The second tier of the pension system will not be able to provide even a pension of €25 per month for 70% of the people who will be the first to see the results of the reform in 2021-2027. Krassen Nikolov has the story.
Krassen Nikolov is a journalist specialised in judiciary affairs. He works for Mediapool and is a regular contributor for BulgarianPresidency.eu for the six months of the Bulgarian Presidency of the Council of the EU.
Nearly 20 years ago, Bulgaria made its first pension reform. It introduced compulsory second tier pension insurance for people born after 1959 via private companies. Now the social ministry published the first serious analyzes. They reveal disturbing facts that question the whole reform. The second tier of the pension system will not be able to provide even a pension of €25 per month for 70% of the people who will be the first to see the results of the reform in 2021-2027.
The publication of information is already a positive development, given that for years the institutions have ignored the question how much the second tier pension scheme will be able to pay its clients when they retire. The miserable pensions of the first retirees under the new system will undoubtedly again put the debate on the pension system on the agenda. Two years ago, GERB enabled insured persons to transfer their bills from private funds to the State Social Security Institute, which further reversed the reform.
The calculations show that people who will retire between 2021 and 2037 will receive on average about 20% lower state pension if they had decided to secure themselves also in a private fund. At the same time, private pension funds do not provide a very good offer. Generally, this is about €25 per month. Only 10% of future pensioners have a large enough stash in private funds to hope for more than €50 per month.
One reason is the very low wages in Bulgaria. When the reform started in 2002, the majority of Bulgarians received wages of about €110 per month. Sixteen years later the average salary in the country is already €550, but most Bulgarians outside the capital work for much less – between €250 and €350 per month. By law, second tier pension insurance is 2% of the salary. Thus for 16 years an average of Bulgarians have accumulated about €1,350 in private funds, which cannot generate a big profit because the law obliges them to invest conservatively. The whole system results in a disappointing second pension of about €25 per month on average.
Still, the model allows flexibility. If the second tier pension is equal to 1/5 of the minimum pension (the minimal pension for 2018 id €100 per month), the pensioner has the right to negotiate with the private fund for a special scheme to be repaid. He can give up his second tier pension and get his money returned in installments for five years. This contract can be inherited on death, unlike life pensions.
Pensions from private funds provide a fairly good prospect for wealthier Bulgarians who pay their maximum social security contributions at an income of €1300 euros per month. These people, if they retire until 2044, will receive an additional €360 lifetime pension. They will have accumulated nearly €63,000 on their accounts in private pension companies.
Economist Petar Ganev of the Institute for Market Economics commented that “there is no fair and unfair amount of the second tier pension”.
“Your second pension depends on the accumulated funds in the individual account – you cannot get something you did not import over the years,” Ganev says.
The expert stresses that everyone has the right to renounce their second private pension and to transfer all their funds to the state National Social Security Institute. For the past two years, however, very few people have taken such a step – the total amount of the funds transferred is about € 34 million over two years. Does it mean that Bulgarians prefer flexible supplementary pensions from private funds rather than relying entirely on the state, or that they many of them care little?
Икономистът Петър Ганев от Института за пазарна икономика коментира, че „няма справедлив и несправедлив размер на втората пенсия“.