Old age security in transitional economies

Abstract

The former communist countries in Eastern Europe and Central Asia (EECA) are undertaking their second great social experiment of the century: the transition from authoritarian central planning to a market economy. One of the many problems they face during the transition is what to do with their pension systems. Their problems are more complex than countries elsewhere at the same income level for three reasons. First, the systems are mature, with high and sharply rising dependency rations. Second, pension coverage is more extensive than in most other middle-income countries, because of over industrialization and the collectivization of agriculture. Third, pension reform is being undertaken at the same time as other fundamental economic changes. The timing, sequence and political economy of pension reform are complex. The author reviews the main feature of existing EECA pension systems, identifies the major reform issues and reform options, discusses obstacles to reform, and proposes a sequence for reform. She focuses primarily on the richer, older European countries of the EECA, where pension systems have matured. Paradoxically, pensions are low in those countries, yet expenditures as a proportion of GDP are high. The main reason for this is the very lowage of retirement, which means a short contribution period and a high dependency ratio. EECA governments must bring spending promises in line with a more realistic revenue ceiling. What makes reform so difficult is that too many people have already retired. Especially during the transition, when there are few opportunities to acquire wealth and some intergenerational redistribution is needed, the retirees need a safety net whether or not they deserve one on the basis of age alone. The author's recommendations are designed to make the system more equitable and efficient for this group. Four years after the fall of the Berlin Wall, pension reform has been elusive in EECA despite the severity of the problem. The author identifies several reasons for this. First, the extent of the pension system crisis was not foreseen in the early days of the transition (except perhaps in Hungary). Indeed, some countries expanded entitlements to help induce the labor market to adjust. As the depth of the problem became clear, EECA countries have tried to formulate reform programs, but only Albania has passed legislation substantially reducing entitlements. Another reason reform has proved difficult in EECA countries is that governments have tried to reduce the scope of the public pillar without providing an alternative to assure old-age security. Failure to begin developing other pillars (based on savings and insurance principles) to meet the active generation's needs for old-age security may have doomed reform efforts from the start.Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Pensions&Retirement Systems,Municipal Financial Management