main insurance contribution goes into the general pool that the state manages, while additional pension insurance is completely voluntary and is a matter that is settled tripartitely by the employee, employer and POF without the participation of the state.
In our country, there is the absurdity of making a "voluntary" deduction from the mandatory contribution to a fund that manages the accounts. Apparently, no one realizes that all POFs are time bombs, the damage from which will still be covered by the so-called "taxpayer". And the reason is simple - companies are too big and important to be left to go bankrupt. This fact is no secret to the companies themselves, who can therefore manage the money as irresponsibly as they wish.
Calls for deregulation would only encourage vicious practices. There is no non-toxic asset on the Bulgarian Stock Exchange even now, and what would happen if POFs break the chain and the minimum yield is eliminated, I can't even imagine.
I agree with the author that it is not right for someone else to use a personal account, but it is not right to ignore the fact that these accounts are formed from the money that, in principle, should go to the National Social Insurance Fund. In Europe, this is how it is - the mandatory contribution under the insurance code goes to the solidarity system, and whoever wants it, contributes to a second pension and accordingly, as the author says, bears the investment risk.
But for the mandatory contribution to carry investment risk and be entrusted to dubious companies with zero regulation - this is not just nonsense, but institutional suicide.
I am not sure to what extent "all" private pension funds are "ticking time bombs". Otherwise, there is some truth in your argument that some of the pension companies (the largest) are most likely considered by the Ministry of Finance to be too big to be allowed to fail. This, as you note, is a problem. But this is a problem of the overall economic vision of our state economists. No private financial institution should be "too big to fail" and in such a situation be saved by the state with taxpayers' money. The moment the state adopts such a policy, the financial institution in question effectively ceases to be private and becomes state-owned. The market distortions and economic imbalances that such a policy would cause should be obvious. From your comment, I judge that you are aware of them.
As for which insurances should be mandatory and which should not, my position is neither one nor the other. Neither the insurances that go to the National Social Security Institute nor those that go to private funds should be mandatory. It is best to have state and private insurance as options from which each citizen can choose. If you want, you can only insure yourself in the National Social Security Institute, if you want, only in private funds, if you want, in both. But the important thing is that each person should have the freedom to plan their savings for old age as they see fit. This would of course require a fundamental restructuring of our pension system, especially in the field of state insurance, but in my opinion this is the most optimal option.
Regarding zero regulation, as long as the state does not interfere in the private insurance sector by supporting this or that fund with taxpayers' money, everything will be fine. Competition in the market is the most effective possible regulation of the activities of private funds. Whatever your opinion about unregulated markets, state regulation, especially in a country like ours with such high levels of corruption, can only worsen the situation. As you note, companies behave irresponsibly precisely because they rely on state support in case of bankruptcy. This is the real problem, not the lack of regulation.