Slovenian Pension System in the Context of Upcoming Demographic Developments Boris Majcen and Miroslav Verbič Institute for Economic Research

Contents of the Presentation Relevant characteristics of the on going Slovenian pension reform Estimated effects of the pension reform on fiscal sustainability and welfare Supplementary pension savings Concluding remarks

Pension Reform Options Higher contributions (or budget transfers) Lower benefits Later retirement Keeping status quo not possible! Who will loose? Only young and future generations or also pensioners? What about pension reform in Slovenia ?

Relevant characteristics of the pension reform Improved horizontal equity in the pension system The gender divide regarding eligibility and benefits considerably narrowed (equalization of accrual rates, eligibility criteria for women closer to those for men) Greater emphasis on the principle of vertical equity or “solidarity” (minimum and maximum pension base, not capped social security contributions) Flexible retirement with bonuses and maluses Enabled development of supplementary pension savings within the second pillar Gradual introduction of many stated changes The pension system is highly intransparent

Lower benefits Pension base – from 10 to best 18-year average of net wages Acrual rates – from 85% of pension base to 72,5% (till 2024); equilized acrual rates for men and women Correction of acrual rates also for the existing pensioners Revalorization of pension base (horizontal equalization of pensioners) Indexation of pensions Maximum pension base – 4 times minimum pension base

Later Retirement Women – Eligibilty criteria: pension qualifying period (p.q.p.) from 35 to 38 years Pensionable age from 58 to 61 years (p.q.p. 20 years) Pensionable age from 55 to 63 years (ins.period 15 years) Early retirement – no special provisions with some exemptions Flexible retirement The ageing problem solved?

Table 1:Estimates of total balance of the state pension fund (in % of GDP) using different assumptions about retirement age and indexation level of pensions Source: Calculations using generational accounts model (March 2007); cf. Verbič (2007, p. 281).

Figure 1.Welfare effects in Slovenia in case of applying different sources of financing the pension system Source: Authors’ simulations using SIOLG 2.0.

The Second Pension Pillar Includes approximately insured persons. Low participation of employees from medium-sized and small enterprises. Relatively underdeveloped system: low collected premia and low »profitability«. Pension schemes can be individual or collective. Tax reliefs are substantially more favourable with collective schemes: however, they are conditional on at least 51% participation of employees in an enterprise. High administration costs. Highly regulated system: required minimal rate of return amounts to 60% of yield on long-term government bonds.

Figure 2. Supplementary pension savings required in order to keep the total pension at the given level Source: Authors’ simulations using SIOLG 2.0.

Figure 3.Expected change in the supplementary pension savings required in order to keep the total pension at the given level in case of increasing retirement age to 65 years Source: Authors’ simulations using SIOLG 2.0.

Figure 4.Expected change in the deficit of the Slovenian state pension fund in case of mandatory second pillar keeping the total pension at the 2000 level Source: Authors’ simulations using SIOLG 2.0.

Concluding Remarks Implementation of the pension reform not sufficient to compensate expected demographic developments The level of expected deficit of the PAYG-financed state pension fund is worrying Higher activity levels among elderly and changed indexation rule would substantially decrease state pension fund deficit The volume of supplementary pension saving is insufficient at present to compensate the deterioration of rights from the first pension pillar (insufficient participation and too low premia) 8,5% of net wage savings for compensation of total effects of pension reform (5% for compensation of the pension legislation from 2005) Increasing retirement age by one year reduces the additional second pillar savings by 0,4 percentage points