The world is getting older. We are seven billion now; the population of Europe and the US has become significantly older over the last decades: the average life expectancy has increased and the birth rate has fallen. The opposite tendencies are characteristic only for the Asian countries: due to them the number of people on the planet is growing.
Considerable demographic changes have happened in Ukraine over the last 20 years as well: in the 1990s the mortality rate increased and the birth rate decreased. Now the birth rate has gone up but not sufficiently to restore the age misbalance in Ukraine: we have 14 million officially working people and 13 million 700 hundred retirees. It means that one working person has to maintain one retiree. According to the information received six month ago, the number of retirees has grown by 60,000 people and the number of tax payers has decreased by 400,000. It is clear that the joint pension system when the younger people pay taxes from their incomes to secure the pensions for the older people is overloaded. Other mechanisms are needed to be found.
On October 1, 2011 the pension reform came into force in Ukraine; according to it the women’s retirement age will be gradually increased up to 60 years old. However, it is just a minor part of changes. The government has been preparing the Ukrainians under 35 to introduce the second level of the pension reform: obligatory savings in the non-governmental pension funds during the life so that people receive two payments when retired: the one from the state and the other one they have saved. It is planned that this level will start working when the budget of the Ukrainian Pension Fund is deficit-free.
According to the President of the All-Ukrainian Association of Consulting and Expert Societies “Ukrconsulting” Oleh LYKHOVYD who has been working on the pension reform over the years and started with his colleagues the public educational program “Pension Reform Academy,” “people do not accept the saving system because of their ignorance.” This is what we discussed with him: what reasons for optimism we can find when thinking about the future old age and what risks exist.
You assert that people reject the idea of saving money for their old age because they lack information about it. Probably, there is nothing to save?
“If someone earns even 10 pennies it is possible to save up one. I mean that if one can live for 10 pennies, this person will be able to live for 9 if realizes that it is necessary to live not only today, but tomorrow and the day after tomorrow when he or she will not receive even 10 pennies. No matter how poor we are now, we will live worse when retired and will have neither energy nor possibilities to work. Take the animals: no matter how difficult the year is, all the animals lay food for the winter. It is absolutely natural.”
Regardless of all the government’s declarations about moving towards Europe and the European living standards, do you think that in 20-30 years the Ukrainians will still subsist with their pensions?
“They will subsist if they receive only the pension from the state. The fact that the retirement age has been increased in Ukraine is not a complete reform. Its idea is not to increase the retirement age since it is only the so-called parametric reform but to radically change it and make people responsible for their pensions instead of the state. There are the countries that have admitted that they are unable to provide people with their pensions in future. That is why we will be able to live well if we accept our responsibility for our pensions…
“Why can’t the governments do it? If we examine the gender and age diagram of the population we can see that in the last century and decade it was a pyramid wider at the bottom: the younger generation was the most numerous one. If we look at this pyramid now, less people are born. The joint pension system existing in Ukraine is based on the finance pyramid principle: those who came earlier will be paid by those who came later (the people, who work, pay the pensions to the retirees and do not save anything). The pyramid is stable until those who came later prevail. The future generations will also pay this way. However, when the pyramid turned upside-down it became impossible to fund the joint system.
“The developed countries realized it back in the 1980s and initiated pension reforms: this reform is carried through for 30-50 years until the generations change. In Ukraine the Presidential decree concerning the necessity of the pension reform was issued only in 1999; it provided for making people responsible for their pensions. The people who save money, whose savings are secured and do not lose their value do not worry whether the future generations will be able to pay their pensions. For example, the foreign retirees can travel because they have their own savings. Few people can travel for the governmental pensions since even abroad they are insufficient for this.
“We have the system of determined profit. There is a ‘calculator’ on the web-site of the Pension Fund: if one inserts the data, it is possible to calculate one’s pension (one has to insert the expected salary). However, the people who would have done it about five years ago could have seen now that this determined profit turned into a ‘bubble’ since it is based on the formula. However, if the formula is not filled in with the money (the Pension Fund is running a deficit now) it goes up with a smoke. The money comes from generations and the current working generation does not give enough money. There are a lot of reasons behind it. The first one is demographic. The second one is a very unstable economy not only in Ukraine but all over the world. As a result, it is impossible to predict the pensions in 10-20 years. The people are used to the fact that the state has to guarantee them. But what is this state? The Cabinet of Ministers? It has the budget funded form our pockets.
“Moreover, when the state guarantees something, any guarantees deprave. Besides, all the governmental guarantees finish when the budget is running deficit. Only people can give guarantees by reasonably deciding where and how they will save. For this we have our second pension system, the one of determined expenses: one knows how much they save for the future pension and can roughly calculate it. Some people might save 200 hryvnias, others – 50 or 500 hryvnias. Their savings are invested and will bring different profit in different years. Plus the obligatory state pension.”
Who invests into the non-governmental pension funds? The rich people?
“No, not the rich people. Many of them work for large companies and these companies transfer a part of their salaries to the non-governmental pension funds. There are also a lot of people paying for themselves. I know some people who have salaries of a thousand hryvnias and they invest 20-30 hryvnias a month. It is not even the middle class, maybe the lowest level of the middle class, working people having regular incomes. However, long time is needed to accumulate the pension that would maintain people in their old age. Those who are 40-55 years old now will have a bonus to go with the governmental pension.
“We have roughly calculated that if one invests 50 hryvnias a month to a pension fund, this person will save up 600 hryvnias a year. If we add the investment profit (for example, 12 percent per year, which is not that much today) it will make 634 hrynvias. This is little money. However, by monthly investing 50 hryvnias during 10 years, this person will save up 6,000. If the investment profit is the same (12 percent), it will make 11,500 that is nearly twice as much. I can explain where this sum came from. According to the law, pension funds have to invest the money: they have no right to keep the money received longer than a week on their accounts. Secondly, pension funds monthly distribute the profit to every pension account in proportion to its balance. It means the bigger the balance is, the bigger profit is received. So, if the profit is monthly distributed, next month the profit will be distributed to the money invested and the small profit received in the previous month. It is called compounding and they double the monthly invested sum over 10 years.”
If the investor dies, can his or her money be inherited?
“The whole sum of money saved in a pension fund is paid to the heirs at once. Now the heirs receive most of the payments in Ukraine: over the last five years nearly 50,000 people, retirees and their heirs, have received the payments from the pension funds. When one gets retired they can either take the whole sum of money or partially during a term they choose that cannot be shorter than 10 years. If the investor dies before the term expires his or her money is left for the heirs. When retired, one can insure for the life pension. The sum of life monthly payments is calculated according to one’s savings for the retirement day. However, if the investor dies even two months later he or she retired the savings cannot be inherited.”
