REFORM
THREE PILLAR PENSION SYSTEM
FIRST PILLAR
Until the implementation of the Law on Voluntary Pension Funds and Pension Schemes on 1 April 2006, the pension system in Serbia formally functioned as pay as you go system (PAYG). Such a pension system is an intergeneration solidarity system (1st pillar), which implies that pension contributions from the currently employed finance current pensions. To function normally, such mandatory state pension assurance requires a ratio of 3.5 : 1 between employees and pensioners. In Serbia, this ratio was last recorded in 1981, and since then there was a constant downward trend of the number of employees, accompanied by an increase of the number of pensioners. Latest data from 2004 show that one employee is financing one pension. Considering that for years numerous employers have not paid contributions for their employees, leads to the conclusion that this ratio has many more unfavorable effects on the level of pensions. Also, like most countries, our country has faced demographic changes - longer life span and lower birthrate. This is also accompanied by laying-off of employees in the process of privatization, as well as the migration of the active population abroad.
Collected contributions are not sufficient for payment of current pensions. The resulting monthly deficit in the Pension and Invalidity Insurence fund (40%) is covered from the budget, representing a considerable burden for the state. In addition, this system of intergeneration solidarity is characterized by a weak connection between contributions paid and the future pension, and employees do not know what their pension will be when they acquire that right.
FIRST PILLAR REFORMS
All of the above resulted in a reform of the pension system in two directions:
The first direction are changes of the first pillar:
- Gradual raising of the age limit for women/men from the present 58/63 to 60/65 starting from 1 January 2008 until 1 January 2012, by six months per year (in Europe, there is a trend not only to raise the age limit, but also to equalize women and men);
- Gradual harmonization of pensions twice a year (1 April and 1 October), only with costs of living, and not also with the increase of salaries. In order to fully adopt harmonization only with costs of living, as of 2006 harmonization with salaries is reduced by 12.5%, while harminization with costs of living is increased by the same percent. Therefore, this means that in 2006 pensions increase is by 37.5% based on salaries, and by 62.5% based on costs of living; in 2007 by 25% based on salaries, and by 75% based on costs of living, and in 2008 by 12.5% based on salaries, a by 87.5% based on costs of living.
- Using all years of working experience as the base for calculating pensions, instead of the 10 most favorable.
This change of parameters results in a decrease of the average pension compared to the average salary, amounting in this country to approximately 55% (Romania 39.2%, Great Britain 38%, Austria 37.3%, Greece 33.5%, etc.). The reason for this decrease is the impossibility of financing the state pension insurance.
THIRD AND SECOND PILLAR
The second direction is the introduction of the third pillar(supplementary voluntary pension assurance), therefore it can be said that the best part of the so-called three pillar system is functioning in the country. For it to become fully viable, requires the introduction of the second pillar (supplementary mandatory pension assurance.
Both cases comprise payments of additional pension contributions to private pension funds administered by pension companies, however payments to funds belonging to the third pillar are voluntary, and can also be made by employers, trade unions, associations, and all natural persons, while payments to funds belonging to the second pillar are mandatory, and can only be made by employers for their employees.
Whatever the case, these payments do not exclude the obligation to pay contributions for employees to the state pension fund (first pillar).
THREE PILLAR PENSION SYSTEM
FIRST PILLAR
Until the implementation of the Law on Voluntary Pension Funds and Pension Schemes on 1 April 2006, the pension system in Serbia formally functioned as pay as you go system (PAYG). Such a pension system is an intergeneration solidarity system (1st pillar), which implies that pension contributions from the currently employed finance current pensions. To function normally, such mandatory state pension assurance requires a ratio of 3.5 : 1 between employees and pensioners. In Serbia, this ratio was last recorded in 1981, and since then there was a constant downward trend of the number of employees, accompanied by an increase of the number of pensioners. Latest data from 2004 show that one employee is financing one pension. Considering that for years numerous employers have not paid contributions for their employees, leads to the conclusion that this ratio has many more unfavorable effects on the level of pensions. Also, like most countries, our country has faced demographic changes - longer life span and lower birthrate. This is also accompanied by laying-off of employees in the process of privatization, as well as the migration of the active population abroad.
Collected contributions are not sufficient for payment of current pensions. The resulting monthly deficit in the Pension and Invalidity Insurence fund (40%) is covered from the budget, representing a considerable burden for the state. In addition, this system of intergeneration solidarity is characterized by a weak connection between contributions paid and the future pension, and employees do not know what their pension will be when they acquire that right.
FIRST PILLAR REFORMS
All of the above resulted in a reform of the pension system in two directions:
The first direction are changes of the first pillar:
- Gradual raising of the age limit for women/men from the present 58/63 to 60/65 starting from 1 January 2008 until 1 January 2012, by six months per year (in Europe, there is a trend not only to raise the age limit, but also to equalize women and men);
- Gradual harmonization of pensions twice a year (1 April and 1 October), only with costs of living, and not also with the increase of salaries. In order to fully adopt harmonization only with costs of living, as of 2006 harmonization with salaries is reduced by 12.5%, while harminization with costs of living is increased by the same percent. Therefore, this means that in 2006 pensions increase is by 37.5% based on salaries, and by 62.5% based on costs of living; in 2007 by 25% based on salaries, and by 75% based on costs of living, and in 2008 by 12.5% based on salaries, a by 87.5% based on costs of living.
- Using all years of working experience as the base for calculating pensions, instead of the 10 most favorable.
This change of parameters results in a decrease of the average pension compared to the average salary, amounting in this country to approximately 55% (Romania 39.2%, Great Britain 38%, Austria 37.3%, Greece 33.5%, etc.). The reason for this decrease is the impossibility of financing the state pension insurance.
THIRD AND SECOND PILLAR
The second direction is the introduction of the third pillar(supplementary voluntary pension assurance), therefore it can be said that the best part of the so-called three pillar system is functioning in the country. For it to become fully viable, requires the introduction of the second pillar (supplementary mandatory pension assurance.
Both cases comprise payments of additional pension contributions to private pension funds administered by pension companies, however payments to funds belonging to the third pillar are voluntary, and can also be made by employers, trade unions, associations, and all natural persons, while payments to funds belonging to the second pillar are mandatory, and can only be made by employers for their employees.
Whatever the case, these payments do not exclude the obligation to pay contributions for employees to the state pension fund (first pillar).
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