budgetary aspects of the macedonian pension reform zorica apostolska director, mapas april 9, 2008...
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Budgetary aspects of the Macedonian Pension Reform
Zorica ApostolskaDirector, MAPAS
April 9, 2008 Bucharest
Agency for supervision of Fully Funded Pension Insurance (MAPAS)
Agenda
Pension system design and Macedonian Case
Actuarial projections in Macedonia
Parametric reforms of PAYG system in Macedonia
Reformed pension system design and its expected effects
Transitional deficit
Preparation and implementation
Future Challenges
Pension system design and Macedonian Case
No two pension systems are the same
General categories (by method of financing)
Another features of pension systems: Who is covered
Covered risks
Contribution rate
Replacement rate
Design depends on many “external” factors: economy, political, sociological and cultural environment, etc.
PAYG DB
Fully funded DC
Pension system design and Macedonian Case (cont.)
Macedonian pension system before the reform
System features PAYG, DB
More tan 50 years of existence
Mandatory
High level of coverage
Types of pension benefits (risks covered)
• old age• survivors• disability• minimum pension
guarantee
Pension system designs and Macedonian Case (cont.)
Macedonian pension system problems
Economic factorso Unfavorable economic and
labor market developments
o Contribution evasion Demographic factors
o Ageing of population
Decrease of the number of contributors
Increase of the number of pensioners
Expected insolvency of the Public Pension and Disability Insurance Fund
Actuarial projectionsPopulation 60+ / Population 18 - 59
0
200000
400000
600000
800000
1000000
1200000
1400000
2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
year
nu
mb
er
0%
10%
20%
30%
40%
50%
60%
70%
pro
po
rtio
n population 18 - 59
population 60 +
proportion
Actuarial projections Ratio contributors / pensioners
0
100000
200000
300000
400000
500000
600000
700000
2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
year
nu
mb
er
0.0
0.4
0.8
1.2
1.6
2.0
pro
po
rtio
n contributors
pensioners
proportion
Actuarial projections(Contributions – Pensions) / GDP
-8%
-5%
-2%
1%
4%
7%
10%
13%
16%
2001 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
year
pe
rce
nta
ge
incomes
expenditures
surplus (deficit)
Parametric reforms of the Macedonian pension system
Features of the system that influence its flexibility
Retirement ageo Increase in the retirement ageo Age exclusive conditiono Termination of early retirement provisions
Decrease of the replacement rate Change of pension indexation method
Sustainable contribution rate and replacement rate
0%
10%
20%
30%
40%
50%
60%
70%
2001 2020 2040 2060 2080 2100
year
perc
ent
contribution rate replacement rate
Mandatory pension and disability insurance based on generational solidarity (first pillar)
Mandatory fully funded pension insurance (second pillar)
Voluntary fully funded pension insurance (third pillar)
Design of the reformed pension system and its expected effects
For the system Solvent pension system
Increasing national savings
Strengthening the investment power
Economy growth
Increasing the Macedonian labor market efficiency
Design of the reformed pension system and its expected effects (cont.)
For the individual Greater security of the
pension
Risk diversification
Transparency of the
operations
What is transitional deficit? Part of the contributions that flow to the second pillar (outflow from the first
pillar)
How can we measure the deficit?
Number of switchers
Size of second pillar contributions
How can we finance this deficit?
Issuance of Government bonds (debt financing)
Use of the privatization proceeds of public enterprises
Fiscal contraction (tax financing)
Combination
Transitional deficit
Transitional deficit (cont.)
-2.0%
-1.0%
0.0%
1.0%
2.0%
1998 2008 2018 2028 2038 2048
pessimistic
base case
optimistic
How can we control the deficits? Measure the transitional deficit Set the maximum acceptable level of the deficit Design the system to fit that levelFirst pillar parametrical reforms help financing transitional deficit
Macedonian case 35% of pension contributions go to the second pillar
Mandatory entrance only for new labor force entrants (employed after January 1, 2003)
Voluntary entrance for current works
Only 5 to 7 years accrued right for switchers recognized
Transitional deficit (cont.)
Preparation and Implementation
Government commitment to Pension Reform• Pension Steering Committee Established• Actuarial Unit Established• Comparative analysis prepared
Development of a concept, discussion and legislation adoption Public informative and educational campaign Ministers Council
• Makes key policy and political decisions• Chaired by Minister of Labor• Controls overall pension reform implementation strategy
Working Group• All major institutions represented• Meets weekly• Manages overall implementation project
USAID and World Bank assisting
Obstacles Size and ways of financing transition costs
Low scope - small country, low number of contributors and assets in fully funded pension insurance at start
Underdeveloped and in-depth financial and capital market, absorbing power of the market, not enough instruments existing
Absence of custodian function at commercial banks
Preparation and Implementation (cont.)
Ways to overcome obstacles
Foreign and domestic experts prepared assessment of fiscal, financial and macroeconomic aspects of different pension reform options and analysis of capital markets
Action plan developed for legal and institutional changes in pension regulation and financial and capital market
Working group (Ministry of Finance and Central Bank of Republic of Macedonia) – Strategy for Development of Government Securities Market (September 2003)• One of its objectives: Creating financial instruments adequate to
the needs of institutions to emerge from pension system reform
• Another objective: Financing transitional deficit
Preparation and Implementation (cont.)
Ways to overcome obstacles (cont.)
Start of second pillar contributions flow connected by Law with issuance of first continuous issuance of government bonds
(Issuance: 24 November 2005,
Start of contributions: January 1, 2006)
Central Bank – Custodian for the first 5 years of the system (transitory provision)
Regular actuarial projections prepared on annual basis
PDIF balance and transitional deficit submitted to the Ministry of Finance
Preparation and Implementation (cont.)
Future challenges
Improved contribution collection and evasion elimination, increase of employment rate
Regular recalculation of the transitional deficit
Appearance of new instruments (corporate bonds, mortgage backed securities, etc.)
Custodian function at commercial banks
Start of third pillar operations
Start of payments of pension benefits from second pillar
Thank you
for you attention!
www.mapas.gov.mk