SPECIAL, OCCUPATIONAL, MERIT, AND PRIVILEGED PENSION REGIMES ISSUES AND OPTIONS FOR UKRAINE

3 TYPES OF SPECIAL PENSION REGIMES IN UKRAINE 1.EARLY RETIREMENT FROM HAZARDOUS OCCUPATION (LIST #1 AND LIST #2) – 1,5 MIL NO ADDITIONAL CONTRIBUTION EARLY RETIREMENT PAID BY THE EMPLOYER ( GOVT GUARANTEE IF PRIVATE SECTOR, BANKRUPTCY?) REGULAR FORMULA 2.EARLY RETIREMENT FROM OTHER OCCUPATION (PILOTS, BALLET DANCERS..) – 1 MIL SOME PAY ADDITIONAL CONTRIBUTION (+7%) EARLY RETIREMENT PAID BY THE BUDGET REGULAR FORMULA 3.PENSION SUPPLEMENT/TOP UP (MILITARY, CIVIL SER., MERIT, NON-CONTRIBUTORY) – 3 MIL+ SOME PAY SUPPLEMENTARY CONTRIBUTION (+3%) PRIVILEGED FORMULA: LAST WAGE RULE (BONUSES AND PRE-RETIREMENT PROMOTION?), WAGE INDEXATION FISCALLY UNSUSTAINABLE TOTAL UNDER SPECIAL REGIMES: 5,5+ MILLION

Accrual rates and maximum replacement rates for civil servants versus replacement rate for national-scheme, full-career worker Ukraine

Indexation procedures for pensions in payment, civil-service schemes

Expenditure on civil-service pensions, OECD countries (% of government revenues) UKRAINE (2008): 3.3% - CIVIL SERVICE+TEACHERS+DOCTORS+MERIT

Expenditure on pensions for public-sector employees, high-income, OECD countries (per cent of GDP) UKRAINE (2008): 2.5% - CIVIL SERVICE+MILITARY+TEACHERS+DOCTORS+MERIT UKRAINE (2008): 4.2% - PUBLIC SECTOR+ ALL PENSION TOP-UPS

ISSUES IN SPECIAL PENSIONS ARE THEY NEEDED? –NO: WAGE SHOULD INCLUDE ALL THE RISKS; ONE CAN TAKE ANOTHER JOB AFTER HAZARDOUS ONE,... –YES: LABOR MARKETS ARE IMPERFECT, IN SOME OCCUPATIONS LIFE-SERVICE MAY BE DESIRED (MILITARY, POLICE, CIVIL SERVICE,..) WHAT KIND OF SPECIAL TREATMENT? –EARLY RETIREMENT –PENSION TOP-UPS BUT INTEGRATED –COMPLETELY SEPARATE SYSTEMS

ISSUES IN SPECIAL PENSIONS - 2 HOW IS IT FINANCED, WHO FINANCES IT, IS IS EQUITABLE? NORMAL RETIREMENT EARLY RETIREMENT HAS TO FINANCE

FINANCING IN DEFINED BENEFIT SYSTEM –SUPPLEMENTARY CONTRIBUTION TO COVER EARLY RETIREMENT OR HIGHER PENSION –TOP UP AT RETIREMENT STAGE (NO CONTRIBUTION, FULL SOLIDARITY) –ISSUES: BENEFIT LEVEL KNOWN, FINANCIALLY UNSUSTAINABLE (PARAMETERS), POLITICAL INFLUENCES IN DEFINED CONTRIBUTION SYSTEM –CONTRIBUTION TO INDIVIDUAL ACCOUNT –ISSUES: UNKNOWN BENEFIT LEVEL, BUT FINANCIALLY SUSTAINABLE, POLITICALLY MORE RESISTANT

LABOR MARKET IMPACTS IN DEFINED BENEFIT SYSTEM –VESTING PERIODS –WAITING PERIODS –LOCK-IN OF LABOR –COST OF EXIT –LIFETIME-CAREERS –LOW LABOR MOBILITY IN DEFINED CONTRIBUTION SYSTEM –LABOR FLEXIBILITY

DESIRED PATTERN IS THERE BEST PRACTICE? IN DEFINED BENEFIT SYSTEM –SHORT VESTING PERIODS –SUFFICIENT SUPPLEMENTARY CONTRIBUTION –MINIMIZE TOP-UPS –INTEGRATED IN NATIONAL SCHEME –SUSTAINABLE PARAMETERS IN DEFINED CONTRIBUTION SYSTEM –ENOUGH CONTRIBUTION DURING WORK IN SPECIAL OCCUPATION TO FINANCE EARLY RETIREMENT OR LARGER PENSION

OPTIONS FOR UKRAINE CLEAN UP THE CURRENT (DB) SYSTEM –REDUCE PENSION PRIVILEGES FOR NEW RETIREES –REDUCE ELIGIBILITY LIST –REDUCE GENEROUS FORMULAS IN MILITARY AND CIVIL SERVICE –INTRODUCE ACTUARIALLY FAIR SUPPLEMENTARY CONTRIBUTIONS DURING THE ACTIVE SERVICE REPLACE IT WITH DC OCCUPATIONAL SYSTEM WITH INDIVIDUAL ACCOUNTS (DRAFT LAW) –OCCUPATIONAL SYSTEM BASED ON DC FULLY FUNDED BASIS, CONTRIBUTIONS DURING ACTIVE SERVICE –PENSION SUPERVISION, REGULATION AND INFRASTRUCTURE HAS TO BE ESTABLISHED