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26 January, 2012  ▪  Vitalii Melnychuk

A Special Period During Peacetime

Why pension reform was bound to trigger protests

In late 2011, pension reform again made the headlines. It was reported by television and online, but the format was more reminiscent of wartime summaries: “Chornobyl disaster victims in Lviv and other regions continue to protest against non-payment of pensions.” “Pensioner, 69, dies in Donetsk as the police attack a tent village.” “Some 100 protesting pensioners, wielding pitchforks and spades, broke doors and windows and burst into the Donetsk Region Administration.”

LEAD BY EXAMPLE PLEASE

The Law “On Measures to Secure Legislative Provisions for Reforming the Pension System,” which entered into force on October 1, 2011, affected millions of people. The law regulates the introduction of a mandatory defined-contribution pension system and sets a cap for maximum pensions. Its final and transitional provisions made amendments to more than 20 laws on pensions. Most of these changes are fiscal in nature and mean saving budget money on every category of pensioners regardless of their age, sex, status and length of service.

There has been no unbiased, truthful and objective assessment of the pension reform and the social cost of its implementation. These factors combined to prompt Chornobyl cleanup workers, Afghanistan war veterans and children of war to take to the streets.

The catalyst came in the form of government plans to legislatively limit social benefits. The government wants to be able to pay out these benefits only if it has the requisite sum of money in the treasury. Previously, this limitation was contained in every law on the annual national budget, but the Constitutional Court declared this practice unconstitutional in 2008. Consequently, there is a legal conflict today. Social benefits are established by law. If they are not paid, citizens can sue the government and obtain court rulings in their favor. In this case, a court ruling has to be executed regardless of whether there is money in the budget. According to sources in the government, 2.5 million pensioners won UAH 5.9 billion from the Pension Fund alone through courts in the first 10 months of 2011. Chornobyl disaster cleanup workers are due to be paid an additional UAH 6.6 billion, WWII participants and children of war UAH 10 billion apiece, and other categories – if they turn to court and win their cases – a total of UAH 170 billion.

Indeed, the current system of social benefits in Ukraine is a vestige of the Soviet period and the first years of independence when the government followed inefficient Soviet practices instead of building a new, European-like system of social security. Today, 350 categories of citizens, i.e., a total of nearly 14 million people, are entitled to various social benefits paid from the budget. Many of them have the right to several such benefits. This requires spending two-thirds of the national budget on social benefits alone, which no economy in the world can afford. A systemic solution is required, and the government would have to start from itself – not so much to save money but to improve the atmosphere in society and prepare it for reforms. Instead, the government decided to start reforming social benefits by curtailing the rights of Chornobyl disaster cleanup workers, Afghanistan war veterans and other socially unprotected groups. Citizens were not given an honest, understandable assessment of the situation and did not see an example set by the government itself. As a result, we saw protests, pitchforks and spades, and people dying.

AN APOLOGY FOR REFORM

Pension reform is not focused on significantly altering the parameters of the pay-as-you-go pension system. Rather, it stipulates transition to a three-tier pension system with a mandatory defined-contribution component. In fact, a three-tier system was legislatively established back in 2003. However, only two components are at work today: the pay-as-you-go system (1st level), which was greatly modified when the law on pension reform was passed, and the voluntary non-government defined-contribution system (3rd level), which has received virtually no support from the national government.

Unlike the innovations mentioned above, the introduction of the mandatory defined-contribution system does not antagonize society. On the contrary, citizens, businesses and the state each derive a series of benefits. Under normal conditions, participation in the second level will increase individual pensions. Moreover, there is a direct relation between defined contributions and future payments, which will stimulate both employees and employers to avoid salary payments “in envelopes”. To society, this type of the pension system means having a powerful source of long-term investment resources for 10 to 30 years and more. Neither commercial banks, nor insurance companies, nor other businesses can create this kind of source of investments. They will be a major factor of economic security and growth, stimulate the stock market and the country’s real sector, secure higher individual incomes and become an efficient safety valve against economic crises. Our neighbour Poland, where more than USD 80 billion of pension contributions are accumulated on the domestic market, weathers crises well and even enhances its standard of living every year.

Why, then, don't we hear about the mandatory defined-contribution pension system anymore, even though it was scheduled to kick off in 2013? There are several reasons. First, the law does not set concrete terms for its introduction: “starting from the year in which a no-deficit budget of the Pension Fund is secured.” Another formal reason is the need to pass a special law to introduce this system. According to government calculations, the Pension Fund deficit will fall from nearly UAH 20 billion to UAH 2.2 billion in 2012 and to zero in 2013. It would seem that it will be the green light to go ahead with the second level. But to move forward with this, a law needs to be passed now that will make the government prepare for its implementation. Until recently, experts widely discussed this draft law, and the government was expected to submit it to the Verkhovna Rada. But after the law on pension reform entered into force on October 1, 2011, these discussions and talk about introducing the second level of the pension system in 2013 ceased. It appears that the government has a different agenda for 2012 when parliamentary elections are scheduled to take place. The Cabinet of Ministers has already announced that it is going to raise early pensions to the level of current pensions. This takes money. Pensions for Chornobyl disaster cleanup workers and other categories are also set to increase in return for no more court rulings to raise pensions in individual cases. The Pension Fund recently filed a submission to this effect to the Constitutional Court. The law on the mandatory defined-contribution system has been put on the backburner, because few people in the government seem to believe that enough resources will be found to raise pensions. Thus, they again say that the Pension Fund will continue to have a large deficit, more than the UAH 2.2 billion envisioned in the 2012 draft budget. Why go to great pains if the defined-contribution system is again put off, because “there will still be a deficit”?

The pension reform seems to have entered some “special period.” It is very unlike the “beginning of the second stage” which, according to the presidential plan of reform, would have to end with the long-expected introduction of a mandatory defined-contribution system. Instead, people “with pitchforks and spades” in their hands are storming regional administrations.


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