Officials and experts agree that Pension Fund deficit will not affect pension payments in 2017, but requires systemic changes



The state budget deficit includes the gap in payments to the Pension Fund, as a cause for this gap experts name “improper expenditures”  and a shortfall in unified social tax which covers pensions.

Kyiv, October 26, 2016. There is enough money for regular pension payments in 2017. Moreover, provisions are made for a slight increase in pensions which exceed the predicted inflation rate. However, the key systemic problem remains unresolved and it is the Pension Fund deficit. The key objectives for the near future are to find a way to balance the first level of the pension system and launch a pension reform. This was stated by government officials and experts at a discussion held at Ukraine Crisis Media Center. “Currently, we discuss what pension reform measures will be implemented. By the end of the year we are supposed to get additional measures that will help, on the one hand, increase the level of social security, increase the coverage of people and, on the other hand, reduce the burden of improper expenditures on the Pension Fund,” noted Yevgeniy Kapinus, Deputy Minister of Finances of Ukraine.

Pensions will increase by 10 percent

In 2017 pensions will increase by 10 percent within the overall increase in social security. “It is, certainly, not the growth we would like to see but under these conditions,” said Yevgeniy Kapinus. “We plan to increase pensions in December, raise the living wage from 1,130 to 1,247 hryvnias and, therefore, increase the minimum pension,” stated Mykola Shambir, First Deputy Head of the Pension Fund of Ukraine Board. He noted that this growth exceeds the predicted rate of inflation.

Yevgeniy Kapinus added that next year social insurance will cover a wider range of people – including self-employed population. However, said Marianna Onufryk, expert of the Institute of Social and Economic Research, the draft budget provides for reducing spending on special pensions. Norms from previous years on limiting the maximum pension in the amount of UAH 10,740 and taxation of higher pensions at a rate of 18% remain in force. Another retained norm is that working pensioners from a certain level of wages receive 85% of the accrued pension and working pensioners who are civil servants do not receive pensions.

Pension Fund deficit is a significant problem but will not affect the pension payments

Pension Fund deficit continues to grow and can reach UAH 92.6 billion next year. However, the state budget provides for UAH 156.2 billion expenditures to the Pension Fund to cover the specified deficit and the so-called “improper expenditures” that are not derived from the Single Social Contribution: pensions to the retired military, benefits to war veterans, Chernobyl victims, etc. “According to our estimates, the provided funds are sufficient to ensure timely payment of pensions,” said Mykola Shambir. The same view was expressed by Vitaliy Melnychuk, senior expert at “Pension Reform” group. “Our pensioners have nothing to fear. Talks about deficits, lack of funds and so on are second level talks, related to the macroeconomic situation,” he said.

However, emphasized Vitaliy Melnychuk, in terms of the macroeconomic situation the problem is very serious: even now these UAH 156.2 billion is the largest expense of the state budget. “It is 20% of the state budget,” underlined the expert. Marianna Onufryk said that the documents published by the Ministry of Social Policy – budget requests for the coming years – show that UAH 156.2 billion budget funds are necessary for 2017, over UAH 166 billion – for 2018, and over UAH 172 billion – for 2019. “This tendency shows that the situation will not improve and every year the pension fund deficit will grow, […] reforms are not seen – the situation is frozen in the present form,” stated the expert. Marianna Onufryk also noted that she had found in the documents that the Pension Fund needs, which are covered by the state budget, had not been funded for additional 5 billion. “In fact, the public spending had to be at UAH 161.3 and not UAH 156.2 billion,” said the expert.

Reasons for Pension Fund deficit

Reason #1: Shortfall of the Unified Social Tax

Today, 13.5 million citizens pay contributions to the pension fund, while 12.4 million people receive pensions. The main cause of the imbalance between payments and receipts is the extent of the shadow economy. The situation was partly exacerbated by the reduced rates of single social contribution in 2016. “Pension Fund deficit in 2016 of UAH 81.6 billion is the amount that is even smaller than the amount of decreased unified social tax revenues,” stated Mykola Shambir. Yevgeniy Kapinus noted that after reducing the unified social tax, business partly came out of the shadow but to a lesser extent, than expected.

Yevgeniy Kapinus and Mykola Shambir stressed that non-payment of the unified social tax creates a double problem: it is not only the shortfall in Pension fund money to pay pensioners, but also a long problem for working people. “If a person does not pay social contributions, in the future she/he will not have the right to receive a pension or this pension will be very low,” stressed Mykola Shambir. He reminded that a person should have at least 15 years of pensionable service to receive the minimum pension, and 30-35 years – to receive the subsistence minimum.

The decrease in unified social tax receipts was partly caused by the events in eastern Ukraine. Residents of the temporarily occupied territories are eligible for pensions, but the companies located there are forced to pay taxes to the self-proclaimed republics (also known as “LPR-DPR”). According to Vitaliy Melnychuk, Ukraine should raise a question of how appropriate it is to continue paying pensions for these citizens, based on the PACE (Parliamentary Assembly of the Council of Europe – UCMC) resolution as of October 11.


Reason #2: So-called “improper expenditures”

According to the representatives of the Pension Fund and the Ministry of Finances, the PAYG pension system and improper expenditures should be fully separated, because the PAYG system is still financing some expenses that are not covered by the unified social tax. “Among them are small surcharges to war veterans and especially large amount – subsidies. If this is a social norm, it should be financed from the state budget,” noted Mykola Shambir. “The Pension Fund can be the operator of these funds but the state budget should be the source,” added the Reanimation Package of Reforms expert.

A recommendation to balance the Pension Fund is as follows: legalization of employment, increasing the number of unified social tax payers and / or raising the retirement age, as well as verification of welfare beneficiaries. According to Vitaliy Melnychuk, to eliminate the imbalance between the Pension Fund revenues and expenditures it is necessary either to increase the unified social tax or to increase the retirement age. Both these steps are equally unpopular.

According to the Deputy Minister of Finances, the unified social tax should not be increased. Unshadowing the economy would be the best way out of the situation. “Legalization consists of several elements – a reduction in tax rates, strengthen people’s confidence in the state and regulating measures of the state. We need to move in all directions at once,” he noted. Mykola Shambir added that the growth of citizens’ incomes is an equally important factor. “In my opinion, there will not be good pensions without a wage increase,” he noted.

As to additional mechanisms for releasing resources, they could include a reduction in administrative costs and verification of welfare beneficiaries.

Ukraine needs the defined contribution pension system

Vitaliy Melnychuk stressed that now in Ukraine economically active population comprises 16 million people and pensioners – 12.4 million people. Under these conditions, the initial level of social insurance will not provide a decent pension, even in case of substantial unshadowing employment. This thesis was unanimously supported by Yevgeniy Kapinus.

The IMF (International Monetary Fund) Memorandum-2016 stipulates that Ukraine has to stabilize the first level before introducing the defined contribution pension system. In the opinion of Marianna Onufryk’s, it is the only serious drawback of the Memorandum. However, according to Yevgeniy Kapinus, the IMF recommendations are reasonable. “Unfortunately, we do not have a stable macroeconomic situation; there is no answer to the question about the second level; we cannot implement it. But I am absolutely convinced that if we balance the first level and ensure quality changes in this direction, it will allow us to find a way out of this situation,” noted the Deputy Minister of Finances. He added that the Ministry is working on this issue together with the World Bank experts.