The pension system in Slovenia comprises a mandatory, defined–benefit, pay–as–you–go public pension insurance scheme and a voluntary supplemental pension system. The pay–as–you–go scheme covers old–age, disability, survivors’, and widow’s benefits, provided through earnings–related benefits. In addition, a state pension is provided on a means–tested basis. The Pension Fund is also responsible for noncontributory state benefits for select groups, such as farmers, policemen, customs officers, and war veterans, through various legal mandates. In 2005, expenditure on pensions stood at 10.7 percent of GDP. In addition to this first pillar, fully funded voluntary supplemental pension schemes offered through mutual fund and insurance companies also exist. A key player is the state–owned Pension Management Fund (Capital Fund), which manages the Capital Mutual Pension Fund. The latter is a mandatory supplementary scheme for certain occupational groups and a pension fund where privatization certificates can be saved. The total assets of collective voluntary occupational schemes were 1.4 percent of GDP in 2004.

In 1999, the Slovene authorities approved a far–reaching pension reform program. Substantial parametric reforms were approved, to be phased in by 2024. Key measures included (i) lowering the accrual rate from 85 percent to 72.5 percent for full pension service years (40 years of service for men and 38 years for women); (ii) lengthening the period of assessment of wages from 10 to 18 best consecutive years of earnings; and (iii) increasing the full pensionable retirement age to 63 for men and 61 for women with a minimum 20 years of service (Majcen, Nieuwkoop and Verbic, 2005, Government of Republic of Slovenia, 2005). The reform plan also eschewed introduction of a mandatory second–pillar pension system. These reform measures were also applied to existing pensioners in order to ensure generational equity. With these reforms and given the indexation and valorization mechanisms, pension growth was set to lag wage growth at an increasing rate over time. In 2005, this indexation policy was changed, and pension indexation was set to grow at the same rate as wage growth, adjusted for the reduced benefits under the reform plans. It is envisaged that, after these measures are fully phased in, the net replacement rate will stand at 56 percent of wages.

Despite these reforms, which are being phased in very gradually, the pension benefits remain relatively generous. The average net replacement rate—the level of old–age pension benefits relative to wage levels—was close to 70 percent in 2005, one of the highest among new EU member states. Key parameters, such as the period for assessing wages that is used to calculate the pension base and the indexation of average pensions to wage growth, remain generous. The full pensionable age, even after the reforms, is still low by EU–15 standards, and workers can retire even earlier with full pensions depending on the number of children. Significant number of retirees also exit the system through disability pensions.

Projection methodology

Let X_t denote the aggregate transfer of health care benefits in the base year. This can be expressed as the sum of transfers to different age groups, i, as

$X_t={\mathrm{\Sigma }}_1^{100}{X}_{i,t},$

where X_i,t, is the transfer to the age cohort i at time t. X_i,t, can be calculated using the relative age profile,R_i,t, which attributes the share of the total transfers to the different age groups:

$X_{i,t}=R_{i,t}{X}_t\mathrm{.}$

To project forward the age–specific transfers, the per capita transfers are calculated as

$A_{i,t}=\frac{X_{i,t}}{P_{i,t}}$

where, A_i,t, denotes the per capita transfer to an individual of age i at time t ; and P_i,t, is the number of individuals in this age cohort. In other words, the aggregate transfers can also be calculated as

$X_t={\mathrm{\Sigma }}_1^{100}{A}_{i,t}{P}_{i,t}$

The projection for each of the transfers would thus depend upon the growth of the per capita transfers, g, and the population growth within each cohort:

$\begin{array}{c}{X}_{t+1}={\mathrm{\Sigma }}_1^{100}{A}_{i,t+1}{P}_{i,t+1}\\ X_{t+1}={\mathrm{\Sigma }}_1^{100}{A}_{i,t}(1+g)P_{i,t+1}\mathrm{.}\end{array}$

The growth of the per capita transfers is typically linked to per capita productivity growth to reflect the indexation to wages. If the transfers are indexed only to inflation, however, per capita growth would equal zero.

It is also assumed that the relative profile remains constant:

$R_{i,t}=R_i\mathrm{.}$

Thus, transfers are projected as

$X_{t+1}={\mathrm{\Sigma }}_1^{100}\frac{R_i{X_{t}P}_{i,t+1}}{P_{i,t}}(1+g)\mathrm{.}$

Under some scenarios, such as an extension of the retirement age, the relative age profile is allowed to vary for specific variables, such as income taxes, social security contributions, and pensions. Similarly, depending on the healthiness of the aging population, the age profile for health care can also be shifted to the right if more of the elderly are expected to live healthier lives..

Generational accounts

The generational account of an individual measures the present value at time t of the average remaining lifetime net tax payment. This is defined as

$N_{t,k}={\mathrm{\Sigma }}_{s=\max (t,k)}^{k+100}{T}_{s,k}\frac{p_{s,k}}{p_{t,k}}{(1+r)}^{-(s-t)}\mathrm{.}$

Here, T_{s, k}, is the projected average net tax payment to the government in the year s by a member of the generation born in the year k, which essentially represents the sum of the per capita transfer (or tax) A_k,s, of an individual born in the year k across all the government taxes and transfers at time s. The term $\frac{P_{s,k}}{P_{t,k}}$ is the proportion of members of cohort k alive at time t who will also be alive at time s. The net tax payments are discounted using the real discount factor, r. Thus, the generational account captures the average present value over all net tax and transfer payments, as well as probability of survival.

Intertemporal fiscal gap

The intertemporal fiscal gap, based on a dynamic analysis of fiscal policy, is defined as the imbalance in the intertemporal budget constraint. This constraint simply states that in present value terms, the future net tax payments of current and future generations should cover the government’s future purchases of goods and services and the initial net debt. Formally, the intertemporal budget constraint, is expressed as

${\mathrm{\Sigma }}_{s=0}^{\infty }{G}_{t+s}{(1+r)}^{t-s}+D_t={\mathrm{\Sigma }}_{s=0}^{100}{N}_{t,t-s}{P}_{t,t-s}+{\mathrm{\Sigma }}_{s=1}^{\infty }{N}_{t,t+s}{P}_{t,t+s}{(1+r)}^{t-s},$

where G is the government’s purchase of goods and services, D is the initial net debt, and N_t,k, is the generational account in year t of an individual born in year k . The first term on the right–hand side thus represents the net tax payments over the remaining lifetime of the currently living generation, while the second term is the present value of the net tax payments of future, yet unborn, generations. The intertemporal fiscal gap is calculated as the immediate and permanent adjustment in taxes or expenditures needed to ensure that the above constraint holds:

$IBG=[{\mathrm{\Sigma }}_{S=0}^{\infty }{G}_{t+s}{(1+r)}^{t-s}+D_t-{\mathrm{\Sigma }}_{s=0}^{100}{N}_{t,t-s}{P}_{t,t-s}-{\mathrm{\Sigma }}_{s=1}^{\infty }{N}_{t,t+s}{P}_{t,t+s}{(1+r)}^{t-s}]/GDP\mathrm{.}$

Intergenerational balance gap

The intergenerational balance gap is a hypothetical calculation of the intertemporal budget gap based on the assumption that net tax payments of the future generation are the same as that of the newborn in the currently living generation, adjusted for growth:

$\begin{array}{c}{\mathrm{\Sigma }}_{s=1}^{\infty }{N}_{t,t+s}{P}_{t,t+s}{(1+r)}^{t-s}={\mathrm{\Sigma }}_{s=1}^{\infty }{N}_{t,t}(1+g){P_{t,t+s}(1+r)}^{t-s}\mathrm{.}\\ {GBG=\left[{\mathrm{\Sigma }}_{S=0}^{\infty }{G}_{t+s}\right(1+r)}^{t-s}+D_t-{\mathrm{\Sigma }}_{s=0}^{100}{N}_{t,t-s}{P}_{t,t-s}-{\mathrm{\Sigma }}_{s=1}^{\infty }{N}_{t,t}(1+g)P_{t,t+s}{(1+r)}^{t-s}]/GDP\mathrm{.}\end{array}$

Thus, IBG will be greater than GBG if N_t,t+s, is lower than N_t,t(1+g). In other words, if the current policy is favorable to future generations such that the net taxes owed by a member of the future generation are lower than those of a currently newborn, the intertemporal budget gap will be wider than the intergenerational balance gap. For further details on these concepts, see Cardarelli, Sefton, and Kotlikoff (2000).

The evolution of public pensions as a share of GDP depends on the pension system’s level of generosity, the number of people receiving pension benefits, and the productivity and effort of the labor force. More specifically, the ratio of pension expenditure to GDP can be expressed as the following:

$\begin{array}{c}\frac{\mathrm{Pension}\mathrm{Expenditure}}{\mathrm{GDP}}=\frac{\mathrm{Average}\mathrm{pension}\mathrm{benefits}}{\mathrm{Average}\mathrm{productivity}}*\frac{\mathrm{Number}\mathrm{of}\mathrm{pensioners}}{\mathrm{Number}\mathrm{of}\mathrm{employed}}\\ \mathrm{=}\frac{\mathrm{A}\mathrm{v}\mathrm{e}\mathrm{r}\mathrm{a}\mathrm{g}\mathrm{e}\mathrm{p}\mathrm{e}\mathrm{n}\mathrm{s}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{b}\mathrm{e}\mathrm{n}\mathrm{e}\mathrm{f}\mathrm{i}\mathrm{t}\mathrm{s}}{\mathrm{A}\mathrm{v}\mathrm{e}\mathrm{r}\mathrm{a}\mathrm{g}\mathrm{e}\mathrm{p}\mathrm{r}\mathrm{o}\mathrm{d}\mathrm{u}\mathrm{c}\mathrm{t}\mathrm{i}\mathrm{v}\mathrm{i}\mathrm{t}\mathrm{y}}\mathrm{*}\frac{\mathrm{N}\mathrm{u}\mathrm{m}\mathrm{b}\mathrm{e}\mathrm{r}\mathrm{o}\mathrm{f}\mathrm{p}\mathrm{e}\mathrm{n}\mathrm{s}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{e}\mathrm{r}\mathrm{s}}{\mathrm{(}\mathrm{P}\mathrm{o}\mathrm{p}\mathrm{u}\mathrm{l}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{>}\mathrm{55}\mathrm{)}}\mathrm{*}\frac{\mathrm{(}\mathrm{P}\mathrm{o}\mathrm{p}\mathrm{u}\mathrm{l}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{>}\mathrm{55}\mathrm{)}}{\mathrm{(}\mathrm{15}\mathrm{<}\mathrm{P}\mathrm{o}\mathrm{p}\mathrm{u}\mathrm{l}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{<}\mathrm{64}\mathrm{)}}\mathrm{*}\frac{\mathrm{(}\mathrm{15}\mathrm{<}\mathrm{P}\mathrm{o}\mathrm{p}\mathrm{u}\mathrm{l}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{<}\mathrm{64}\mathrm{)}}{\mathrm{\left(}\mathrm{N}\mathrm{u}\mathrm{m}\mathrm{b}\mathrm{e}\mathrm{r}\mathrm{o}\mathrm{f}\mathrm{e}\mathrm{m}\mathrm{p}\mathrm{l}\mathrm{o}\mathrm{y}\mathrm{e}\mathrm{d}\mathrm{\right)}}\\ \mathrm{=}\frac{\mathrm{A}\mathrm{v}\mathrm{e}\mathrm{r}\mathrm{a}\mathrm{g}\mathrm{e}\mathrm{p}\mathrm{e}\mathrm{n}\mathrm{s}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{b}\mathrm{e}\mathrm{n}\mathrm{e}\mathrm{f}\mathrm{i}\mathrm{t}\mathrm{s}}{\mathrm{A}\mathrm{v}\mathrm{e}\mathrm{r}\mathrm{a}\mathrm{g}\mathrm{e}\mathrm{p}\mathrm{r}\mathrm{o}\mathrm{d}\mathrm{u}\mathrm{c}\mathrm{t}\mathrm{i}\mathrm{v}\mathrm{i}\mathrm{t}\mathrm{y}}\mathrm{*}\frac{\mathrm{N}\mathrm{u}\mathrm{m}\mathrm{b}\mathrm{e}\mathrm{r}\mathrm{o}\mathrm{f}\mathrm{p}\mathrm{e}\mathrm{n}\mathrm{s}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{e}\mathrm{r}\mathrm{s}}{\mathrm{(}\mathrm{P}\mathrm{o}\mathrm{p}\mathrm{u}\mathrm{l}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{>}\mathrm{55}\mathrm{)}}\mathrm{*}\frac{\mathrm{(}\mathrm{P}\mathrm{o}\mathrm{p}\mathrm{u}\mathrm{l}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{>}\mathrm{55}\mathrm{)}}{\mathrm{(}\mathrm{15}\mathrm{<}\mathrm{P}\mathrm{o}\mathrm{p}\mathrm{u}\mathrm{l}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{<}\mathrm{64}\mathrm{)}}\mathrm{*}\frac{\mathrm{1}}{\mathrm{e}\mathrm{m}\mathrm{p}\mathrm{l}\mathrm{r}\mathrm{a}\mathrm{t}\mathrm{e}\mathrm{*}\mathrm{p}\mathrm{a}\mathrm{r}\mathrm{t}\mathrm{i}\mathrm{c}\mathrm{i}\mathrm{p}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{r}\mathrm{a}\mathrm{t}\mathrm{e}}\\ =\mathrm{B}\mathrm{e}\mathrm{n}\mathrm{e}\mathrm{f}\mathrm{i}\mathrm{t}\mathrm{E}\mathrm{f}\mathrm{f}\mathrm{e}\mathrm{c}\mathrm{t}\mathrm{\left(}\mathit{B}\mathit{E}\mathrm{\right)}\mathrm{*}\mathrm{E}\mathrm{l}\mathrm{i}\mathrm{g}\mathrm{i}\mathrm{b}\mathrm{i}\mathrm{l}\mathrm{i}\mathrm{t}\mathrm{y}\mathrm{E}\mathrm{f}\mathrm{e}\mathrm{c}\mathrm{t}\mathrm{\left(}\mathit{E}\mathit{L}\mathit{I}\mathit{G}\mathit{E}\mathrm{\right)}\mathrm{*}\mathrm{A}\mathrm{g}\mathrm{i}\mathrm{n}\mathrm{g}\mathrm{E}\mathrm{f}\mathrm{f}\mathrm{e}\mathrm{c}\mathrm{t}\mathrm{\left(}\mathit{A}\mathit{E}\mathrm{\right)}\mathrm{*}\mathrm{1}\mathrm{/}\mathrm{E}\mathrm{m}\mathrm{p}\mathrm{l}\mathrm{o}\mathrm{y}\mathrm{m}\mathrm{e}\mathrm{n}\mathrm{t}\mathrm{\left(}\mathit{E}\mathit{M}\mathit{P}\mathit{E}\mathrm{\right)}\mathrm{,}\end{array}$

where

Aging Effect = (Population > 55)/(15< population <64)

Eligibility Effect = (Number of pension recipients) / (Population > 55)

Benefit Effect = Average benefits / Average productivity

Employment Effect = Number of employed/(15< population <64)

• = Employment rate * Labor participation rate.

The contribution of each of these factors can be derived by differencing the log–linearized version of the equation above:

$\frac{\mathrm{d}(\mathrm{P}\mathrm{e}\mathrm{n}\mathrm{s}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{E}\mathrm{x}\mathrm{p}\mathrm{e}\mathrm{n}\mathrm{d}\mathrm{i}\mathrm{t}\mathrm{u}\mathrm{r}\mathrm{e}/\mathrm{G}\mathrm{D}\mathrm{P})}{\mathrm{d}\left(t\right)}=\frac{[\mathrm{d}\ln {\left(\mathit{BE}\mathit{\right)}}^{}*}{\mathrm{d}\left(t\right)}\frac{d\ln \left(ELIGE\right)}{\mathrm{d}\left(t\right)}*\frac{\mathrm{d}\ln \left(AE\right)}{\mathrm{d}\left(t\right)}*\frac{\mathrm{d}\ln \left(EMPE\right)]}{\mathrm{d}\left(t\right)}*\frac{\mathrm{P}\mathrm{e}\mathrm{n}\mathrm{s}\mathrm{i}\mathrm{o}\mathrm{n}\mathrm{E}\mathrm{x}\mathrm{p}}{\mathrm{G}\mathrm{D}\mathrm{P}(t=0)}+\mathrm{e}\mathrm{r}\mathrm{r}$

where Pension Exp/ GDP (t=0), measures the pension expenditure in the initial period. To minimize the residual, the difference is taken over the short period of a year and summed over the entire period (Eskesen, 2002).

The baseline scenario follows the assumptions in the Convergence Program of Slovenia. It is assumed that labor activation policies adopted by the Slovene government will help to lower the unemployment rate by 1 percentage point from the current 6.4 percent to 5.4 percent by 2020 and stabilize at this level thereafter. Similarly, the labor participation rate is assumed to increase from 68 to 73.6 percent by 2050 on account of these and other legislative measures to increase the full pensionable age. The demographic shift also affects the participation rate as the number of elderly with a lower participation rate increases. The number of pension recipients is also assumed to rise reflecting an increase in the average effective retirement age to 62 by 2023, in line with the approved pension reforms. It is also expected that average benefits will decline due to the reform measures introduced in 2000. The replacement rate is expected to decline from 70 percent to 62 percent by 2030 as per the estimates on the impact of the pension reform outlined in World Bank (2004). Average productivity growth is also assumed to decline gradually from 3.5 percent to 1.7 percent by 2050 as the economy converges to higher income levels and growth slows down. Under these assumptions, pension expenditure is expected to rise rapidly after 2024 to almost 16 percent of GDP by 2050.

Pension projections are very sensitive to underlying assumptions (Appendix figures). An optimistic scenario is projected assuming stronger productivity growth, higher labor participation by the elderly, and further pension reform to lower the benefits level. Specifically, the labor participation rate is assumed to be higher by 1 percentage point, and the net replacement rate is assumed to decline further to 49 percent of wages over the long run. Labor productivity growth is expected to stay constant at 3.5 percent at current levels. Although the labor productivity growth rate is assumed to be higher, it does not reduce pension expenditure as a share of GDP because wages, to which pension benefits are indexed, also grow in line with productivity. In this scenario, pension benefits as a share of GDP rise to 12.3 percent. Under a more pessimistic scenario, when the average retirement age is assumed to increase only to 59 years, the eligibility effect will lead to higher pension expenditure than in the baseline case. Similarly, the labor participation rate is expected to rise to 71 percent by 2050. In this scenario, pension expenditure is expected to rise to 17.3 percent.

In each of the three cases, the demographic effect contributes the most to the rise in pension expenditure (Appendix figures). Despite the negative contribution of the eligibility effect, the benefits effect, and the employment effect, these do not offset the impact of population aging. Even under the optimistic scenario, when benefits are assumed to decline further and the number of retirees declines relative to the base case—as the elderly work longer—the demographic effect dominates.

To analyze the impact of pension reform on debt sustainability, alternative scenarios showing the impact of pension reform on pension expenditure are also projected (Appendix figures). Four different scenarios are considered. First, we consider the impact of a gradual increase in the average effective retirement age from 61 years to 63 years—2 years beyond the baseline scenario assumption. The demographic pressure on pension expenditure is delayed, with a reduction of over 2 percent of GDP by 2050 relative to the baseline. Second, benefit reform—such as through an increase in the number of years used for calculating the pension base—that results in a further lowering of the entry net replacement rate to 52 percent is assumed. This estimate corresponds to the replacement rate under the reforms implemented in 2000 but before the indexation to wages introduced in 2005. In this case, the rate of increase of pension expenditure is lowered, although it still remains high at over 13.5 percent. Third, a more dramatic reform that indexes existing pensions to prices is estimated. This would substantially lower pension expenditure, to 8.0 percent of GDP through 2025, as the impact of pension reforms is also evident. Subsequently, demographic pressure increases spending to 11 percent of GDP. Last, a combined scenario that incorporates an increase in the retirement age and a decline in the entry net replacement rate is considered. In this case, pension expenditure is contained at around 11 percent of GDP over the next 50 years.

View Full Size

Slovenia: Pension Projections, 2004-50

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 250; 10.5089/9781451835786.002.A003

Source: Staff calculations.

• Download Figure
• Download figure as PowerPoint slide