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25 June, 2015

"The abolition of special pensions system has encountered vehement opposition"

The Minister for Social Policy spoke to The Ukrainian Week about his vision of the pension reform, de-shadowing of taxes and salaries, subsidies and assistance to IDPs and ATO veterans

U.W.: In late March, you said that that Pension Fund was 81 billion hryvnia short to pay pensions at the current rate. What is the situation today?

– This figure is not just for 2015; these are the dynamics that accumulated over the years. Each year, the Pension Fund was short of a certain amount and received state subsidies to cover it. Today, the gap between the PF's own revenues and its expenditures is 81 bn hryvnia. To this day, the Pension Fund has been able to meet its obligations to the citizens of Ukraine in full and on time only because the state budget provides funds to cover this gap. Any increase or indexation of pensions would result in additional figures amounting to tens of billions of hryvnias.

U.W.: How do you plan to fill the PF's budget hole?

– The situation in the PF is the result of the economic situation. The fund is filled with the contributions withheld from people's wages. In the situation of an economic decline and job cuts, wages cannot grow either, which results in decreasing PF revenues. Therefore, the stabilization of the PF situation depends primarily on the economic developments. Two factors can help solve the Pension Fund's problems: the economic growth and the legalization of the labor market (that is, of shadow jobs and wages). According to various estimates, about 200 billion hryvnia of wages are paid annually in the shadows. No contributions are paid on these amounts, with the PF not getting a single hryvnia. As the situation stabilizes, an increase in wages and pensions can be expected. The budget provides for raising social standards by 13% starting December 1, 2015. But let's not forget about the factor of war in Ukraine.

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U.W.: Will you have to go back to the issue of raising the statutory retirement age?

– Today this issue is not on the Government's agenda. We believe that we have enough resources to implement the pension reform without raising the retirement age and the length of pensionable service, and without compromising the retirement terms. The Ministry of Social Policy has developed a draft law that was introduced by the Government into Parliament. It provides for putting in order the pay-as-you-go pension scheme, introducing unified principles of pension accounting (that is, abolishing VIP pensions) and establishing a three-tier pension system (PAYG, defined contributions system and non-state pension insurance funds). If the bill is not supported by the Parliament, the next Government will face the challenge of looking into pension reform options. This may require increasing the retirement age, which I, as an expert, do not support. Already today, during discussions in the Parliament, we can feel the opposition to the reforms undertaken by our Ministry. The abolition of the system of special pensions (for public servants, judges, prosecutors, MPs, and Ministers) has encountered vehement opposition. However, I believe that we will manage to overcome the ambitions of some politicians who want to use this issue for self-advertising, and pass the bill.

U.W.: One of the components of the proposed pension reform is introducing the second tier of the pension system and gradually bringing the rate of the contribution to personal savings accounts from 2% to 7% of the payroll. How could this measure be combined with decreasing the unified social tax (UST) rate from 36-49% to 16%?

– Today, UST rates range from 36% to 49%. As for 16%, this is a long term prospect. For the moment, the comprehensive tax reform is in development. I believe that irrespective of what the tax reform will be, the rates of the defined contributions system can be anywhere between 2% and 7%, and eventually grow to 15%. However, there will be no general increase of the UST rate. The increase is more likely to take place through the redistribution of contributions. For the PF and for me as the Minister for Social Policy, the contribution amount itself is not important (or how it is administered or how it is called). The important thing is that it covers all the PF liabilities to the citizens in the pay-as-you-go system. This means almost 250 billion hryvnia. At the same time, the system has to remain personalized. I need to know who pays contributions and in what amount, in order to calculate his or her future pension.

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U.W.: The Government expects about 3.5-4 million households to apply for subsidies for utilities payments. Taking into account current prices and incomes, there should be at least three times more applicants for subsidies. Is the welfare system ready for this?

– By various estimates, today Ukraine has about 14 million households, therefore, there cannot be three times more applicants. However, we do not set the limit of 3.5-4 million households. If more people turn to us, this is not a problem. To effectively launch the reformed system of subsidies offered by my team in the Ministry and supported by the Government, about five months were required. However, we only had four weeks to start changing the system. Last month, the country got the new reformed system of subsidies. As of today, about 500,000 people have turned to Social Protection offices and to local authorities.

U.W.: One of the major innovations in tax legislation adopted in late 2014 were changes to the UST adopted to bring wages "out of the shadows." Did this innovation prove efficient, given the current statistics?

– The previous Government took the UST administration from the PF and transferred it to the State Fiscal Service (SFS). To my mind, changing the UST is inefficient. This is a malpractice that no other country has. I can understand why Azarov and Arbuzov introduced it: they wanted to control and distribute manually any finances passing through the state budget. As a result, we have serious discrepancies between the SFS and PF databases, and a whole number of problems. Frankly speaking, collecting the UST is not a priority for the SFS. In civilized countries (such as Germany), the administration and collection of insurance payments (UST) is carried out by funds, including pension funds and social insurance funds.

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U.W.: What has your ministry done for the rehabilitation of ATO participants? Do you plan establishing rehabilitation centers? What about subsidies for ATO participants?

– All relevant social programs have been transferred to the Ukrainian State Service for War Veterans and ATO Participants. The service was established to address social and other issues of the disabled war veterans. The current state budget provides for six major programs controlled by this service. They include social and psychological rehabilitation, prosthetics care for the disabled, allocation of housing to survivors, labor rehabilitation (employment), sanatorium-and-spa treatment, and subsidies for utilities payments. These programs are already being implemented. Subsidies are provided to individuals having the official status of military operations participants (disabled veterans). Before I came to the Ministry, about three months were required to get the status in order to enjoy certain privileges. In cooperation with the Ukrainian State Service for War Veterans and ATO Participants, we reduced this procedure. Now it takes not more than a month. The central committee at the above service has been liquidated. It collected all the information, but failed to examine the documents in time. The function of awarding the status of military operations participants has been transferred to ministerial committees, Interior Ministry, Security Service, Ministry of Defense, State Border Service, and the National Guards.

U.W.: How much does the state budget allocate for the benefits and rehabilitation of ATO participants? How will they be granted?

– Each state program provides for different amounts. There are also non-monetized benefits. For example, families receive death gratuity payment, but no travel privileges. The funds from six state budget programs will be transferred to local authorities. Under each program, there is a protocol for the allocation of funds. For instance, utility subsidies are paid at the end of the year. This applies to all categories of privileged citizens, and segregating just ATO participants is impossible. 300 million hryvnia have been allocated for the housing program for survivors.

U.W.: What is the difference between the number of registered internal migrants and their real numbers?

– It has been reported that 1.3 million migrants have been registered on the territory of Ukraine. However, identifying their actual numbers is next to impossible. You can not provide each migrant with a social workers or a policeman to control them. It is the responsibility of the relevant departments of the State Migration Service (SMS), which, according to the laws of Ukraine (and in compliance with the social status of the displaced persons), should check the residence of the migrants. Our Ministry only registers them based on the certificates provided by the SMS. However, the cases of the so-called "retirement tourism" do exist (when a person gets registered as a migrant, but resides in the territory that is not controlled by the Ukrainian authorities). Security Service often publishes such information.

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U.W.: How simple is the registration system?

– You have to provide a certificate issued by the SMS, indicating the place of registration. But the problem is that registration is now the responsibility of local authorities. There are queues. Besides, local authorities are also responsible for granting subsidies and allocating social assistance, while neither their staff nor their payroll have increased. Today, border regions (parts of Donetsk and Luhansk oblasts controlled by Ukraine, and Kharkiv Oblast), as well as Zaporizhia and Dnipropetrovsk oblasts, carry the heaviest social burden. But no one was prepared in advance for such situation, no one could think that we would have 1.3 million migrants who have to be registered, provided with medical and social assistance, and accommodated.


Pavlo Rozenko was born in Kyiv. He graduated from the Kyiv Polytechnic Institute. He worked as the First Deputy Minister of Labor and Social Policy of Ukraine. In 2006-2007, he headed the Social Policy Service at the Secretariat of the President of Ukraine. In the past, he was an MP from the UDAR party and Petro Poroshenko Bloc. Since December 2, 2014, he is the Minister of Social Policy of Ukraine

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