Pension system reform

Secure old age for all generations

Photo: Shutterstock

October 2010

Slovenia is facing a new reform of the pension system. On 9 September, the Government approved the draft compulsory pension insurance act and sent it for parliamentary discussion. There are widely divergent opinions among the Slovenian public as to whether the pension system needs to be reformed, what types of changes are needed and how far-reaching those changes should be, and they are often dependent on which side of the table of the social partnership they come from.

Slovenia is constitutionally defined as a welfare state. The state is thus obliged to provide at least basic social welfare for its citizens throughout their lives. The public pension system, which is based on compulsory pension insurance for everyone with an employment agreement, is a very important part of the social security system, as pensions are for the most part the sole source of income for the elderly population.

However, the fact is that – like everywhere in the developed world – Slovenia’s population is continually aging, life expectancy is increasing, and owing to the lower numbers of the younger generations the percentage of the working population is falling. All of this puts considerable pressure on the pension system, as well as on the state budget, from which all losses from the pension coffers are covered. The economic crisis has further aggravated the difficulties of the existing system: the fall in economic growth which has occurred in the past two years has forced the entire country to face the fact that there are no reserves in the pension coffers that could cover insufficient revenues, which appear during crises or similar extraordinary events. If the Slovenian Government hopes to continue to provide regular and decent pensions in the coming years, changes are inevitable.

The basic goals which the Government hopes to achieve through pension reform are:

  • to ensure the regular payment of pensions to current retirees and workers who will  retire in the coming decades;
  • to halt the reduction of starting pensions with respect to salaries and to ensure the increase of their real value with respect to the cost of living, which would provide the present and future generations a decent pension that will provide them security in their old age;
  • to increase the fairness of the pension system with a particular emphasis on individual contributions to the pension coffers, on equal burdening of the young, middle-aged and older generations, on the position of workers who began working early in their youth and who work in difficult working conditions and on a gradual approach to the introduction of changes.
Photo: Shutterstock

The key solutions proposed by the Government in the draft act sent for parliamentary discussion are:

  • a gradual increase of the retirement age and equal conditions for men and women: the retirement age for both sexes will now be 65, and the minimum age for obtaining the right to early retirement will be 60
  • incentives for extending employment periods (rewards, penalties)
  • a gradual increase in the accounting period, from the 18 to the 34 best successive years
  • new method of aligning pensions with salaries and cost of living increases.

It should be emphasised that the concept of intergenerational solidarity will remain the cornerstone of the Slovenian pension system: the actively employed will pay contributions from their salaries, thereby providing retirees with pensions.

Gradual increase of the retirement age

The retirement age will be raised to 65 for men and women. The change will be implemented gradually: reaching age 65 will be a condition for retirement only in the year 2021 (men) and 2025 (women).

Incentives for extending the employment period

We have already mentioned that along with all of the unfavourable demographic circumstances and the economic crisis, the financial difficulties of the pension coffers are also exacerbated by the Slovenian “custom” of retiring as soon as you satisfy the conditions. The incentives (both rewards and penalties) proposed by the Government in the new system are intended to change this behaviour pattern. 

 

The Government proposes:

  • that for each year of work after fulfilling the conditions for early retirement until reaching age 65, individuals will also receive 20 per cent of their early retirement pension;
  • that for each year of work after the fulfilment of the minimum conditions for old-age pensions, the basis for the calculation of the pension is increased correspondingly (which of course positively affects the final pension);
  • that upon partial retirement, which will now be extended to self-employed persons and farmers, along with corresponding salaries (with respect to the number of hours worked), individuals will also receive part of their early retirement pension;
  • that reducing contributions for compulsory pension insurance will also encourage employers to retain older employees in employment relationships;
  • that each born or adopted child will reduce the age condition for retirement by 8 months, but to a maximum of 24 months. This incentive can be exercised by parents who received compensation for child care during the first year of the child’s life.

Only one penalty is proposed: for each month of difference up to the fulfilment of the conditions for old-age pensions the pension basis will be reduced by 0.3 per cent.

Extending the calculation period from 18 to 34 years

In addition to raising the retirement age, the extension of the calculation period is one of the items of the pension reform which is generating the most controversy. However, the fact is that Slovenia has one of the shortest calculation periods in Europe, as it is nearly impossible to find a country where the pension bases are calculated over periods shorter than 25 years.

The main criticism of opponents to this measure is that it will result in considerably lower pensions. Since this could actually occur, at the same time as the gradual extension of the calculation period, the Government is proposing two parallel measures which will prevent the reduction of pensions. Thus the accrual percentage, which is crucial to the calculation of actual pensions, will be raised to 80 per cent, and at the same time the horizontal levelling of pensions, i.e. the alignment of new pensions with all already existing pensions (which causes all new pensions to be automatically approximately 20 per cent lower) will be abolished.

It is also significant that both of the parallel measures will be implemented immediately, while the calculation period will be gradually extended until 2026, by one year per year.

New method of aligning pensions

In Slovenia, pensions are currently completely aligned with salary increases. However, owing to the increasing number of retirees this method is becoming unsustainable, which has become particularly noticeable during the present crisis. In addition, comparisons with European countries which are facing similar demographic changes show that the majority have already adjusted the alignment of pensions to the changes in question.

Therefore according to the proposed change, pensions will be aligned with salary and cost of living increases, once annually at a ratio of 60 : 40. A safety valve is also proposed which would prevent the growth of pensions from lagging behind cost of living increases, which would ensure at least the maintenance of the real values of pensions.

Why the proposed changes are necessary

The main reasons for changing the pension system are the already mentioned changes in the structure of the population and the labour market, which we have seen in Slovenia and elsewhere in the developed world in recent years:

  • an aging population and a reduced percentage of actively employed population
  • late entry of young people onto the labour market 
  • excessively early retirement

Aging population and a reduced percentage of actively employed population

According to data from the Statistical Office of the Republic of Slovenia, in 2003 the number of people older than 65 in Slovenia exceeded the number of children, i.e. up to 14 years of age, for the first time. At the beginning of 2010 there were 338,265 people older than 65. By 2060 this figure is expected to rise to 589,900, and will represent 33.4 per cent of the overall population. During the same period the number of people older than 80 is forecast to rise from 71,200 to 249,500, which will represent more than 14 per cent of the overall population.

Since the birth rate in Slovenia has been continually declining in recent decades, the younger generations are also numerically weak. Thus in 2060 in Slovenia, 100 employed people will work for more than 62 people over 65, which of course raises significant questions about the capacity of the pension coffers, since there simply will not be sufficient revenues for the payment of pensions at a level that provides a decent living. 

Late entry of young people onto the labour market

The changes in the age structure of the actively employed population are also a consequence of the increasingly late entry of young people onto the labour market and the increased length of educational periods. Thus according to data from the Pension Insurance Institute, the number of insured persons up to 24 years of age decreased by 13 per cent from 2002 – 2008, which had a significant influence on the fact that the average pension period in the 20 – 34 age group decreased by over two years.

This causes a double shortfall in the pension coffers: on one hand the number of people paying contributions is reduced, and on the other, increased life expectancy extends the average period of receiving pensions, even though the period when an individual is subject to compulsory pension insurance is actually shorter.

Excessively early retirement

Although the employment rate of older people in Slovenia is gradually rising, in comparison with the EU it remains at a low level and as such is one of the main structural problems on the labour market. Slovenia has one of the lowest employment rates for people between 55 and 64: in 2008 it sat at 32.8 per cent (the European average (EU-27) is 45.6 per cent). This situation is primarily the result of too-early retirement, i.e. retirement before the fulfilment of the legally determined minimum conditions for old-age pensions, which is characteristic of the Slovenian economy’s transition period. And of course the majority of people retire as soon as they fulfil the minimum conditions for retirement. 

Furthermore, the consequences of too-early retirement are also reflected in the increasingly worsening ratio between the actively employed population and retirees. This means that while the number of insured people grew slowly in the period from 1990 – 2009, the number of retirees grew significantly faster, which meant a fall in their ratio from two employed persons per retiree in 1990 to 1.6 employed persons per retiree in 2009.

If the changes that the Government is currently proposing are not enacted, in 10 years this ratio will fall to below 1.5, and by 2050 the contributions of one employed person to the pension coffers will no longer cover the pension of 1 retiree.

Pension reform expected to contribute to high autumn temperatures

The parliamentary debates over pension reform will undoubtedly be very intense, as the political parties will use them to gain political points. The country’s largest trade union (the Association of Free Trade Unions of Slovenia) has already called for a referendum on pension reform, but despite this the Government believes that the proposals are going in the right direction. Therefore in the next few months it will work hard to get the proposed changes introduced by 1 January 2011. This is the only way that the system will be able to be changed gradually, with sufficiently long transitional periods, which will significantly soften the reforms from the viewpoint of the individual.

Text by Alenka Čebular, Sinfo, October 2010