Attempts to implement pension reform in Ukraine have been undertaken for the last 25 years. However, the result is not comforting. Working Ukrainians have no stimuli to pay pension contributions; there is a chronic deficit of the Pension Fund, which puts pressure on the state budget; at the same time, the amount Ukraine spends for pensions is almost the biggest amount in the world (in percent of GDP), and until recently had a very high ‘labor taxes’, encouraging the motivation of business to go into shadow. Reforms are difficult to undertake due to many objective and subjective factors, including the complex demographic situation, high level of involvement through the shadow economy, imbalances in the budget and political populism. After the completion of the Revolution of Dignity we are witnessing a new wave of attempts to improve the existing pension reform, which is carried out in terms of attention from the international community, primarily the IMF, as well as in the conditions of fierce political competition.
After gaining independence, Ukraine, which inherited a Soviet pension style, began questioning whether the formation of a new pension system, which would be consistent with current socio-economic conditions would be possible. Since independence was gained, there have been several attempts of systemic changes to the pension system. One of the key efforts was the adoption of a very progressive law ‘On mandatory state pension insurance’ in 2003. The new law provided for carrying out the pension system reform in Ukraine, the establishment of solidarity, mandatory public and private pension systems, and also related the level of pensions to the length of professional experience and wages in Ukraine.
However, in practice the law has not led to real reforms, has not solved the problem of the permanent deficit of the Pension Fund, has not provided the implementation of a state funded system of pension provision and cannot guarantee a decent level of pension provision for citizens.
This happened due to a number of circumstances, in particular:
- During consideration of the law within parliament, the norm on long-term sustainability of pension systems and the rate of gradual increase in the retirement age to 60 years for women and 65 years for men was eliminated.
- The law did not solve the problem of privileged pensions: ‘VIP-retirees’ continued to receive pension much bigger than objective economic circumstances could maintain.
- The law also did not solve the problem of high tax burdens on the Salary Fund associated with pension contributions.
- The entry into force of a second level of pension reform (obligatory state insurance) was postponed until the adoption of a separate law on the launch of the Cumulative Fund of obligatory pension insurance
However, the populism of politicians in the race for electoral support was the biggest problem. Buying electoral loyalty of pensioners became a trend. For example, from 2002 to 2010, the minimum amount of pensions increased by 9 times, while the average salary increased only by 3.4 times. Another problem is the existence of privileged pensions and early retirement for certain segments of the population. As a result, Ukraine was in a vicious circle of rising budget deficit accompanied by the demographic problem. Increasing pension costs, it increased the deficit of the Fund. The simultaneous worsening of the demographic situation reduced the possible options to solve the problem.
Difficult demographic situation in Ukraine considerably complicates the design and implementation of pension reform. One of the main demographic problems of Ukraine is the very high premature mortality and, as a consequence, one of the lowest in Europe, life expectancy, particularly among men.
One of the controversial parameters of the demographic situation in Ukraine is the fact that Ukraine is one of the oldest countries in the world. It is true, if we take into consideration only index of 60+, the proportion of the population over 60 years of age. However, the proportion of people aged 65+ in Ukraine is lower than in the EU (15.6 per cent vs 18.9% in EU in average) due to the fact that in the interval from 60 to 65 years a quite large number of people are dying.
One should also consider the fact that in Ukraine the average life expectancy of men is lower than in most developed countries. However, not only the absolute age of retirement and average life expectancy at the time of retirement preferential early retirement are important. Ukrainian women take one of the highest places in the world for life expectancy during retirement period – so, in 2012, it amounted to 23 years, which exceeded their average seniority. For men the average life expectancy at the time of retirement is equal to 14 years, which is comparable to the similar indicator in other countries. At the same time, in Ukraine, almost half of men retire at age 60 and the rest - at 40, that is actually the average age of retirement is 55 years.
Another threatening trend is the aging of the population. The future level of population ageing and demographic burden will grow due to the reduction of the working period of the population. This will contribute to a catastrophic reduction in the birth rate that occurred in the 1990s.
As a result, as of 2017 in Ukraine there is the situation when for 12.5 million of pensioners there are 26 million people of working age of which only 176 million people are employed. Only 10 million of them pay UIP - base for the formation of the Pension Fund.
The budget for 2017 stipulates the Pension Fund deficit in the amount of 141.5 billion, representing 5.5% of GDP. Thus the Pension Fund is able to finance a deficit to less than half of its costs. A similar situation was observed in 2016 – for the volume of the Pension Fund in the amount of UAH 257 billion the deficit was equal to UAH145 billion.
Now in Ukraine the pension costs amount to 15% of GDP, which is one of the highest in Europe and significantly higher than many countries with significantly higher levels of aging such as Sweden, Finland, UK, Norway, Switzerland. The retirement age in our country remains one of the lowest in Europe – in fact, taking into account privileged pension at the age of 55, compared to 63.1 years in average in the EU countries. The average duration of employment in Ukraine – that is, the period during which a person earns a pension is the same for men and women (about 34 years). Also in 2016 in Ukraine there were 830 000 individuals under pension age, who received so-called "early" retirement.
Therefore, the development of a draft pension reform occurred in a rather complex and stressful conditions. In May 2017, the Cabinet of Ministers under pressure of the IMF approved the draft project of a long-awaited pension reform. The current version of pension reform includes the following key points:
- Increase of the years of pensionable service from 15 to 25 years
According to the government's proposed reform, the retirement age remains at 60 years for persons with an insurance period of 25 years.
Now those who are 60 years old have the right to a retirement pension. The law specifies that these individuals must have been insured for 15 years.
From January 1, 2004 only the years of pensionable service are important for the accruals for pensions. Thus from this time the work book is not a confirmation of insurance. And the flexible corridor in the retirement age is introduced as well as the possibility of compensation of losses of insurance — citizens who do not have enough years of work experience in order to satisfy the requirement with minimum experience, will be able to pay contributions for the missing years (maximum 5 years).
The draft reform project does not stipulate the raising of the retirement age, as demanded by the IMF.
- “Modernization" of pensions. 50% of pensioners will have increased pensions
For this, the government introduces single rules of determining of the amount of pension payments.
The introduction of new formula for calculating pensions for a uniform approach to the ‘old’ and ‘new’ pensioners using the average wage level UAH 3764,40 is planned. That is, it turns out that the rate at which pensions are calculated will be increased almost three times.
According to Prime MinisterGroysman, as a result of this ‘modernization’ up to UAH 3 764,40 more than 5 million pensioners, from October 1, 2017 will receive the increase of pensions of UAH 200 to UAH 1 thousand per month.
The introduction of such provision is due to the fact that a lot of pensioners who retired 10 years ago, get less pension than others who began to receive pensions recently. As of today, the amount of the pension depends on three factors: the employee's salary, length of service and average wage in Ukraine, which is applied when calculating pensions.
The average salary is growing every year, therefore, the pensions of Ukrainians should be recalculated but the last time such a recalculation took place in 2012 with the use of the average wage in Ukraine in 2007 - UAH 1197,91. During this time the average salary in Ukraine, which is applied when calculating the pension, increased to UAH 3764,4, or by more than three times. In a result, 2/3 of the pensions did not even reach the subsistence level.
- The taxation of pensions is abolished
From 1 October the taxation of pensions for working pensioners was abolished.
Now the pensions, the amount of which exceeds UAH 12 470 (10 living minimums), are subject to taxation by the tax to incomes of physical persons at the rate of 18% and military duties at the rate of 1.5% of such excess.
- The abolition of the special conditions of retirement
Pensions for years of service will be assigned only for the military people.
The reform also stipulates that from January 1, 2018 the right for pensions for years of service for employees in education, health, social protection and other categories is revoked.
The proposed tool is another method that should allow the government to reduce the number of pensioners.
- The establishment of a special regime for workers with harmful working conditions.
The draft reform provides that the company instead of reimbursement of pensions will pay a higher UIP for their employees engaged with harmful working conditions (with a gradual transition to a funded pension system). The draft proposes that for the persons who perform work in harmful and dangerous working conditions additional UIP should be paid – in the amount of 15 %. That is, in general, for such employees the company will pay the single contribution at the rate of 37%. For all other categories of workers eligible for early retirement in hazardous working conditions, additional UIP will be equal to 7%. That is, in general, the employer will pay for such employees UIP at a rate of 29%.
It is also stipulated that additional contributions of UIP from January 1, 2019 for employees younger than 35 years will be accumulated in their individual pension accounts
- The annual transfer of pensions
The draft stipulates an automatic rate of annual indexation (recalculation) of pensions to protect against inflation.
It is planned that the recalculation will take into account the financial possibilities of solidarity system — that is, if there is the growth of the economy and the budget is filled better.
In this case, the government noted that indexation would be tied to the growth rate of average monthly salary for three years — not less than 50% of this growth and not less than 50% of the consumer price index
- 15% reduction in pensions for working pensioners was abolished
From October 2017 the government proposes to abolish the 15-percent reduction of pensions for working pensioners. Among 2.3 million working pensioners the pensions are now reduced for 494 thousand of them. The draft project offers that those who work, should receive wages and pensions in full.
- Increase of social standards
It is stipulated that in 2017 there should be a second increase of social standards by 5% - from the 1st of October. The minimum pension in this case will be equal to UAH 1373. The increase in pensions will affect 9 million pensioners.
Thus, the government took a step towards fulfilling one of the main requirements of the International Monetary Fund for Ukraine to get the next tranche. However, the further fate of the proposed reform will depend on the Parliament and it is expected that it will cause fierce battles.
Overall, the proposed reform is focused on the reduction of chronic shortage, modernization and increase of efficiency of functioning of the solidarity level of the pension system, including due to the unusual combination of elements of a funded system, however, it practically does not affect the problem of formation of the second and third levels of the pension system. Therefore, the reform proposed by the government can hardly be called a fully-fledged systemic reform that will radically change the existing pension reform. It is also worth noting that the formation of an effective pension system requires a series of reforms in related areas - financial, tax and social ones.
Budget resolution of 2018-2020 – the first step to the medium-term budget planning
According to the explanatory Memorandum, the main directions of budgetary policy for 2018 - 2020 (hereinafter — the budget resolution) are based on the provisions of the Program of Activities of the Cabinet of Ministers of Ukraine, the Coalition Agreement, the Medium-term plan of priority actions of the Government until 2020, Strategy for Sustainable Development “Ukraine—2020”, programs of cooperation with international financial organizations. For the first time this document envisages the introduction of mid-term budgeting for three years. The main problem of the budget resolution is its weak correlation with the provisions of the state budget, which makes it a purely formal document. The main directions of the budget resolution for 2018-2020 are, according to accompanying documents, as follows: • acceleration of economic growth by creating a favorable investment climate and maintaining macroeconomic stability, in particular, continued fiscal consolidation; • public administration reform, decentralization and public finance reform; • development of human capital through the reform of the health system and education, improving the provision of state social support; • establishing the rule of law and fight against corruption; • ensuring security and defense of the state. As regards foreign policy, in 2019 it is planned to successfully complete a program of cooperation with the International Monetary Fund and to obtain a stable position on foreign markets of borrowings. The most positive aspect of this document is the introduction of medium-term budget planning with the harmonization of several policy documents. First, the three-year budget is necessary if a country is actively pursuing reform. The reform plan should not just be embodied in the form of strategy, but to have understandable financial security. Therefore, in the case of Ukraine a medium-term budget plan may be the financial reform agenda. This is especially necessary in the context of stability of tax policy in connection with the permanent non-systemic changes in the Tax Code. Secondly, the move to three-year planning in many cases became the reason of the decrease of populist decisions concerning increase of social expenditures in pre-election periods. Legislative increasing of the interdependence of formation of the budget for the current year and a medium-term fiscal plan will help to avoid political influence in making budget decisions. Thirdly, the introduction of a medium term budget plan will also help in improving the effectiveness of the government programs. This is important, given the possibility of resource planning and more effective and balanced allocation of budgetary funds. Very often certain projects, especially concerning construction and reconstruction, last decades because of annual changes in budget priorities and lack of funding. In case of medium-term budget planning, long-term infrastructure projects are possible, and the Ministries will be interested in the implementation of important programs, not only in the disbursement of funds. In the future, the medium-term plan will improve cooperation between the responsible bodies for the preparation of the budget and the budget forecast of the central and local level of government. Three-year budget plan can be the first step on the path to a long-term scenario that will generate long-term state strategy of the main directions of state policy. Moreover, the proposed cap in government spending may be a good benchmark for assessing the quality of state decisions. If we analyze the specifics of the document, its main problem is that the provisions of the budget resolution are very weakly correlated with the provisions of the state budget, which was passed in Parliament. This situation makes it a purely formal document. Other problematic issues are as follows: 1. The lack of explanation of the measures and directions of the state policy on achieving the proposed indicators. Most of them are quite declarative, making it impossible to assess how realistic they are. The question remains as following - on the basis of what calculations the main parameters of the budget resolution were determined. 2. One of the problems is the lack of a monitoring system and adjustments of the proposed expenditure caps, which makes it impossible to evaluate how realistic they are. This also applies to the planned revenues and expenditures for future years, for which the significant growth in the next 3 years is stipulated. In Ukraine, URS may depend not only on economic situation but also on the political one, which increases the risk. In addition, the law does not define any monitoring mechanism, there is no mechanism to adjust the proposed "cap" that is essential in the changing economic situation. The solution to this problem is to develop responsible planning of the necessary regulatory framework for the budget for monitoring and adjustment of deviations. The adjustment mechanism should be implemented with reference to previous plans and forecasts. 3. Problems of implementation of the three-year plan at the local level. This question is of particular relevance concerning fiscal decentralization. In Ukraine there is the situation when the budget is prepared without taking into account the real needs of the regions, preparation of budget requests of local authorities is purely formal, and all decisions are taken at the level of main managers of budgetary funds. Simple bringing medium-term budgetary planning figures to local authorities has nothing to do with the medium-term budget planning. Therefore, in the context of fiscal decentralization it is necessary to develop an effective mechanism of cooperation of competent authorities for its implementation in central executive authorities and at the local level. A three-year plan can give the local government an understanding of the importance of efficient use of resources and a constant search revenues of local budgets, and not only the expectation of permanent funding from the center. Scenarios. The future fate of the medium-term budget resolution can have 3 scenarios: 1) status quo - budget resolution will remain a formal document and its provisions will be poorly correlated with a budget proposed by the Cabinet of Ministers in September 2017. This will lead to the continuation of the chaotic and inconsistent state policy, the loss of state capacity to implement reforms and stimulate economic and social development, to the accumulation of systemic risks. 2) based on the proposed three-year budget resolution, the introduction of a medium term budget planning without a simultaneous reform of the entire system of strategic planning will not lead to the desired effect (predictability and consistency of the state budget policy). This can also create conditions for the permanent inconsistency of medium-term budget plans with the policy in relevant spheres of activity of state authorities. This scenario can bring all efforts spent on its preparation to nothing and does not protect against implementation of the risks associated with the uncertainty and frequent changes of economic policy priorities. 3) based on the proposed three-year budget resolution, the introduction of strict medium-term budget planning simultaneously with the reforms of the entire system of strategic planning is optimal. Medium-term budget resolution should be integrated into the system of state forecasting and program documents. Approval of the budget plan should be carried out annually together with the law on state budget for corresponding year, at the same time to prevent its refinement in subsequent years in the event of changes in the macroeconomic situation or state policy in a particular area. The lack of political will on transition to the medium-term budget planning on the basic of leading experience of European countries will not allow to achieve the following objectives: 1) conducting a balanced policy of forecasting of budget revenues and expenditures; 2) the realism of the budget decision-making and legislative interdependence of formation of the budget for the current year and medium-term fiscal plan will help to avoid political influence on the adoption of budgetary decisions; 3) improved cooperation between the responsible bodies for the preparation of the budget and the budget forecast of the authorities at the central level and local level; 4) avoiding populist decisions to increase social expenditures in pre-election periods; 5) improvement of the efficiency of public programs, taking into account capacity planning rather than annual dependence on the current budget, the budget funds will be more effectively distributed and balanced; 6) medium-term budget planning is the first step on the path to long-term scenario that will generate long-term state strategy of the main directions of the state policy.
Presentation of the transparency ranking of Ukrainian regions
International Centre for Policy Studies together with Institute of social and economic reforms continues to work on the project "Transparent, Financially Healthy and Competitive Self-governments in Ukraine". The issue of transparency of local self-government is one of the two components of the project, along with financial health. So now we present the ranking of transparency of 22 regions of Ukraine in the form of a web platform which highlights all of the rating indicators, as well as recommendations for improving the level of transparency of the regional councils. ICPS expert Svitlana Radchenko noted that in order to assess the transparency 22 regional councils used the data obtained from the following sources: • Answers to the questionnaire submitted by ICPS to 22 regional councils. Each questionnaire contained 16 questions • Respond to requests for information sent by ICPS unofficially through a third party ("request of a secret client"). Each query contained three questions and was aimed at identifying the response of regional councils to requests from ordinary citizens • Information that is publicly available on official websites of regional councils • Information from the profiles of regional councils in the social network Facebook 22 regional councils were assessed, with the exception of the temporarily occupied territories and the Crimea. Two regions (Donetsk and Luhansk) were excluded from the ranking due to differences in the competence of the regional councils and ad hoc civil-military administrations introduced in Donetsk and Luhansk oblasts by the President of Ukraine due to anti-terrorist operation on the territory of regions. These administrations have partially taken over the functions of local self-government and executive power. In the process of monitoring of official websites of regional councils by ICPS experts 67 indicators in nine (9) key areas have been allocated, they reflect the situation on transparency of the regional councils. The most important areas were the information policy, budgeting, citizen participation and professional ethics and conflict of interest. The overall rating can range from 0 % (worst score) to 100 %(best score). Three areas now have the highest level of transparency in our rating. However, as we see even these regional councils have a lot of work to be done, because the best result is only 58.5 %. Mostly low positions in the ranking are associated with two factors: 1) lack of basic information on public procurement and disposal of assets of the regional council at the web site. It is worth to be noted that some areas have a fairly full web site at the first glance due to the presence of all main sections (such as Zhytomyr region council), but if you search the required information, it turns out that this sections are not informative enough for citizens. 2) the presence of a large amount of information on the website, but a physical inability to find it due to uncomfortable interface. Therefore, some regional councils formally publish data, such as the Declaration on assets and income of the regional head or the deputies or other officials of the council, however, the search for such information, even purposeful, may take an extremely long time. Michal Pesko (Transparency International Slovakia) presented the Slovak experience in the use of ratings to increase the transparency of local governments. It should be noted that the transparency of regional councils is the first one implemented in Ukraine. We believe that the results will contribute to increase of the the level of transparency of regions in Ukraine.
ICPS provides training for united territorial communities on how to manage finances
ICPS in the framework of the project "Financial transparency of united territorial communities", supported by the Embassy of the Kingdom of the Netherlands continues to actively teach how to manage finances. Specialized seminars were already held in 14 regional centers and scores of representatives of the united territorial communities got important information on how to create a budget, to optimize costs and to raise additional funds after joining grant programs. "In order to make communities less dependent on government subsidies, it is necessary to use all resources that exist in the territories of united territorial communities," - said the ICPS expert Vasyl Povoroznyk. Strengthening of control over use of funds and prevention of corruption are also important.
The conference "Supporting economic reforms in Ukraine"
Within the cooperation ICPS, Friedrich Ebert Stiftung and deputes of the European Parliament, a senior economist Vasyl Povoroznyk participated in the conference "Supporting economic reforms in Ukraine" which was held in Brussels. The report was dedicated to the informal economy and the decentralization process in Ukraine. In particular, it dealt with the analysis of key factors influencing the growth of the informal economy in the country. Because according to the data, segment of the informal economy is about 50% of GDP. Among the major, it is primarily inefficient system of state regulation and tax burden. As for the decentralization reform, the most topical issue is the legislative regulation and making appropriate changes to the Fundamental Law. Also pursuant UTC`s creation process that should occur on a voluntary basis, but in some cases the features of a particular community are not captured.
Transparent budget and investment: how to ensure the financial transparency of united community
The International Centre for Policy Studies supported by the Embassy of the Netherlands within the project “Financial Transparency of united communities” holds seminars in all 24 regions of Ukraine for representatives of local governments that make decisions on engagement and use of financial resources of regional business representatives and NGOs. The project is aimed at increasing the economic capacity of united communities that will more effectively address the issues of local development, enhance the competitiveness of territorial communities, combating corruption at the local level and ensuring the welfare of the local population. “The main goal is to tell stakeholders about how to form their own financial resources, to improve the “financial health” of united communities and to act at new legal conditions”, - the Director of the Department of ICPS Angela Bochi said. The issue of sustainable development at the local territorial level is extremely important given the need to stabilize the socio-economic situation in the region during the economic crisis and the decentralization reform. "Currently, budget legislation is changed again, the expenditure responsibilities of local budgets are changing and the Tax Code still remains unchanged. Additional sources on increased funding of tax resources to local budgets are not received. It is therefore necessary to raise funds from other sources and search for available opportunities in our time of grant support and financing”- the expert on budget and management issues Tetyana Ovcharenko explains. In addition, ICPS experts told community members about the need to raise additional funds in their budgets, because to manage money, first of all, such communities should have them. Also they called on the public to get involved in control over the use of budget funds to prevent corruption, stressing that this community should play an important role in this process, because it is talking about money which focused directly in the specific UTC.
The causes and consequences of delaying IMF tranche
The International Monetary Fund decided to postpone the allocation of the next tranche of $ 1 billion to Ukraine. First of all it is important to identify the root causes of postponement. The official version is the Donbas blockade. But it is important to clarify that it is not about blockade participants, but about the actual decision of the NSDC about the governance effectiveness as for 2 months after the blockade there hadn`t been done any quality calculations and plan out of the crisis. Director of the Economic Department Angela Bochi notes that it is obvious that the IMF decision cannot be fully associated with the Donbas blockade. One of the important tasks posed by the IMF is the anti-corruption reform. Particular attention was paid to the implementation of anti-corruption courts in Ukraine that hasn`t been started, as well as the election of the NACB auditor was called into question. Formally, our reform of anti-corruption bodies means only their creation because the international business and investors don`t see changes in the country's anti-corruption field and don`t feel the pressure reduction. In fact, postponement of the fourth tranche in March hasn`t become the news, because we had to get this tranche in December 2016. I remind that the third tranche was delayed because it has already been clear that the issue of the next tranche will be postponed. In addition, the third tranche would still be an advance because Ukraine formally didn`t fulfil the requirements concerning implementation of pension reform (the retirement age raising), land reform (the introduction of land turnover), launch of anti-corruption courts. Speaking in fact, we have only fulfilled 3 of the 11 structural lighthouses in the last period. Preliminary requirements – the budget and "Privatbank" nationalization - our country is ostensibly satisfied but, for example, SFS reform hasn`t been carried out since 2015. In other words, the second tranche was given in advance to Ukraine and the third, most likely, won`t be given in advance. The expert also noted that it is likely that IMF program for Ukraine will be stopped altogether, as in 2009, and then the main issue for the government will be curbing the exchange rate. And this question is not in gold and forex reserves which are enough now, but in another factor - the panic among the population. This situation could further deepen the political crisis in the country. Senior economist Vasyl Povoroznyk also noted that the IMF is often a signal for foreign partners: is it worthily to trust the country or not. If the assistance stops, it is a red light for other international partners.