TRANSITION COSTS and their impact on adequacy Dragomir

TRANSITION COSTS and their impact on adequacy Dragomir Draganov Senior expert Ministry of Labour and Social Policies Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

CONTENTS 1. Bulgarian pension reform – main outcomes 2. Post-reform adequacy 3. Transition costs – definition and measurement 4. Measures for smoothing the transition costs and their impact on adequacy 5. Future developments 6. Conclusions Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Bulgarian pension reform • Introducing a new multi-pillar pension legislation • Decreasing the contribution rate • Rising the retirement age and introduction of new eligibility conditions • Introducing a new pension formula and a new indexation mechanism • Disallowing the early retirement Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Post-reform adequacy Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Transition costs – definition • Two problems: – Conceptual: ill-defined notion – Country specific: post-reform parametric reforms • “Pure” transition costs = the sum of diverted employee’s contributions = the government compensations Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Transition costs - measurement Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Measures for smoothing the transition costs • Indexation of pensions: – Index 2000 = inflation (75 %) + average contributory income increase (25 %) – Index 2007 = inflation (50 %) + average contributory income increase (50 %) • Pension calculation – reduction of pensions of those insured in the private mandatory system • State subsidies • Minimum and maximum pension amounts Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Measures for… and their impact on adequacy (1) Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Measures for… and their impact on adequacy (2) Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Measures for… and their impact on adequacy (3) Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Future developments (1) Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

CONCLUSIONS • Transition costs are not so high in comparison with the other public pension system liabilities • Current taxpayers (state subsidies) and current pensioners (indexation) will cover the transition costs • Reforms have had a positive impact of current adequacy of public pensions but… will have a negative impact on their future adequacy • The general question is: “Would private pension system be able to compensate it? ” Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision

Thank you for your attention! Dragomir Draganov draganov@mlsp. government. bg Republic of Bulgaria Ministry of Labour and Social Policy http: //www. mlsp. government. bg Republic of Bulgaria Ministry of Labour and Social Policy Tallinn, September 6 -7 th 2007 Seminar of Private Pension Provision