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Op-Ed: A Bomb Is Ticking!

February 11, 2013

Loup Brefort, Country Manager for Serbia B92 Blog

There is a bomb ticking in Serbia. Is there anyone who can stop it from exploding?

I know this “bomb” is a difficult and sensitive issue and not only in Serbia but throughout most of the “Old Continent”. I am talking about aging of the population and its consequent impact on the continued financial viability of the pension systems.

While many countries in Europe face the same problem, Serbia is in particularly difficult situation. In 1989, there were less than a million pensioners in Serbia for a population of 7.8 million. Today, the number is over 1.6 million, for a population of 7.2 million. In 1989, 3.5 persons in the active labor market contributed to the pension system for each pensioner, today, the ratio is only 1.2 per pensioner. Clearly, the current system of pay-as-you-go, where contributions from today’s employed are supposed to fund the pensions paid to retirees, and the deficit covered by taxpayers through budget transfer, is fiscally unsustainable.

A multi-pronged approach will be necessary to address the problem. Faster economic growth and job creation is indeed needed to increase the number of contributors and revenues collected in the pension fund. It will also be critically important to address the problem of the aging of the demographic pyramid through an increase in the birth rate and the reversal of the brain drain and net migration outflow. But this can only produce results in the medium and the long term. To defuse the ticking time bomb before it explodes, Serbia cannot avoid profound reform of the pension system in the coming years. There are simply too few contributors for the number of retirees drawing a pension. Too big an informal sector is obviously a problem and all efforts should be made to create a business environment that encourages return of actives to the formal sector. Payment (in)discipline to the social funds needs also to be addressed.  And the “culprits” are not just in the private sector, as some would think. You may be surprised to hear that the utilities of a large municipality in Serbia did not pay a single dinar of social contributions for their employees to either the pension or health fund over the past couple of years.  The debts of companies in restructuring for unpaid contributions amounted to almost 200 million Euros by the end of 2011, of which about 50 million Euros for pension, even though the state, i.e. the taxpayers, transferred some 370 million Euro in 2010 and 2011 to clear old previous arrears for unpaid pension contributions by these companies. This, obviously, cannot go on forever!

Efforts to increase revenue, however, will not be enough to bring back the system to a sound and sustainable financial footing.  Too many retire early without contributing the full number of years to the system, the rules for early retirement and disability pensions are much more generous than in many comparable countries and, with progress in life expectancy while pensionable age remains unchanged, pensions need to be paid over a longer and longer period of time. Reforms are undoubtedly politically difficult but Serbia cannot afford not to pursue them.

There may be many “conspiracy theorists” that would think that, when one talks economics, one is actually aiming to conspire against the social. But, unfortunately, as Jawaharlal Nehru put it: “Facts are facts and will not disappear on account of your likes” …


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