Officials have rightly focused on the problems of Ukraine’s pension system, which have accumulated over the years and, like a snowball, only continue to grow and deepen with time. Therefore, the attempt to bring the pension reform started back in 2003 to a logical conclusion is not a matter of political PR, something on the lines of “look how cool we are, we work for the people!” This question is existential from the category whether or not there will be a pension in this country at all with all the possible consequences that you can imagine. I will not repeat for the hundredth time the mantra about low pensions for ordinary citizens and extremely high payments to judges, decent old age and care for the elderly, well-known figures about the imbalance of the Pension Fund. I will try to add to public discourse new, in my opinion, not quite obvious figures and facts to understand why the status quo pension policy is doomed to oblivion as soon as possible.
As always, there are two pieces of news: one is good, the other is bad. The first piece of news is that, based on demographic forecasts, which are discussed in more detail below, we have ten years to build a new infrastructure of the pension system, to develop and approve, that is, to make new rules of its operation acceptable to society. The second piece of news is that if nothing is changed, the solidarity system will go bankrupt after the same period. Obviously, government officials understand that and therefore they are worried. Already today, subsidies from the state budget to the Pension Fund to cover its deficit are almost UAH 200 billion (as of 2020), which is 19% of current budget expenditures. Let us keep this number in mind.
Three main factors affect the balance of revenues and expenditure of the Pension Fund. Two objective ones are demographic trends and labor market trends. One subjective is the system of rules according to which pensions in the solidarity system are calculated. In other words, these factors are demography, economy, law. If we can deal with the law, then demographic and economic trends should still be taken for granted.
From the whole list of scenarios of demographic dynamics, Ukrainian researchers offer to take the option with the following parameters as the most realistic. The current birth rate is 1.17 with a slight growth to 1.22 by 2050, an increase in life expectancy from the current 67.3 years for men and 77.2 years for women to 72.7 and 80.7 years in 2050, respectively. Such parameters look quite realistic with the exception of the last third – the balance of migration, which for some reason is considered constant at the level of growth of 15 thousand people in the long run. In fact, we are well aware of another fact that the number of migrant workers outside Ukraine is at least 3.5–4 million people. Clearly, not all of these people are abroad permanently, but many of them are for sure. It seems that this version of the forecast does not take into account the much higher mortality rate, which, unfortunately, has increased in the last year, considering the pandemic COVID 19. Nevertheless, that’s the way it is.
As of today, it is estimated that about 38 million people live in Ukraine, excluding Crimea and certain areas of Donetsk and Luhansk oblasts (ORDLO). Of this total 8.9 million people are of retirement age (60+), 22.3 million people are in the age group 16-59 years. Therefore, as of today the ratio of retirees to those who theoretically have to pay contributions to the solidarity system is about 0.4. This ratio is one of the main parameters to be taken into account when calculating the revenues and expenditures balance of the Pension Fund. In the forty-year perspective, in view of the above parameters of the demo forecast, it will increase to 0.44 in 2031, to 0.53 in 2041, to 0.7 in 2051, etc.
It should be noted that demographic indicators, for obvious reasons, differ significantly from the data of state registers. In particular, SSC payers are much less, as there are officially unemployed (≈1.4 million people) and hidden unemployment, employment in the informal sector of the economy (≈3.5 million people), which in fact is obviously higher, along with the previously mentioned Ukrainianlabor migrants around the world. As a result, according to the official statistics of the State Tax Service of Ukraine, there were only 10.2 million SSC payers last year, including sole proprietors. The number of pensioners, according to official data of the Pension Fund of Ukraine, is not 8.9 million people, but about 11 million as of the beginning of 2021, since there are also 1.5 million people who get a disability pension, 641 thousand people who receive a pension due to the loss of a breadwinner, 72.8 thousand people who receive social pensions. It is not difficult to see that considering not the demographic statistics, but the real balance of the labor market and beneficiaries of pension benefits, the ratio of workers, i.e. SSC payers, to retirees is already almost 1. But even without taking into account the actual figure, but only the estimated one according to demographic statistics, subsidies from the state budget to the Pension Fund of Ukraine to cover its deficit in the future will look something like in Figure 1. In other words, other things being equal, provided that the pension system remains in its current form, the state budget subsidy to the pension fund in 2030 will be 85% of own revenues, in 2040 – 113% and further in increasing numbers.
It should be noted that the amount of budget subsidies to the Pension Fund was already more than 100%, namely in 2016 it was 134% of its own revenues, due to the fact that the SSC rate was reduced by almost half to 22%. The amount of budget subsidies to the Pension Fund at a level comparable to the latter’s own revenues is not a critical limit and that is why we should assume that we have ten years to build a new pension system. If we lose this time, it will be much more difficult to do so in the future, probably even impossible.
In addition to the demographic factor, negative trends in the economy and, in particular, in the labor market significantly influence the imbalance of revenues and expenditure of the Pension Fund of Ukraine, which for some reason are poorly considered by experts related to the pension sector.
First, lockdown and quarantine restrictions clearly have a negative impact on the revenues of the Pension Fund of Ukraine. Fig. 2 shows data on SSC payers, which are identical to the employed population, during the first national lockdown last year. Everything is self-evident here, so there is no need to explain anything, one should only hope that the full horror of the epidemic will end soon. The 1 million unemployed who could receive at least the minimum wage immediately turns into an additional deficit of the Pension Fund of about UAH 16 billion per year. The total deficit of public finance is even greater, because all these people must receive unemployment benefits. It should be noted that no one knows what new “black swans” may appear in our globalized and digital world. By the way, nobody knows what the labor market will look like in 10, 20 and 30 years!
Secondly, returning to the current problems of the domestic labor market, we can state the following hidden negative trends. According to official statistics, from 2008 to 2019, the number of employees in the real sector of the economy and those employed in the public sector decreased by approximately 35%. The number of public sector employees is a constant and averages 33% of the total number of regular workers(7.4 million people), including the number of public entities employees of 2.5 million people.
The wage fund of public sector employees in 2020 was UAH 447 billion, including SSCs of UAH 75 billion. According to recently released consolidated national accounts, the total wage fund in the economy was UAH 1.8 trillion. Since, as always, the absolute and static figures themselves do not say anything, so let us move on to relative and retrospective data. They show that during 2007 – 2020 the share of the wage fund of those who receive wages from the budget increased by 9 percentage points. This is despite the fact that for the period from 2014 to 2019 the number of medical workersdecreased by almost 300 thousand people, educators –by 164 thousand people, scientists and researchers–by 7 thousand!
Thus, the problem is that there is a tendency to increase the disparity between wages in the real and public sectors of the economy, the latter of which, after all, is financed by taxes. And here we come to an important and not obvious to all point.
SSC, which is accrued to the wage fund of public sector employees, is in fact an additional hidden subsidy from the budget to the Pension Fund. If SSC is paid for each employee in the real sector of the economy by the employer at the expense of funds received as a result of financial and economic activities, then SSC is paid by the state for each employee of the public sphere, and the source of these funds is taxes! Taxes are also a source of not disguised but direct subsidies from the state budget. From an economic point of view, there is no difference, it is only formal. In figures, this means that the actual budget subsidies were not UAH 200 billion (line 2710 of the CBC (code of budget classification) of budget expenditures by economic classification), as officially reported, but UAH 275 billion, as UAH 75 billion should be added to the first figure (line 2120 of the CBC). In relative terms, this is more than a quarter of current state budget expenditures. Thus, taking into account this fact, the figure of 0.68 for 2020 in Fig. 1 is easily converted to the figure of 0.95. The failure of the solidarity system immediately becomes more obvious and much closer! This feeling is exacerbated if we recall that the highest pensions are received by former public sector employees (judges, prosecutors, law enforcement officers, etc.) who received higher salaries and more SSC was accrued at the expense of the same taxes.
To sum up, it should be noted that the reform of the solidarity system is advocated when demographic dynamics are negative, or when the lack of the Pension Fund’s own funds requires additional funds from the state budget, which has its own considerable deficit. However, there are hidden disparities in the labor market and in the economy, which will not go away on their own and require certain management actions, the development of a plan to correct existing macroeconomic imbalances. Obviously, it is impossible to procrastinate with the pension reform in the future.
Although from a demographic, economic, social, security, political points of view it is difficult to find precedents in world history, where the starting conditions for a pension reform were more difficult, but it should be implemented with an understanding of the real state of affairs, not with hidden intentions of gaining another advantage in political karma. Therefore, maybe somewhere in 2023, we will finally bring to a logical conclusion what was started back in 2003!