Otto von Bismarck once said that the culture of a nation is determined by the manner in which it cares for its pensioners. Ukraine seems to be coming to understand the actual meaning of this postulate. A new pension law was enacted more than a month ago and the title sounds promising: On Universal Compulsory State Pension Insurance. It envisions a three-level pension system including three subsystems: joint, cumulative, and non-governmental. The deadlines are still to be set, but the reform is underway. Some 12.5 million pensions have been recalculated in phase one and one-third has been increased, says the cabinet.
The Pension Fund, however, is not overjoyed. As previously predicted by its head Borys Zaichuk, the average pension, after recalculation, will be UAH 143, and the minimum will be UAH 91.80. For those whose pensions turn out the same or even below what they previously received from the state, the increment will be automatic, but a mere 4.2% (versus last year’s inflation rate of over 8%).
In a word, the reform is outlined, but there are rough edges. The overall inference is that the pension reform does not justify the hopes placed in it. Normal pensions allowing a living standard like that in the West are denied both those who previously received extremely high salaries by Ukrainian standards and, of course, those at the medium and lower income levels. Fuel was added to the fire by the cabinet resolution of November 20, 2003, lowering the average wage from UAH 376 to 306.45, justifying this on rather debatable grounds. This, of course, affected the level of recalculated pensions. The resolution alarmed the Ukrainian Employers Federation (but not the trade unions). UEF issued a statement to the effect that the resolution antagonized employees and created an unhealthy atmosphere in enterprises. A number of other champions of the people’s cause quickly materialized, promising to return the seventy hryvnias.
Of course, all this could not pass unnoticed by the government. Premier Viktor Yanukovych declared recently, “Pension reform is a long-term issue and it’s our duty to visit the regions and explain it to the people.”
“The pension reform is not a cure-all, it’s not one of those cases when a decision can be made, carried out, and the problem is solved. We will constantly work out better ways to solve problems and will correct shortcomings once we detect them.” By one of the problems Mr. Yanukovych understood the minimum pension, which was somehow left without any increase. Labor and Social Policy Minister Mykhailo Papiyev said that the government, acting on the president’s instructions, is drafting a resolution to increase the minimum pension not by 4.2 but by 12% (currently UAH 90 a month), and that the same will apply to pensions not recalculated under the new law. He also noted the need to solve other important aspects of the pension reform before the end of the year. One of these aspects relates to most pensions remaining below the living wage (set at UAH 342).
Taking such measures all over Ukraine will require very heavy spending. Pension Fund disbursements are likely to exceed UAH 30 billion this year, which is almost half of all central budget expenses. At the same time, people are unaware of the difference between receiving UAH 90 and 108, when it comes to buying food. Letters received by the Editors are filled with bitter disappointment. One such letter, signed by pensioner Mariya Konovalenko, reads: “Gentlemen, our despair and outrage defies description.” A former schoolteacher, she complains, “First they launched a big publicity campaign, telling everybody that pensions will finally be fair, and we believed them again...”
Interestingly, First Vice Premier Mykola Azarov voiced a similar opinion, addressing the Union of Tax Consultants. He said that too many promises had been made when preparing the pension reform, and that its actual purpose was to show the people that it was best work out in the open, not in the shadow, thus potentially to narrow the scope of the shadow economy. Premier Yanukovych confirmed this cabinet view on the pension reform last Thursday, saying that the reform will help legalize individual incomes and drag the economy out of the shadow. At present, a number of employers pay their employees under the table, but they all should remember that such pay will not be taken into account when calculating their pensions. He added that increasing official pay will stimulate the accumulation of money by the Pension Fund and, accordingly, will result in an increase in the minimum pension.
Under attack by angry pensioners, the Ukrainian political leadership seems to have had no time to ponder the key pension policy guideline. The latter is generally understood as actually transforming the pension insurance system under construction, especially its components such as cumulative and non-governmental sub systems, into a powerful investment resource... So far, the World Bank is the only entity to have appeared on this virgin soil. Mykhailo Rutkovsky, director of the bank’s sector on human resource development, submitted a pension system structural readjustment project recently, with the emphasis on the accumulation aspect and an effective social insurance deposit management pattern. The project’s main idea is to place all social insurance deposits under the command of a single body, thus reducing administration costs and insurance fees.
Meanwhile, the prospects of the non-governmental insurance system remain uninspiring. Ihor Didkovsky, publisher and founder of the journal Pensiya [Pension], believes that the notion of trust may have a negative impact on private pension funds, owing to the older generation’s unhappy memories. However, he also notes that in many countries such funds successfully compete with banks in number of deposits and in many ways determine their economies, being inherently interested in keeping such deposits in effective use. The author of this social project is afraid that the Ukrainian pension reform is threatened by procedural problems, some of which materialized when recalculating pensions. He told The Day that the same will apply to the non-governmental pension funds and related asset management companies. They are actively preparing to enter the market; formally, they are prepared, says Mr. Didkovsky, but only formally, as there is no legal framework or means of operating such large capital. Nevertheless, he hopes that the needed methods will soon be worked out in Ukraine.
