Slovakia trips itself as it pushes through more pension reform

By bne IntelliNews March 27, 2015

Benjamin Cunningham in Bratislava -


In the midst of its latest effort to rearrange the pension system, the Slovak government looks to have tripped itself up in its haste.

Among other changes, Prime Minister Robert Fico's government has been seeking to introduce a minimum pension payout that guarantees to all who have contributed for at least 30 years a pension of €269.50 per month. However, that now has MPs scrambling to patch a legislative loophole that is emblematic of the governing Smer party's quick- fix outlook on pension reform.

A gaping chasm in the proposed law, which passed a second reading in parliament on March 17, essentially gives incentives for lower income earners to gamble their savings on the markets, with almost nothing to lose. The parliamentary committee dealing with the reform was racing to propose changes to the bill as late as March 24 after analysts noted the flaw. 

"The minimum pension proposal is not considered well written to say the least," says Radovan Durana, an analyst with the Bratislava-based Institute of Economic and Social Studies.  "They were just not thinking." he tells bne Intellinews.

Slovaks have the option of diverting 4% of their gross wages into private pension funds. The guaranteed minimum in its original form would have meant lower income earners could divert part of their savings into the private funds with little risk. They would still get a payout at the lower threshold. 

Public funds would then be needed to make up any shortfall. The loophole therefore doubly contradicted Smer's larger drive to bolster state coffers by pulling funds back into the state pension system.    

While lawmakers have scrambled to propose that the minimum pension payout should decline in proportion to the amount savers choose to divert into the private funds, their haste in drawing up the original bill could yet prove costly. The opposition has vowed to challenge the move, and other elements of the Smer reforms, in the Constitutional Court. The glacial pace of the Slovak judiciary could mean years of legal wrangling to follow. 

Critics contend that with an election approaching, the rushed changes were driven by a desire to woo low income voters, but failed to mesh with other legal norms. "If you paid into the system for 29 years and 11 months you have no rights," Durana says. "It does not make sense given the way the existing social insurance law is written," he notes.

The minimum pension, as proposed, is pegged at 136% of the subsistence level. Pensioners under the subsistence level will receive other social benefits to make up for the gap. 

Repent at leisure?

While the mishap surrounding the minimum pension law looks likely to be corrected, the rush to pass the law is indicative of the generally hurried reform plans. The government has also reopened the second pension pillar - under which mandatory contributions are diverted to private fund managers - for a period of three months.

Starting on March 15, savers can divert their accounts back into the state system. In doing so, Bratislava hopes to recoup some €300mn, much of which it would like to spend soon, with an election approaching in spring 2016, yet it remains unclear whether that will work out either. 

On the one hand, it's unclear just how much the government will be able to reap. On the other, although it will clearly offer extra funds to spend and help to reduce new debt issues, the move will do little to combat a deficit that is veering towards the EU's 3% of GDP threshold.

The government's populist spending drive led  the deficit target to expand from 1.98% to 2.3% late last year. Brussels pitches the likely budget gap at 2.8%. According to EU rules, the cash from the second pillar cannot "be applied to the deficit this year", Durana says. "All this money needs to be recalculated for the years that it was paid into the system."

Still, the Fico government hopes to encourage older workers, or those who have already retired, to pull their money out of the private funds. Some 1.5mn Slovaks have paid in €6.6bn to the private pension pillar since it was created in 2005.

Citing the trivial returns they'll see after investing for just a few years, the state has sent out letters to encourage them to move their nest eggs. "It basically says, if you are not rich and not 20 years old you should get out of the second pillar," Durana said. 

Yet like much of the West, Slovakia's population is aging, leading to increased pressure on the state's pay-as-you-go pension system as the years go on. In fact, the swing that will occur will be among Europe's most severe. While Slovakia now has the third youngest population in the EU, it is set to become one of the three oldest by 2060, according to a recent study by Bratislava's Comenius University.  

"Instead of solving the problem of how to get better value from your savings, the government opened the second pillar," Durana says.  "For the next 10 years the first pillar should not change significantly, but this is just postponing the problem."

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