Transformation of Social Security: Pensions in Central-Eastern Europe

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From Vol. Political Economy of old-age Pension Reforms in Georgia. The paper [1] examines the factors that played a major role in development of the old-age pension system in Georgia. Economic performance, demographic aging, domestic political constellations, and external influence are traditionally thought to be responsible for the pension system reforms.

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Qualitative data analyses and in-depth interviews have been used to test these explanations. This analysis did not confirm the hypotheses, but it revealed that fiscal constraints and international technical assistance were the main factors behind reforms during the first two chronological attempts to change the system. Political factors and liberal economic ideology influenced the patterns of old-age pension policy development from —, while the negative outcomes of the Russian-Georgian War and World Financial Crisis are currently the major obstacles for comprehensive pension reforms.

The limitations of this study suggest that in order to clarify the exact nature of old-age pension system, shorter time periods and separate reform initiatives should be investigated. Keywords: transition, political economy, retirement, pension reforms, Georgian government. In accordance with the ideological and political goals, the pension system was born entirely of the state and retirement payments that were financed on a pay-as-you-go PAYG basis through the transfer of funds from state-owned enterprises to the USSR State Insurance Company, Gosstrakh , which had a department in Georgia.

The Soviet retirement pension system consisted of two parts, a public component and a voluntary component, which together provided relatively generous old-age pension benefits. However, as almost all dimensions of economic and social life, the public pension systems had been challenged by the turmoil of the s. After the first few years of transition, institutions of representative democracy have emerged, a new legal infrastructure has been installed, and the private sector has developed; whereas the question of fundamentally reforming the existing set of welfare policies, including pension arrangements, had attracted little attention.

On the revenue side, shrinking contribution bases and poor administration of revenue-generating systems had destabilized resources for pension expenditure. On the benefit side, demographic aging, shrinking participation in the labor force, and growing informal employment had led to a marked increase in the number of pensioners compared to the number of contributors. Old-age pensions became low, unfair, and were not sufficient to protect the pensioners from falling into extreme poverty. These tendencies inevitably affected the old-age pension system. Therefore this paper seeks to answer what determined the development [9] of the old-age pension system in Georgia, and whether policy changes and unimplemented reforms can be explained by economic and fiscal problems, by political limitations on available reform choices, by a combination of these factors, or by some other circumstances.

This study also intends to reveal the problems the old-age pension system has faced and to evaluate the achievability of the reform endeavors. In addition to the nature of the research questions, the methodological approach was defined by time and resource constraints. There are substantial trade-offs between qualitative and quantitative analysis, the dependent and independent variables, the length and depth of the account, and the availability and reliability of data sources.

Nonetheless, to achieve the research goals, this study consecutively applied the evaluation of relevant academic scholarship, qualitative data analysis, and in-depth interviews as complementary approaches. In-depth interviews were conducted with major stakeholders, including decision-makers at the Ministry on Reforms Coordination, MOLHSA, SSA, economic experts, and the representatives of private insurance companies and relevant civil society organizations.

On the one hand, economic recession and demographic aging are assumed to destabilize public pension finances and consequently create pressures for policy reform; while on the other hand, political actors and the environment can affect old-age pension system development. Pressure Factors. Theories on the economic sustainability of old-age public pension systems assume that pressures for change derive from financial deficits. The economic stagnation and fiscal deficits represented the immediate pressures on the consecutive governments in transition economies to adjust the pension system, but the intensifying long-term strains also resulted from the impact of demographic aging, as the proportion of the elderly in populations had been rapidly rising.

Despite the severe socioeconomic situation, life expectancy had been increasing among the elderly during the s, creating a strain on old-age pension systems. Also, a pattern of changes in fertility rates affects the old-age dependency ratios and creates strong pressure for reforms within several years because the current fertility rates are typically employed for the extrapolation of future trends as a rationale for changes.

Political Factors. An account of the political set of hypothesized relationships is a more challenging task than considering the effect of pressure factors on pension system development. Most political economy theories consider the political environment, such as the fragmentation of political power [25] and differences in governing bodies and institutions, [26] as a central explanation for policy development. State-centered theories recognize the state and its policies as more than neutral, influencing pension system development as an autonomous agent; [27] while the new-pluralism assumes that public pension systems are determined by patterns of democratic political competition among different non-class based interest groups.

In addition to reformers, other domestic actors in pension policy development were the political parties, the ministries and other governmental agencies, the experts and trade unions, public opinion, and representatives of financial and capital markets. In a democracy, parties which decrease old-age benefits can expect to face the wrath of the old-age population, while authoritarian governments are granted more freedom to conduct policy adjustment.

Another explanation on pension policy reforms is the direct and indirect influence of external economic, political, and ideological factors in shaping the old-age pension policies. First Stage of Development: Economics of Pensions. Reforms of the pension system are the changes in the totality of institutions, procedures, and resources drawn on to ensure a replacement income during retirement age.

Four attempts of initiating systemic changes in the old-age pension system can be distinguished: the first two were made consecutively in —99 and —03, while from the reforms continued in two different directions. Emergence of a Reform Agenda. The socioeconomic collapse associated with the dissolution of the Soviet Union in Georgia was reinforced by the civil wars, which sparked the national macroeconomic crisis, precarious fiscal conditions and completely destroyed the inherited old-age pension system. In the Government turned down the system of differentiated pensions and replaced it with flat payments.

The pension benefits were determined by simple arithmetic: the number of those formally employed in the population was multiplied by the average salary and tax tariff, and then revenues were divided by the number of pensioners. In the parametric adjustments of the system resulted in the retirement age being increased by five years for men and women respectively, cancellation of the early retirement provisions and introduction of a right on old-age pension benefits only for those who previously contributed to the system.

The problems of the pension system were further aggravated by a serious economic crisis at the end of the s. This critical situation created by the poor collection of tax revenues was transformed into the large-scale financial crisis, mainly as a result of the economic problems that developed in the CIS countries. At the same time, the country had one of the lowest tax collection rates 9 percent of GDP among the transition economies, and the government had been reluctant to initiate taxation reforms. The National Bank, however, reported that the final outcome only came to 68 percent of what had originally been projected.

The economic hardship also determined that many Georgian citizens decided to leave the country. The demographic burden was intensified by the growing mortality and decreasing fertility rates. At the end of the s the population over age fifty-nine made up The impact of fiscal constraints on the old-age pension system was first recognized by the officials of the Ministry of Labor and Social Security who initiated an initial agenda on old-age pension reforms.

It was assumed that the first step for changes had to be part of a well-drafted legislative framework to give to ultimate decision-makers a clear picture what needed to be done. After the introduction of a new state constitution in , all Soviet laws, including those on social security, were annulled. Although the bills envisaged the differentiation of old-age pensions according to amounts of contributions and period of payments, they did not imply any pension formula or other means to calculate differentiated pension benefits. Ultimately, the bill was not approved, and in the government established a working group with a more ambitious initiative in which the influence of the World Bank, with its retirement pension orthodoxy, became apparent.

Italy's diplomatic activities and allegations, all reports of international observer missions notwithstanding, resulted in the fact that Slovenia became a member of the CE as late as 14 May , almost a year after it had been admitted to the UN.

European Pillar of Social Rights: social protection and inclusion

In the meantime, in August , Italy recognised Slovenia's right to succession to all relevant treaties some 50 in number that had been concluded between Italy and Yugoslavia. Among them was the Treaty of Rome , an agreement on compensation for the expropriated Italian property in the border area. But after the political situation in Italy changed and the right-centre government of Silvia Berlusconi and Gianfranco Fini came to power 10 May , Italy refused to honour this contract and demanded the return of property in kind.

Since Slovenia refused to accept this claim and insisted on the respect of international law, Italy vetoed negotiations on the Europe Agreement. It claimed that Slovenian legislation was not in accord with European legislation as regards the purchase of land by foreigners. It was of little help for Slovenia to argue that an obligation to sell land to foreigners is relevant only after a state becomes a member of the EU according to the principle of the free movement of capital nor that no similar demands have been made to other countries which had signed Europe Agreements.

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For Slovenia it now became a demand by the EU, not Italy alone, to change its legislation. The EU considered the dispute a bilateral matter and would not jeopardise relations with one of its important members. The Slovenian government hat to make a declaration that before signing the Europe Agreement it would initiate a change of the Constitution allowing for the purchase of land by foreigners, and that the amendment to the Constitution would become effective before the end of the ratification process.

Thereby Slovenia consented that after the treaty would enter into force, EU nationals who at any time legally and continuously had had a permanent residence for three years on the present territory of the Republic of Slovenia could, subject to reciprocity, acquire title to land. Efforts and Obstacles on the Way to Membership , Studienverlag, , pp. The change of the Italian government, first to Lamberto Dini's technical government and then to a centre-left government under Romano Prodi, led to immediate improvements in bilateral relations. A Europe Agreement was finally signed on 10 June , four and a half years after Czechoslavakia, Hungary and Poland and more than three years after Bulgaria and Romania.

It finally entered into force on 1 February It was also the country that had the shortest interval between the signing of an accession agreement and the membership application. While the Visegrad-four had several years between these two key dates, Slovenia applied directly after signing the Europe Agreement, at the very same day. This was long before the Europe Agreement would enter in force on 1 February and even before the interim agreement was applied starting from January It also turned out to be the right decision.

The European Commission's opinion on Slovenia's application for EU membership, delivered at the same time as to the 9 other applicants from Eastern Europe, in autumn , gave credit to Slovenia as a stable democracy fulfilling to the required degree the first two Copenhagen criteria political and economic. It pointed out that Slovenia would have to make considerable efforts to be able to adopt and implement the acquis. Areas highlighted were internal market, environment, employment, social affairs and energy. Slovenia was also well-prepared for the negotiations.

It was to a large extent on the basis of the latter two documents that Slovenia prepared its "Strategy for Accession to the European Union " in Janez Potocnik, Slovenia's chief negotiator for membership, pointed out in an article written together with Jaime Garcia Lombardero :. In that period, at least in Slovenia's case, the real negotiations took place within the country, with respect to its preparation to undertake the necessary changes not only in principle, but also despite interferences with the existing division of economic and political power. These "internal negotiations " were crucial for efficient and fast progress during the negotiations.

This will be demonstrated below.

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As discussed in the previous sub-section, the CJEU rejected the extension of the Albany exception to the fundamental freedoms. That raises the question whether the other lesson of the Albany judgment, according to which the introduction of a compulsory pension scheme executed by one single fund is not contrary to competition law if the scheme in question is sufficiently solidary, is valid in the field of the freedom to provide services.

In other words, the question arises, following the Viking and Laval judgments and the echo they have found in CJEU judgments relating to occupational pensions, whether the compulsory membership to an occupational pension scheme managed by a single operator is compatible with the freedom to provide services. There is no doubt, and the CJEU has repeated this on several occasions, that occupational pension providers provide services within the meaning of Article 57 of the TFEU.

On the other hand, these companies are deprived of the possibility of contracting with a service provider other than the pension fund or the insurance undertaking to which they are necessarily linked. Nor is there any doubt that this restriction must be justified under Article 56 of the TFEU, regardless of the nature law or collective agreement of the measure imposing the membership obligation. As already stated, in the Albany judgment compulsory membership of a pension fund was justified under competition law because of the solidarity features of the pension scheme managed by that fund.

Can the solidarity of an occupational pension scheme also constitute an overriding reason of public interest capable of justifying a proportionate restriction on the freedom to provide services? To answer this question, we can only try to extrapolate the position that the Court might adopt from other cases relating to the freedom to provide services.

As a preliminary point, it appears that this question need not be analysed through Article 2 of the TFEU, which allows States to derogate from certain provisions of European law for the organisation of services of general economic interest. This article played a central role in the Albany judgment.

Several authors are of the opinion that this article could also apply to the freedom to provide services, 37 which would make it possible to develop a uniform approach to exceptions to competition law and the freedom to provide services. In several judgments, the CJEU has accepted that the need to safeguard a social security system against a risk of serious harm to its financial equilibrium constitutes an overriding reason of public interest capable of justifying a restriction on the freedom to provide services.

In accepting that maintaining the financial equilibrium of a social security system constitutes an overriding reason of public interest, the Court therefore also accepts that the protection of solidarity existing within that system may justify a restriction on the freedom to provide services.

However, this case law cannot simply be transposed occupational pension schemes pillar II , as those cases concerned statutory schemes pillar I. Nonetheless, these findings could be a precedent for occupational pension schemes with strong solidarity between members and which occupy an important place, in terms of their coverage and the amounts they award, in the pension system of the Member State concerned, so that questioning their operation would have repercussions for the system as a whole. Assuming that the protection of the solidarity of an occupational pension scheme is accepted by the CJEU as an overriding reason of public interest, the proportionality of the restriction is to be established.

In the Kattner judgment on German health insurance funds 42 and the Freskot judgment on compulsory natural risk insurance for Greek farmers, 43 the Court seemed to attach great importance to the fact that the insurance in question offered only basic cover , thus leaving room for an offer of supplementary insurance by private operators — to the extent that commercial providers could provide such coverage 44 — to guide national courts in assessing the proportionality of the restriction.

What, then, would the CJEU decide about the obstacle constituted by compulsory membership of an occupational pension scheme in addition to the basic pension provided by the State? In order to be proportionate, is it necessary for the benefits of compulsory occupational pension schemes to be sufficiently low so that their beneficiaries can also contribute, if they so wish, to individual pensions? One can see the difficulties that this kind of decision would lead to. If this path is followed, it would be necessary, for example, to fix the amount from which the benefits paid by the occupational pension scheme are considered too high to leave sufficient room for individual pensions.

Such an assessment would be eminently complicated, as well as eminently political. The situation of compulsory occupational pension schemes with regard to the freedom to provide services in Europe is therefore uncertain, and is bound to remain so given the absence of a specific CJEU decision on this question.

It is also uncertain because, even if the Court accepts solidarity as a justification for restricting the freedom to provide services, it cannot be said with certainty what degree of solidarity must be guaranteed for this justification to be proportionate. The previous section has raised the question of the place of occupational pensions within European competition law and the freedom to provide services. Two aspects seem to be of particular importance for social occupational pension schemes: collective bargaining and compulsory membership. Initially, after the Albany judgment, it seemed that EU Treaty provisions would not be applicable to important aspects of national social policy.

The cases in the field of social protection that followed the Albany case law show that the social partners — as well as the public authorities involved in extending the application of collective agreements — are to heed the requirements stemming from the fundamental freedoms, such as the requirement of transparency when selecting a provider. The possibility to make membership to a pension scheme or fund compulsory is also governed by the Treaty provisions on, for instance, the freedom to provide services.

The obstacle created by compulsory membership must be justified. Whether in the field of competition law or the freedom to provide services, we have seen that the existence of solidarity between members of the occupational pension scheme is or would most probably be a central condition for the compatibility of compulsory affiliation with European law. However, uncertainty prevails in this respect, as it is difficult to determine the degree of solidarity required, and whether the standard is the same for competition law and for the freedom to provide services.

One could, so it appears, reasonably surmise that the guiding question is whether the features of the scheme could be offered by commercial providers. Such trends occur even in Member States with strong occupational pension systems featuring compulsory membership. It is difficult to predict how the CJEU would assess these trends in the light of the standard of solidarity it has developed in its previous case law. Be that as it may, it seems that today the decisions of the CJEU are no cause for great alarm regarding the fate of social occupational pension schemes.

Indeed, it seems that some of them could lead to or strengthen the trends mentioned above towards a decrease in the degree of solidarity within occupational pensions.

If it were so, they would consequently weaken the protection of mandatory occupational schemes against the requirements of market rules enshrined in European law. The EU has only limited legislative powers in the social policy sphere itself. We outline their main objectives and how these are supposed to be achieved.

Our aim is to highlight their potential effects on solidarity within occupational pension schemes. In addition to the two Directives, we briefly discuss a new proposed Regulation for the creation of a Pan-European Personal Pension Product, with the same objective of highlighting what its implications could be for social occupational pension schemes if it were to be adopted. Before we begin this section, it is useful consider the types of occupational pension schemes in order to facilitate understanding of the discussion that follows.

The level of the pension benefits is a direct function of the contributions and becomes known only on the date of retirement.

Transformation of Social Security: Pensions in Central-Eastern Europe - Google Livres

Defined benefit DB schemes are schemes in which the benefits, instead of the contributions, are defined in advance, for instance as a percentage of the average or final salary. Such schemes require additional financial buffers. Solidarity is absent in pure DC schemes as the benefits the pension are directly dependent on the personal amount of contributions paid by or for the worker: at the end, everyone is supposed to receive what he has contributed to the scheme. On the opposite, solidarity is present in DB schemes.

But its intensity is varying. However, it could have an indirect influence on solidarity within these schemes. This is linked to the requirements contained in the Directive with regards to IORPs engaged in cross border activities.

Equitable and Sustainable Pensions : Challenges and Experience

They are legally required to make up any funding deficits, whereas such an obligation does not necessarily exist for purely national schemes. Indeed, per definition DC schemes are fully funded, because the amount of the benefits they pay depends directly on the amount of funds available to them. On the contrary DB schemes are often underfunded, and making up funding shortfalls can be an expensive undertaking.

The difficulty for setting up cross-border schemes is even greater for DB schemes because of the additional assets requirement to which they are subject.


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But although that textual change appears to make temporary underfunding possible, the full funding requirement is still in place, raising the question whether there is any change in practice. DB schemes are also more difficult to organise on a cross-border basis for another reason than funding requirements. As the Commission explained, IORPs organising DB schemes on a cross-border basis are more likely to be subjected to complex national legislation from a Member State different from the one they are established in, owing to the complexity of the schemes and features that do not exist in DC schemes.

Yet, the more a scheme is DC oriented, the less likely it is to meet the solidarity criteria developed by the CJEU in competition law, which could be problematic for compulsory social pension schemes. As discussed, those criteria are probably also relevant for the freedom to provide services.

However, the importance of this plausible development should not be overestimated, as so far there have been few cross-border activities of pension funds. Another important piece of EU law on occupational pensions is the Directive on the acquisition and preservation of supplementary pension rights. More specifically, it lays down four important requirements regarding acquisition and preservation of supplementary pension rights, in addition to improving obligations of information provided to workers. First, waiting and vesting periods, i.

In its very aim to promote worker mobility, i.