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19 June, 2015

Yet Another Attempt at Pension Reform

The existing pension system is one of the major pillars of the ineffective and corrupt political and socio-economic model of the “old Ukraine”

Strongly misfit for the needs of this time and generation of Ukrainians, it is unfair and inadequate, extremely burdensome for the taxpayers and business, affecting the lives of every Ukrainian.

Ukraine is de facto still using the pension system founded in 1889 in Germany by Otto von Bismarck and copied by the Soviet authorities later. This is the solidarity system where all working people pay contributions into the Pension Fund to finance pensions for the current pensioners, expecting that the next generations will similarly be paying contributions to finance their own pensions once they retire. The system was fairly effective when the number of those employed exceeded the number of pensioners. This ratio changed in the 1980-1990s as Ukrainian families moved to 1-2 children, life expectance grew and the number of pensioners rose, while the number of employed taxpayers shrank. The system began to fail now and then, but the authorities kept finding room to “improve” it in all years of independence by introducing privileged pensions to civil servants, judges, prosecutors, MPs, customs officers, journalists of state-owned media and many others.

RELATED ARTICLE: Minister for Social Policy Pavlo Rozenko on his vision of the pension reform, de-shadowing of taxes and salaries, and assistance to IDPs and veterans of the war in Eastern Ukraine

Currently, pensions for most people remain scant (UAH 1,590 or ar. USD 80 per month for most, with only 3% of the population entitled to pensions that exceed UAH 3.500 or ar. USD 170). Yet, multiplied by the number of pensioners, they add up to a huge burden for the taxpayers, growing at the pace that the economy cannot catch up with. The Pension Fund tax in Ukraine is among the highest ones in the world. And still, the Pension Fund runs into chronic deficits that increase annually and will reach USD 253bn in 2015. These permanent deficits are tapped by transfers from the budget, thus stealing funds from health care, culture, education, defense, and road construction. The situation will continue to worsen unless cardinal measures are taken, as the current ratio of pensioners per working people is 1:1, and it will go to 1:1.4, which can lead to a collapse of the pension system and leave no chance of a well-off retirement for those who work today, especially for the young generation. 

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