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Bigger pensions: 14% or 40%?

Current developments in Central and Eastern Europe.

Dr. S-W – 01/2021

Actually, things could have turned out better for many Romanian pensioners: in 2019, the majority socialist party decided to increase pensions by a whopping 40%, but starting from a very low level. The increase should have come into effect in September 2020. This gives the now Conservative government enough time to reverse the reform. This was not least due to pressure from international organisations, which warned of the consequences for public finances, which were already in a precarious state before COVID-19.

The conservative government, led by the PNL, reduced the 40% increase to a mere 14% increase by decree. The dispute then went into the next round: the Romanian parliament repealed the decree so the government immediately took it to the Constitutional court. They ruled that the repeal of the government’s decree did not automatically restore the old legal situation regarding the 40% increase. The parliament is to decide again. The 14% increase will apply until then. To be continued ....

Poland has quite different problems in terms of pension policy. A contributory pension plan for employees has been in place for two years. Its purpose is to replace the unsuccessful private pension funds, which - following the World Bank model - implemented the originally compulsory second pillar of pension insurance. The residuals of these funds generated negative returns of -22.8% over the last 3 years (as of: October 2020). In contrast, the new programme is only compulsory for employers, and not for employees. The majority of them are automatically enrolled in the new system, but they also have the option of withdrawing from it.

Despite various incentives, the program has not been as popular as the government had hoped: Only 40% of those entitled in the larger companies (more than 250 employees) ultimately remained in the system instead of the hoped-for 75%. Much lower participant numbers are expected in smaller companies. This is simply because they pay lower salaries on average and this leave less room for additional savings efforts.

With a certain delay as compared to Poland, Estonia has converted its formerly compulsory, funded second pillar of old-age provision into a voluntary system. And once again, the ripples went all the way up to the Constitutional court. An interim parliamentary majority and even Estonia's President were of the opinion that the conversion of the compulsory system into a voluntary one was unconstitutional. The court did not agree, so that the reform could now come into force. Members of the system can now withdraw their deposits at any time, but must then pay a tax of 20% on them. Members were also allowed to suspend their contributions (at 2%) for 9 months as from October 2020 due to COVID-19. Nevertheless, only 1.4% of those entitled made use of this option.