A Conference Co-Organized by:
The Centre for Economic Development
The Balkan Institute for Labor and Social Policy
With the support of:
The Trust for Civil Society in Central and Eastern Europe
The Radisson Hotel, Sofia, Bulgaria, March 16, 2010
I am honored to join you today to discuss past achievements and upcoming challenges of pension reform in Bulgaria. The World Bank is delighted about the opportunity to contribute to the ongoing discussion on the future of Bulgaria’s pension system and how to strengthen its affordability and sustainability.
No matter how well a pension system is designed, it is bound to fail if there is no ownership and public support for it, if it is not credible to the broader public. That is why we welcome:
- this forum to discuss the challenges of the pension system in Bulgaria and to come up with innovative solutions to achieve the main objectives of the pension systems: social protection and consumption smoothing; and
- the ongoing work of the Advisory Council on pensions established by Minister Mladenov, and the contribution of social partners in this context.
The Bulgarian pension system has undergone a first round of significant and well designed reforms in 2000-2003. A process of increasing retirement ages was initiated; early retirement programs curtailed; a multi-pillar structure and a simple and fair benefit formula were introduced. I would like to congratulate all who were involved in the reforms at that time.
As previous speakers pointed out, neither society nor the economy remained static; and possibly opportunities were missed to further strengthen the system or take corrective action over time. The experience of pension reforms around the world has further reinforced the need to rethink and reassess the effectiveness of the current pension model and financial sustainability of pension system – especially in the face of an ageing population.
The economic crisis is putting additional short-term pressures on the system; but the main long term-pressures come from demographic trends and these pressures are not receding unless they are dealt with.
With a fast declining and ageing population Bulgaria cannot afford to delay discussions on the long-term sustainability of its pension system. Bulgaria faces the most dramatic population decline among the new EU member states. By 2025, Bulgaria’s population is projected to decline by 18%, or 1.5 million people, as compared to the year 2000, the year pension reforms were initiated. By 2025 almost 1/5 of Bulgaria’s population will be 65 and older, one the highest share of elderly population among the new EU member states. This means that the pension system in Bulgaria will have fewer contributors, i.e. a smaller share of working age population, and more beneficiaries, i.e. a higher share of pensioners than most of its peers in the EU.
The number of contributors in Bulgaria is further reduced by existing exemptions -- for early retirement and other schemes -- which in practice means that some 57 percent of men and 36 percent of women already receive some pension by the time they reach retirement age.
Despite a worse demographic situation retirement age in Bulgaria is relatively lower than in other countries. Moreover, women retire earlier despite having a higher life expectancy than men.
In the boom years financing pension deficits was not much of a problem as buoyant government revenues made room for higher spending while achieving sizable fiscal surpluses. The economic crisis, however, has put additional pressures on government revenues which are unlikely to subside soon. Unemployment is rising as economic activity has declined, and is expected to be higher for some time. Even when the economy returns to growth, financing increasing pension deficits will not be sustainable.
Contribution rates have been reduced significantly to one of the lowest rates among the new EU member states, but little has been done to improve the long-term fiscal sustainability of the pension system. At the same time, ad hoc pension increases have reduced benefit predictability and have contributed to unsustainable increase in pension spending.
Additional reforms to the system will be needed to ensure that Bulgarians receive adequate pensions without jeopardizing macroeconomic stability and growth objectives. These reforms need to be designed, agreed with social partners and communicated to society as soon as possible to address the challenges coming from an unfavorable demographic situation and relatively low participation rates. I trust the experts will come up with possible reform options tailored to Bulgaria’s needs and circumstances and that this forum will contribute to building consensus on such difficult but much needed reforms in the pension system.
These are difficult times for Bulgaria, Europe and the world. For more than ten years the World Bank in Bulgaria has been a steady partner, supporting reforms in the area of social security and pensions, both in terms of investing in the modernization of the social security administration and in terms of analytical support to ensure fiscal sustainability of the pension system – and we are delighted to respond to the Minister’s request for continued support and work with all partners towards an effective, just and sustainable pension system.