UKRAINIAN PENSION REFORM: BYPASSING THE WORKERS TO EVALUATE THE LABOR

09:28 14/11/2017
Promising to change the country’s life for better and to “wipe out the remnants of the Soviet past”, Ukrainian Parliament had approved the pension reform on October 3. However, while introducing numerous key changes to the system, it does not grant any convincing benefits to the workers. Instead, they will face a harsher struggle for salaries and decent pensions.

Voted by 288 deputies (with 226 votes needed) and called a “historic decision”, the new pension reform opens another door for 17,5 bn USD IMF assistance program. The reform (pending introduction on January 1, 2018) was widely discussed prior to first votes this May and many key features-to-be have already been communicated to the public. But as the starting date approaches, anxiety around the upcoming changes urges many to forecast their prospective fortune. Today, Ukraine has about 12 mln pensioners and 16 mln people working officially (with only about 10,5 mln paying the pension contribution), which means complicated recalculations and a vital need to reduce the shadow labor market (simply put, to employ more people officially).

The government says the reform will prevent growth of pension fund deficit of approx. 141 bn UAH (with the total of 284 bn UAH, or about 9 bn EUR) by providing stable pension contributions backed by regulations allowing to retire officially only after having worked a required amount of years. To receive a pension, any citizen will need to have a sufficient insurance record. Starting from 2018, people retiring at 60 will require a 25-year record, those having a 15 to 25-year record can retire at 63, while those with less than 15 working years can quit at 65 (scholarship students will have their studies counted as seniority). Retirees without a record will receive social assistance based on their family’s incomes. As a sort of compliment, the government will allow to purchase up to 5 years of insurance record for approx. 17 000 UAH (about 570 EUR) per year.

Another feature is pension indexation (to secure the retired people from inflation rates) with recalculations depending on the capabilities of non-contributory system, but not less than by 50% of average salary growth during last 3 years and 50% of consumer price index. Current salary restrictions for working pensioners (setting the maximum income at 85% of their pension) will be canceled along with special pensions for scientists and other workers. Excluding army employees from the list, the government plans to increase their wages to allow early retirement.

On the contrary, seniority allowance for doctors, teachers and social care workers will be withdrawn to prevent “possible benefits from retirement with low salary”. Such decision is based on the fact that pension fund deficit is caused by the difference between lower average contributions to the fund and higher average retirement payments received by citizens (and the situation had only worsened in 2016).

The number of occupations considered harmful or hazardous will also be reduced. Workers performing duties posing direct threat to their health and/or life (miners etc.) will keep their right to retire early, while other employees will be stripped of such opportunity. This means that privileges related to hazardous occupations will be preserved for only 128 000 out of 410 000 people.

According to the Vice Prime Minister of Ukraine, 11 bn UAH (about 350 mln EUR) have been spent on the reform only this year. Officials also claim it will take about 7 years to eliminate the pension fund deficit, but another forecast (made by the Institute for Demography and Social Studies) says it will not happen earlier than once there become fewer pensioners and more officially employed workers. And that will be at least in 2050.

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