Pensions in Ukraine (Ofer Abarbanel online library)

Pensions in Ukraine are provided pursuant to the Law of Ukraine on Compulsory State Pension Insurance (statements of the Ukrainian Supreme Council,2003,No.No. 49-51, art.376) that stipulates the three-tiered pension provision system. It is appropriate to take a look at this system in order to understand how pensions are paid out as well as financed and which indicators influence pension calculation.

The Pension System

The first tier

This level is otherwise described as solidarity system since it is based on solidarity and subsidizing principles. So within this framework pensions are assigned according to the achieving of a certain age (60 for men and 58.5 for women), invalidity and loss of breadwinner. This system is funded by individuals such as employees, entrepreneurs, self-employed and others that are obliged to contribute to the compulsory state pension insurance.[1] This payment amounts to 22% of individual salary, which is paid either by individual or by employer. The money paid is received by Pension Fund of Ukraine – authority that is responsible for compulsory state pension insurance and manages it. Above mentioned payments of insurees are then redirected by Pension Fund to pay pensions of today’s retirees. Such system does not ensure that current employees, who contribute to state pension insurance, will get their own pension in compliance with contribution been made. Due to population aging Pension Fund is not able to manage money by making investments but need immediately to redirect money providing retirees with pensions. Future prospects are even worth as percent of retirees of total population is going to increase from 23.5% to 27.8% by 2050.

The second tier

The second level is represented by an accumulation system of compulsory state pension insurance. This system does not work yet but the implementation is scheduled for 1 January 2019.[needs update] It provides for hoarding the money in the accounts of State Accumulative Fund of Ukraine or non-governmental pension fund and refer to contributor to the compulsory state social insurance. In comparison to the first system to every individual,who will contribute to the accumulation system, will be assigned the personified account.[2] The plan is to save some portion of compulsory insurance payments to pension system (tier 1) and handle them properly in oder to get investments revenues and protect them against inflation. The amount of contribution to Accumulative Fund is not yet defined but one thing is certain – that it will not exceed 7% of salary. To use money from this accounts participants need to achieve retirement age. A good feature of this system is that retirement savings could be inherited and are made along with payments within solidarity system. The administrative support will be provided by the Pension Fund of Ukraine.

The third tier

The last system is based on volunteer contributions to non-governmental pension funds and is stated in the Law on Non-governmental Pension Provision,[3] which was enacted on 1 January 2004. Non-governmental funds are legal entities established under the Law of Ukraine “On private pension provision”, have the same principle of operating as those pension funds in the compulsory accumulative system (tier 2) and carry a status as non-profit organizations.[4] The pension fund creates an account in the name of the participant and accumulates contributions either from the individual, his or her employer or the participant’s family. Participants of this system do not lose the right to compulsory state pension payments and are entitled to set their retirement age. Contributions to those funds and received investment income on it receive tax relief.

Pension Reform of 2017

On 3 October 2017, the Verkhovna Rada voted on legislation to overhaul the pension system and on 8 October Ukraine’s President Petro Poroshenko signed this law. Amendments were driven by several factors such as low pension levels, as 8 million of the approximately 12 were receiving the minimum pension of 1312 (32 EUR) while medium pension amounted to 1886 UAH (50 EUR), price of consumer basket 2550 (81EUR) that exceeds minimal pension, significant deficit of Ukraine’s Pension Fund and the need of modernization. Special attention to the reform has been paid by IMF as the reform was the requirement for receiving a US$8.4 billion tranche.[5]

Changes in the pension system

From the 1 October 2017 minimal wage have risen and amounts now to 1452 (46 EUR) as social standards have increased. The reform foresee rise in pensions for 9 million pensioners with average increase of 700 (20 EUR).[6] As Ukraine’s pension calculation depends on salary, qualifying period and average salary significant gap between pensions of employers of the same branch and same qualifying period could arise due to the difference in retirement year. The need for modernization lies in that the average salary rise from year to year and therefore pensions of Ukrainians should be adjusted. Last time such modernization has been made in 2012 where the average salary rate of 2007 has been used. In recent years the average salary rate has grown threefold but pensions have grown a little bit. Thus pensions need to be recalculated. As a basis is taken the average salary rate for the 2014–2016 in amount of 3764,4 (117 EUR).

The next amendment applies to the automatic recalculation of pension that should take into regard the increase in average salary and inflation. Annual indexation of pension happens through increase in average salary, which is taken as a base, by 50% growth in average salary for 3 previous years and by 50% increase in consumer price index for the previous year.

From 1 October 2017 working pensioners started to receive the full amount of the pension as according to previous regulation the state withheld 15% of the salary. No taxation is applied to the salary of working pensioners as before the reform had been introduced.

Officially retirement age was not changed and with having sufficient qualifying period it is possible to retire at the age of 60. But requirements for the qualifying period necessary for retirement has changed. Till the reform was introduced it accounted for 15 years. From the year 2018, it amounts to 25 and should be gradually increased till 2028 up to 35 years. Retirees have to be allocated into 3 groups – 60, 63 and 65 years. The older a person – the fewer demands are placed. The youth of today that is going to retire after 2028 should bank on 35 years of pension insurance record and more. For example, from the 1 January 2018 those have the right to retire who reached the age of 60, worked and contributed to Pension Fund for 25 or more years. With the qualifying period of 15 years, only those who have reached 63 are entitled to a pension. Those who do not have sufficient qualifying period must retire later or can buy missing years by the government.

Also, changes were introduced for public servants, judges, prosecutors, educators that are receiving special pensions and have special conditions of retiring. Now they lose the right to retire due to their age and during pension calculation are treated without any priority.

With this reform, the second level of pension system has been introduced and has to be implemented from 1 January 2019. Members of the accumulation system are individuals that by the beginning of the year 2019 are subject to compulsory state pension insurance. Individuals that, at this point in time, have less than 10 years before pensionable age are given an option not to contribute to the accumulation system of compulsory state pension insurance.

Interesting facts about Ukraine’s pensions

The total budget expenditure in the year 2017 amounted to 790 billion UAH. From which 284 billion UAH account for expenditures of the Pension Fund representing approximately one-third of total budget spendings. However, only deficit of Pension Fund of 141 billion UAH had been financed with the budget, the rest had been funded by Single Social Contribution.

The highest average pension in 2017 received residents of the capital which is 2408.02 UAH (75 EUR) and the lowest in Oblast Sumy – 1560.95 UAH ( 48.75 EUR).

According to the data of the Pension Fund almost half of retirees (5.6 million) receive minimal pension.

Pensions of public servants, judges, prosecutors, educators exceed average pension by several times. According to the State Statistic Service pensions, over 10,000 UAH (312 EUR) are received only by 15.5 thousand Ukrainians.

Six million working people pay Single Social Contribution from which 12 million pensions are funded which means each person who works and contributes to the compulsory state pension insurance supports two retirees.

Current situation

As stated above, the state pension programme is financed through mandatory contributions and the state budget.[7][8] Amount of pension person receives from Pension Fund depends on three indicators: salary, the contribution period and average salary. Men over the age of 60 and women over 58 may claim a pension if they are filling the contribution period threshold of 15 years, rising to 25 years at 1 January 2018 and stepping up one year each to 35 in 2028.[9] Despite demands of the IMF the pension ages were not risen with the new pension law of 3 October 2017.[10] However, the reform raises the requirement to claim pension payments from 15 to 25 years in 2018 and 35 years in 2028.[11] Beside this the taxation of pensions has been cancelled from 01.10.2017 on and the pension reduction for working pensioners (which is very common due to low pension payments) is lifted also.[12] “Special pensions” for public servants like judges,prosecutors etc.has been cancelled from 01.01.2018 on-from this time on just military staff is able to get such “long-term-service”-pensions. Finally the pension payments will be also linked to the development of the average wage. Till 2017 the indexation of pensions was mostly much lower than the inflation and irregular.

The current system lacks on the demographics in Ukraine and the balance of payers and receivers of pensions. Actually, there is a ratio of 1:1 of payer–receiver and the deficit of the State Pension Funds drains 35% of the whole state budget in 2017.[13]

References

  1. ^User, Super. “Pension System of Ukraine”. www.westinvestgroup.com.ua. Retrieved 2018-06-06.
  2. ^User, Super. “Pension System of Ukraine”. www.westinvestgroup.com.ua. Retrieved 2018-06-06.
  3. ^[1]
  4. ^User, Super. “Pension System of Ukraine”. www.westinvestgroup.com.ua. Retrieved 2018-05-02.
  5. ^“10 things you should know about Ukraine’s pension reform • Global Ukraine”. global-ukraine.com. Retrieved 2018-06-06.
  6. ^“10 things you should know about Ukraine’s pension reform • Global Ukraine”. global-ukraine.com. Retrieved 2018-06-06.
  7. ^Ukraine: Pension system profile, International Organisation of Pension Supervisors(December 2009)
  8. ^Ukraine (Social Security Programs Throughout the World: Europe, 2014), Social Security Administration (2014)
  9. ^“New law hikes pension burden now, cuts it in future | KyivPost”. KyivPost. 2017-10-06. Retrieved 2017-12-10.
  10. ^“New Pension Reform: What It Suggests | UACRISIS.ORG”. Ukraine crisis media center. 2017-10-05. Retrieved 2017-12-10.
  11. ^“Archived copy”. Archived from the original on 2017-10-07. Retrieved 2017-10-06.
  12. ^“New Pension Reform: What It Suggests | UACRISIS.ORG”. Ukraine crisis media center. 2017-10-05. Retrieved 2017-12-10.
  13. ^“New law hikes pension burden now, cuts it in future | KyivPost”. KyivPost. 2017-10-06. Retrieved 2017-12-10.

Ofer Abarbanel – Executive Profile

Ofer Abarbanel online library

Ofer Abarbanel online library

Ofer Abarbanel online library