Journal Issue
Working Paper Summaries (WP/94/1 - WP/94/76)

Working Paper Summaries 94/52: Pensions, Price Shocks, and Macroeconomic Stability in Transition Economies

International Monetary Fund
Published Date:
August 1994
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In Belarus, as in many countries of the former Soviet Union, pensioners form a large and vulnerable group of the population. Attempts to protect this group from the large unanticipated increases in prices in the early 1990s have included a revaluation of benefits for retirees with pensions fixed in nominal terms, and the introduction of indexation arrangements based on recent wage and price growth.

In this paper, we illustrate the potentially destabilizing effects of lagged indexation procedures, as inflation begins to decelerate, on pension fund balances. Simulations based on hypothetical scenarios suggest that the imbalances generated by these arrangements may jeopardize the macroeconomic adjustment effort.

The paper evaluates a number of possible policy options for a transition period of price stabilization, including, inter alia, the introduction of flat rate pensions, raising the retirement age, and tightening the eligibility criteria for pensions. An alternative is to minimize the lag for pension adjustments, but it may not be feasible to reduce this to less than one quarter in many cases. And to avoid deficits in the Pension Fund, it would be important to ensure that the cost of any pension revaluations not exceed changes in payroll contributions.

For the transition period in Belarus, the introduction of a flat rate basic state pension for those with an appropriate work history is seen as the most attractive option from the point of view of protecting the poor and generating needed savings on account of pension expenditures. Other measures, such as increasing the required working time, would also have to be introduced in the short term to take account of the longer-term problems of an aging population.

In the medium term, once price stability has been achieved, it should be possible to revert to social insurance principles introduced in the former Soviet Union in 1991. Alternatively, if the basic flat rate state pension is maintained, funded pensions may be possible as a second-tier supplement--although this does not appear to be feasible in the immediate future.

Projections suggest that Belarus will also face medium- to longer-term problems related to the aging of the population. This makes the structural reform of the pension system in the next few years of considerable importance. The analysis is meant to be illustrative, and should also be of relevance in other transition economies with aging populations.

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