The launch of the accumulative pension system in Ukraine was one of the election pledges of President Volodymyr Zelensky. The ruling 244-member Servant of the People’s manifesto expands on that idea and contains the task of setting in motion a second level of the accumulative pension system, otherwise nationwide mandatory savings.
Ukraine’s population is aging fast. In 2013, for example, and in a few years on, 500,000 people were born and about 600,000 died. However, in recent years the birth rate has been steadily falling. In 2020, with a mortality rate of 615,000, the birth rate of 289,000 reached its anti-record.
By 2050, the population of Ukraine may fall by 8-10 million people, according to estimates by the Institute of Demography. Taking into account the explicit trends, the population of Ukraine may well decline to 30 million people. As a result, the workforce will drop too, which is a significant economic issue.
In general, even now, without individual entrepreneurs, the number of single social contribution payers and retirees is approximately equal. In the future, this ratio will get worse. As of now, 25 percent of the population is over 60. By 2050, the share is expected to reach 35 percent.
As such the reform is extremely complex and requires many law amendments, but everything big starts with something small. The Office of Simple Solutions and Results has put together a roadmap for taking the country out of the pensions gridlock. To achieve that, we propose to enforce the concept of an accumulative pension system.
It is expected to be launched through a 2 percent reduction in single social contribution and a 2 percent reduction in personal income tax. These 4 percent will then be redirected to the savings system: 2 percent paid by employees and 2 percent by the employer. This will allow us not to overload business and workers since the burden will generally remain the same. Although, there are of course some groups that call for an increase in taxation, but we advocate strongly against that.
Under the reform, all employees will be offered to join the accumulative pension system. Individual entrepreneurs, farmers, and self-employed will be able to pay contributions voluntarily.
It will also be possible to navigate between two pension systems and change them if needed. Draft law implies that participants can choose between authorized pension funds and bank pension deposits.
The accumulative pension reform is also a generation-long reform that will take around 30-35 years. Although that seems like a long shot, the benefits will be astounding. As the economy will continue to grow, the average salary in the country will go up too. In 2023, at the time of the expected start of the accumulative system, the average wage is predicted to be Hr 17,600 hryvnias monthly. The growth of the average salary will certainly contribute to the growth of budget revenues from single social contributions and personal income tax. When the accumulative pension system is launched, the budget revenues from these sources will slightly decline, but then will grow again in 2024.
At the same time, the level of savings based on the tax base of accumulative fees is estimated at Hr 86 billion in 2023. In general, this is about 1.3-1.4% of gross domestic product. And the five-year accumulation of these amounts will bring the level of pension assets to 5-6 percent of GDP by 2027 and 10-11 percent of GDP by 2030.
The implementation of the proposed reform will increase the level of social protection of older people. They will receive a lifelong pension that can be inherited. In addition, accumulated funds will be available as a significant lump sum payment in certain cases.
Furthermore, the reform will also revive the stock market and boost economic growth by increasing the investment ratio. Also, it will help deliver the Servant of the People’s election pledges.
The reform we propose was put together with the help of Halyna Tretyakova and the Ministry of Social Policy, and we presented it to a group of Ukrainian parliamentarians. On May 21, 2021, the reform will be discussed in the committee again.
Although the reform is both complex in essence and difficult to enforce, I encourage members of the Ukrainian parliament to approach the Office of Simple Solutions and Results so we could work together on bringing to life this momentous change.
Mikheil Saakashvili has been the chair of the executive committee of the National Reforms Council since May 7, 2020. He served as governor of Odesa Oblast from May 30, 2015, to Nov. 9, 2016. He was president of Georgia from Jan. 25, 2004, to Nov. 17, 2013.
