Ukraine’s state pension system not only overburdens the tax system – it also fails to offer retired Ukrainians a decent life after they leave the workforce.
Amid the ongoing discussions on the final version of tax reform, there is consensus on lowering the unified social tax on salaries from 41 to 20 percent to avoid widespread evasion. That’s the tax that feeds the ever-hungry pension fund.
“Of course this step will lead to a deficit of nearly Hr 100 billion in contributions to the pension fund. We plan to balance it with compensatory steps and a parametric reform of the pension system in the nearest future,” Finance Minister Natalie Jaresko wrote recently in an op-ed for Ukrainian online newspaper Ukrainska Pravda.
Twelve million retired Ukrainians – a quarter of the nation’s population – receive pensions, even though they are not high enough to live on.
Ukraine’s average monthly pension – 66 euros or $72 – is not enough to live on for the nation’s 12 million retirees.
The officially employed population pays a unified social tax to support the elderly. The qualifying age is 60 for men and 57 for women, but the age will be set at 60 for both genders by 2021.
A persistent recession in the last two years has made it difficult to fund pensions, cutting gross domestic product nearly in half in dollar terms – from about $180 billion to just more than $94 billion expected next year.
According to the State Pension Fund, the average monthly pension across the country as of October was Hr 1,691 or about $70. With 42 percent inflation in the country, and benefits increasing by only 13 percent in September, the majority of the retired population are now losing ground.
Paltry pensions force the elderly into poverty or propel them back into the workforce or to rely on friends or relatives.
Ukraine spends around 15 percent of its GDP on its elderly, a high percentage among nations.
The nation also has one of the heaviest tax burdens on businesses. It is ranked 107th among 180 countries in the tax burden rating compiled by auditors PWC and the World Bank.
But these tax rates motivate many Ukrainians to avoid official employment or declare lower salaries, robbing the government and pension fund.
Recipients of pension payments by type and size of pensions as of Jan. 10
Ukraine’s pensions are low in general, averaging only $72 per month, but some categories of people – judges and military personnel – qualify for higher pensions.
Pension reform
Attempts to fix the pension system have stuttered for more than a decade as the nation ran up significant deficits in its pension system.
The Ukrainian government is now faced with a series of hard choices.
“We could easily optimize the expenditures of this fund,” Deputy Minister of Finance for European Integration Artem Shevalev told the Kyiv Post. “We could drastically change the qualifying parameters, like increasing the retirement age. We could also decrease the benefits, but after devaluation and inflation those pensions are already very low.”
Shevalev said the well-being of the retired population is crucial to the development of Ukraine’s domestic economy. But the International Monetary Fund, Ukraine’s key creditor, is insisting on cuts in state social security spending.
“The system has to provide resources for the people who need them most,” IMF representative Jerome Vacher told the Kyiv Post. “That’s why we need to push for things like means-testing ahead of anything else, because there’s a lot of work to be done here.”
In 2015, the government will spend nearly $10 billion on pensions.
Nevertheless, Ukrainian think tanks that research the country’s pension system say there is room for improvement without decreasing pensions.
“After the unified social tax cut, first of all, we need to start the verification of retired people and the recipients of social benefits, as no one has updated the registry for a long time,” Pavlo Kukhta, a pension reform expert at Reanimation Package of Reforms think tank, told the Kyiv Post. “We need to resort to supporting only the poor, old people – that’s all we can afford in our demographic and economic situation.”
Kukhta also said that the pension fund needs an independent audit to cleanse it of corruption.
Private pension funds
The national commission of state regulation of financial services market has registered 70 private pension funds.
Investing in private retirement plans is still not popular in Ukraine, but people are trickling in, Antonina Samoylova, director of the Administrator of Pension Reserves, which manages nine pension funds, told the Kyiv Post. The institution has been working since 2007 in many regions of Ukraine and has 4,500 clients across the country.
The debate between flat-tax rates and progressive ones heats up when it comes to taxing the rich.
“We don’t have a lot of clients considering the size of Ukraine, but our contributors are those who have deliberately chosen to invest in their retirement plan,” Samoylova said.
“The government is now holding talks with the IMF and the World Bank on improving the pension system to make current and future pensioners feel that their country is taking care of them,” said Lyudmyla Denysova, head of the parliamentary committee on social policy.
That process is likely to take years, however. In the meantime, a window of opportunity has arisen for those capable of convincing Ukrainians of the need to set up private retirement plans well in advance, because there’s no guarantee the state will be able to provide adequate pensions for a long time to come.
