Банкеръ Weekly


State Hammers Pension Pillars

Current against future pensioners, solidarity instead of personal lot, the state National Social Security Institute (NSSI) in collision with private funds, a momentary stability at the expense of uncertain future: these are the challenges that will be faced by the pension system if Parliament adopts the proposal of the government to quickly redesign the current pension system model. Government and trade unions signed a memorandum, as could be entirely expected, for another freezing of the retirement age after workers went on a warning walk on the Sofia’s central yellow pavement. But the most controversial text in the document is the idea to empower those born after 31 December 1959 to freely choose whether to insure themselves in an additional universal pension fund, or their contributions to go in full in the budget of the state social insurance system. At first glance there is no drama, as workers can continue to use the old way. Now 12.8% of the insurable income of workers in the most massive third category of work goes into the NSSI, and another 5% will be distributed in a private fund. The funds flowing into state insurance cover costs for current retirees while money in equity funds accumulate in individual accounts, which then pay a share of the pension. An important detail is that in a case of death the funds are inherited, unlike the "social investment" to the state.

According to the chairman of the parliamentary budget committee Menda Stoyanova pension funds will not be destabilized by changing the model. People who work and ensure will have time to make a choice until their retirement after they decide which option is more advantageous for them. In her words, only for those who begin working just now will have only one year to choose a private fund. If they do not, their whole pension contribution will be going to the NSSI. "Over 50% of the insured in the supplementary pension fund have not chosen and were directed to some fund through the official channels. It will be the same, but the official recipient this time will be the NSSI if there is no active request on behalf of the of worker," explained Stoyanova. She added that most young people
do not know in which fund
their contributions go, nor how much money they have gathered on their lots and what additional pension guarantee will be available to them from their resources. And when it comes to retirement, the pension’s size anyway is reduced by a factor taking into account proceeds to the private lot.

Private insurers, employers and many experts, however, saw behind this proposal a hidden attempt to nationalize private funds. President of the Bulgarian Association of Supplementary Pension Insurance, Nikola Abadjiev, said that the transfer of money from private companies in the state fund will deprive people of supplementary pension in the future, it will cause chaos and de facto will destroy the Bulgarian pension model, as the confidence in the system will collapse. Abadjiev believes that if the proposal is adopted, there will be various forms of pressure on the insured persons in private funds to choose the state fund, one of which is the one-off free choice. That is, if a young person who has just stepped into the labour market, and has not decided whether to choose private or public fund, this person will remain forever "in the grip of the State Institute." To this question Menda Stoyanova said: "Do you think that the money can go back and forth moving constantly each year between a private pension fund and NSSI? It should be clear who belongs to which system when one is to be retired. "
Representatives of the supplementary pension insurers pointed out that
the problems of the "sick" First Pillar:
low income levels, minimum payments and deficit will thus be transferred to the healthy second pillar. "These 8 billion levs that have accumulated so far with us are invested in the economy, the money works for people and is returned to them in their accounts, and the annual the yield is over 6%. We will have then to sell assets if it comes to transfer of sums to the state and a large part of our resources are invested in long-term financial instruments," stated Abadjiev. The ruling circles, however, believe that the warnings for a collapse of the capital market are too exaggerated, and the volume of the capital market "is not particularly big".

President of the Association of Industrial Capital Vasil Velev compared amendment to re-nationalization. "Personal money from private funds goes into the pit of public insurance, where it is to be spent the same year for current pensions. So 8 billion levs will just flow out as if a river into the sea and will most probably be spent on cheese and bread," said Velev. But the leader of the Confederation of the Independent Trade Unions in Bulgaria (CITUB) Plamen Dimitrov assured that the union will not allow anyone to touch the money in private funds without the permission of the insured people and urged businesses and unions to conduct educational campaigns among young workers and to explain to them where profitability is more advantageous. In this move there is a great deal of potential. People know very little how capital funds manage their money and what they offer, when the moment for decision comes.

Experts also do not accept the proposal unequivocally. Chairman of the Committee on Labour, Social and Demographic Policy Ademov highlights the fact that such a proposal is too serious to be passed "hastily" between the first and second readings. "Such things have already been done in Hungary and Poland, but for Bulgaria this is a new proposal and is extremely challenging. Such a strategic decision rethinks the philosophy of the social security pillar model, as private pension funds are placed in competition with state security, but they are different in character," explained Ademov. He added that
4.2 million people are now insured in private funds
and if hypothetically one or two million of them transfer their assets into NSSI, this will lead to a serious disturbance of the capital markets, because most of the money in the funds is invested in assets in government securities.

Former Social Minister Ivan Neykov sees this move as an attempt to fill the hole in the NSSI money from the second pillar of insurance. Neykov noted that profitability in private pension funds is better than that of the banks and therefore for people it is more advantageous to not transfer their money. Most extreme in their assessment is Vladimir Karolev, adviser to the Economy Minister, who said he did not want to give money to NSSI and receive a state pension. "I do not rely on NSSI but I save, whatever income I may have. The system takes money from those like me who pay taxes, and give it to those who do not pay. And I'm sure that if something happens to me, neither the state nor NSSI will help me," Karolev pointed out.

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