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World: Three Pillars Seen As Key To Eastern Pension Reform

By Anthony Wesolowsky

Eastern Europe and the former Soviet Union are coming face-to-face with the limitations of state-run pension plans for dealing with aging populations. In the second of a three-part series on pension reform, RFE/RL correspondent Anthony Wesolowsky looks at how some of the former East Bloc countries are overhauling their pension plans.

Prague, 9 September 1999 (RFE/RL) -- If West Europeans think their pension systems are in need of reform, they should take a look further east to the former Communist states of eastern and central Europe and the former Soviet Union.

The problems there are similar, but in many cases magnified. As in Western Europe and most of North America, birthrates are falling across central and eastern Europe and most parts of the Soviet Union, outside the Central Asia nations. At the same time, some countries -- such as Russia and Ukraine -- are experiencing a rise in mortality rates, mainly as a result of poor diet and health care.

That means even fewer workers are paying to support more retirees. In some cases, the ratio of workers to retirees is shockingly low. In Bulgaria, the ratio of workers to pensioners is about one-to-one. For comparison, in France -- a much richer country also pondering the fate of its state-run pension system -- the ratio is five workers to one pensioner.

Making matters worse, many East Bloc governments urged thousands of workers to take early retirement in the early 1990s in a bid to avert massive unemployment. The retirement age in most former East Bloc countries is 55 for women and 60 for men -- five years earlier than in the West.

But retirement has only meant more hardship. The economic and social collapse following the fall of the Berlin Wall has been especially cruel to the elderly, many of whom saw their life savings disappear with inflation. Across the region, state-run pensions are paltry even in the best of cases, such as in Poland, where a monthly pension check amounts to about $160. In Russia and Ukraine, a pension payment can amount to about $10, if it is paid at all. Those two countries are having difficulty finding money to pay pensions, so many elderly people are forced to go without payment for months.

Almost all the countries in transition find themselves spending more for pensions, despite the paltry payments. The governments in Warsaw and Riga are among the most pressed to meet pension payout demands. According to the International Monetary Fund, pensions payouts in Poland amount to about 15 percent of gross domestic product. In Latvia, the figure is about 11 percent. Not surprisingly, those two countries -- along with Hungary and Kazakhstan -- are among the pioneers in pension reform.

What most of these countries have opted for is a system advocated by the World Bank and known as the "three-pillar" system.

The first pillar of the system retains the state-funded element, offering a basic low pension. The second pillar augments that amount with new mandatory funds that are based on past earnings and managed by private so-called "pension fund societies." The third pillar is much like the second but it is completely voluntary and privately run, with no role played by the state.

Poland is the latest former communist state to adopt the three-pillar system. Last March, 20 private pension funds started operating in Poland. By the end of this month, all working Poles under the age of 30 -- about 3 million people -- will be obligated by law to select a private fund to manage one-fifth of their pension contributions. Poland follows in the footsteps of Hungary and Kazakhstan, which instituted similar reforms in 1997 and 1998, respectively.

Warsaw estimates about $1 billion will pour into the coffers of the privately run funds this year alone.

But Remigiusz Borowski, an official at Poland's Ministry of Labor, says that while the system has been reformed, it has not been completely overhauled. He told our correspondent that Poles still want the government involved in the pension system, to ensure the elderly don't slip into poverty.

"The state should stop poverty. For example, the state presses for the people to pay contributions [into the state pension fund]. The contributions are obligatory. We only changed the system a little, to give more choice to the people. And if you have more choice you start to think. It's always better for the people to think about their future."

Although the three-pillar system is meant to save the state money, Borowski says that for the first 30 years or so, Warsaw will actually pay more for pensions. He says that's because while younger workers are putting money into the private funds for their own retirement, Warsaw still must pay the pensions of those who have already retired. There will also be costs involved to regulate the private funds.

That experience may prove there is no panacea for the region's pension woes.

(In Part Three, experts look at the model of Chile, a country that has been a pioneer in pension reform in Latin America.)