APPENDIX I: Simulation of Long-Term Pension Funding Needs Under Different Retirement-Age Scenarios
1. Using World Bank population projections we project the necessary social contributions to finance the state pay-as-you go pension system in Belarus during 2000-50. Although the projections are extremely simple, they give an indication of how high the social contributions will need to be to cover pension obligations in the next 50 years.
2. In the first case, the retirement age is set at the current levels: 55 years for women and 60 years for men. Under the assumption that the pension system can collect 80 percent of the social contributions due, the payroll tax needed to finance future pensioners will increase from the current level of about 29 percent to 62 percent in 2050.
3. In the second case, the retirement age is increased to 60 years for both men and women. Such an increase, under similar assumptions yields about 10 percentage points decrease in the required social tax rate needed to finance the pension payments in 2050.
4. In the third and most ambitious case, an increase in the retirement age to 65 years for both men and women requires a social tax rate of only about 32 percent in 2050.
Andrews, E., and Mansoora, R., 1996, “The Financing of Pension Systems in Central and Eastern Europe,” World Bank Technical Paper No. 339.
Barr, Nicholas, 2000, “Reforming Pensions: Myths, Truths, and Policy Choice,”IMF Working Paper 00/139 (Washington: International Monetary Fund).
de Castello Branco, Marta, 1998, “Pension Reform in the Baltics, Russia, and other Countries of the Former Soviet Union (BRO),” IMF Working Paper 98/11 (Washington: International Monetary Fund).
Feldstein, Martin, 1998, Privatizing Social Security (Chicago and London: The University of Chicago Press).
Heller, Peter S., 1998, “Rethinking Public Pension Reform Initiatives,” IMF Working Paper 98/61 (Washington: International Monetary Fund).
Kotlikoff, Laurence J., 1998, “The A-K Modell—Its Past, Present, and Future,” NBER Working Paper No. 6684. Also available via the Internet: http://www.nber.org/papers/w6684.
Schiff, Jerald, Niko Hobdari, Axel Schimmelpfenning, Roman Zytek, 2000, Pension Reform in the Baltics: Issues and Prospects, IMF Occasional Paper No. 200 (Washington: International Monetary Fund.)
“Survey of Consumer Finances,” a triennial survey of the balance sheet, pension, income, and other demographic characteristics of U.S. families (Federal Reserve Board). Available via the Internet: http:/www.federalreserve.gov/pubs/oss/oss2/scfmdex.html
World Bank, 1994, Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth,” (New York: Oxford University Press).
World Bank, “Pensions Primer—Notes, Papers, Country and Regional Studies, Issues in Pension Reform,” Available via the Internet: http://www.worldbank.org/sp/.
Prepared by Roman Zytek.
Although under conditions of low inflation some of the increase in the average replacement rate could be attributed to the increase in the number of retirees (as new retirees receive higher than average benefits), this argument does not apply fully to Belarus, where the distribution of pensions was compressed by the need to compensate for high inflation rates.
To some extent, the government tried to justify the increases in real wages above productivity growth as compensation for increasing the utility rates paid by households to limit cross-subsidization. However, in practice, the increase in the economy-wide labor compensation bill went well above the amounts needed to compensate households for higher utility tariffs and housing rents.
Almost Rbl 55 billion in arrears due to the SPF were accumulated by enterprises belonging to the ministry of agriculture, Rbl 41 billion: ministry of industry, Rbl 3.3 billion: ministry of architecture, the debt of budget organizations being Rbl 9 billion.
The SPF entered 2002 with Rbl 46,7 billion in accumulated savings from previous periods, or an equivalent of 20 percent of its monthly expenditure during January-March 2002. By the end of March, the SPF held a negative net cash position of Rbl 29.3 billion. The loss of reserves virtually eliminated capital revenue of the SPF (about 2 percent annual SPF revenue).
Moreover, contributions to the SPF are based on wages of the previous month, but are received by the SPF only in the following month. However pensions are paid for the current month, so high inflation tends to undermine pension finances.
Although in previous years the State budget allocated funds to support part of the SPF’s payments of child allowances, in practice, because of the SPF’s large surpluses, the actual transfers were much smaller than budgeted.
See Appendix I for a discussion of the impact of increasing the retirement age.
Life expectancy at age 65 in the U.S. stood at 17½ years in 2000. up from 14½ years in 1960, and was projected to increase to 20 years after 2060. See UNISEX Life Expectancy at Retirement Based on Period Life Tables, published by the U.S. Social Security Administration, http://wwww.ssa.gov/history/reports/adcouncil/report/tableld.htm
For example, in Estonia, life expectancy at birth for men plunged from 64.4 years 1991 to 61.1 years in 1994, before recovering to 64.4 years in 1998. Similar patterns were observed in Latvia and Lithuania.
For detailed discussion of proposed pension reforms in Belarus see ILO (2001).
To some extent, this notion responds to a distortion in the allocation of assets in transition countries. Empirically, in most Western economies, the distribution of assets is strongly skewed in favor of the older generation, while in transition countries, such as Belarus, this is not the case. (For the U.S., see “Survey of Consumer Finances,” http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html.
See accompanying staff report.