Reforming Pension Systems in the Baltics, Russia, IMI and Other Countries of the Former Soviet Union

Pages:75-76
SUMMARY

One of the most serious problems the Baltics, Russia, and other former Soviet Union countries face in their transition to market economies is the reform of the public welfare systems inherited from the Soviet period, which were designed to provide "cradle-to-grave" protection to the population. Attempts to reform the existing systems have been modest so far, and public welfare spending continues... (see full summary)

 
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Page 75

IMF Survey: What types of pension systems are currently in place in these countries? How do they differ from systems in other countries?

CASTELLO BRANCO: The present public pension systems are run on a pay-as-you-go (PAYG) basis, with pension benefits financed by current payroll contributions, in some cases supplemented by budget transfers. They are essentially like the pension systems of many industrial countries, although countries in this group have much lower per capita incomes and levels of economic development. Unlike in most industrial countries, public pensions in these countries are not complemented by private pension schemes.

To understand their initial position and reform options, it is useful to group existing pension systems into three broad categories, comprising the German, the Swiss, and the Chilean "models."

- The German model is dominated by a large mandatory publicly managed PAYG pension scheme, which currently provides an average wage earner with a full contribution record of 45 years with a pension benefit equivalent to about 70 percent of average net wage earnings. Owing to the wide coverage and high income replacement rates of the public scheme, private pension provision has traditionally played a relatively small role.

- The Swiss model is based on a sizable mandatory publicly managed PAYG pension scheme, supplemented by an almost equally large mandatory private scheme. The public scheme has a wide coverage, a significant redistributive component, and promises an average wage earner a pension benefit equivalent to about 40 percent of average wages. The fully funded private pension scheme is designed to provide a pension benefit equivalent to about 30-40 percent of a contributor's wage.

- The Chilean model, dominated by a large mandatory privately managed pension scheme, is supplemented by a relatively small public scheme, essentially designed to provide poverty relief.

IMF Survey: What are the specific shortcomings of pension systems in the Baltics, Russia, and other countries of the former Soviet Union? Castello Branco: Large-scale PAYG systems can have a number of problems. They can result in serious labor market distortions-especially at lower levels of economic development-as they undermine incentives to work and pay taxes. Also, it has been argued that PAYG pension schemes reduce incentives for private saving and capital accumulation and are often associated with relatively narrow equity markets...

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