Can pensions cuts fix public budget lacks?

(Photo: I.Vukša)

The retired in Serbia, some 1,7 million of them, u receive RSD 24.312 on the average. A total of 60% of them retired for age, 19% the invalid pensions, while 21% receives family pensions. Some 400.000 retired receives a minimal amount – some RSD 10.000.

The state does not have sufficient funds for pensions but their decrease only will not be sufficient for the pension system sustainability if cuts are not followed by financial consolidation in all sectors, it was concluded at yesterday’s meeting on pension system reform organized by Danas Conference center.

Pensions will most likely be cut progressively but not linearly, Miladin Kovacevic, an analyst of Macroeconomical analysis and trends forum (MAT).

According to him, IMF also recommended Serbia parameter reforms comprised within the latest changes of the Law on the retired and disabled insurance. The reforms such as increase in age and implementation of penalties for premature retirement as Kovacevic says are not to be questioned but they can provide results only in the long run, 15-20 years.

Miladin Kovacevic (Photo: mc.rs)

Repeating that pensions cuts is not a long-term solution after all, the expert underlines that the sustainability of the first pension system pillar – governmental pensions, will depend on next reform steps in the retired and disabled insurance system.

The Financial Manager at the Fund for retired and disabled insurance, Ivan Mimic eminded that as of 2003 until today, there have been a few reforms of the pension system where the expected results were generated when it comes to expenditures but not when it comes to profits which is yet to be solved.

The Fund provides 58%, in total pensions amount while 42% is covered by the state while in the European countries funds provide 80%, and governments 20. The average pension consuming in Serbia totals 17 years for men, 16, 6 for men and 19 for women, and there is 1,72 million of the retired ones in total.

If not pensions, what else?

Miladin Kovacevic adds that the aging process speeds up, pointing out that pensions are an important category for preventing inequality deepening. Reforms cannot be avoided, neither can pensions cuts but still the biggest problem is that the country does not have developed social policy. He agrees that salary cut is not a popular solution but he says savings must be generated somehow and that tax fees increases which are already up to 65% would be too much for weak economy. On the other hand, if taxes are decreased, we have to find compensation to maintain the level of essential income.

The WB suggested VAT increase up to 24%, contributions increase as well but there is a danger of employers running into grey economy, Kovacevic said.

He thinks capital increase of the Fund is possible but not through money (which lacks) but it can be done through state-owned property, concessions payment collection, renting, etc.

The analyst of the Institute for Economy, Mahmud Busatlija, agreed with it stating that the state must not sell state-owned and construction site but to rent it and to pay the funds to the Fund.

Mahmud Busatlija

He also thinks that a portion of capital in public companies such as Telekom should be transformed into preferential shares which bring only profit without management wherefrom a part of accumulation would be redirected into fund.

Apart from that, the Fund should operate as an investment one and to provide advantage to trading into its securities. Busatlija reminded that the Fund has been running trials against the state with respect to its property in spas as well as that its shares in Energoprojekt have been taken away from it, where it was the founder and a co-owner.

- Pension value is slowely decreasing even without reforms and they are groupped in pure consumption, so their cut endangers the ones producing and selling because their work becomes uncompetitive- Busatlija warned.

Savings calculation

Savings which the budget would have through salaries and pensions cuts in public sector, were calculated in MAT based on a few simulations they did which imply different percentage and cuts combinations.

According to one of the simulations which MAT did, linear cuts of 10% would generate annual savings of RSD 67, while cuts of 15% would generate RSD 101 billion.

According to Miladin Kovacevic, in the first case savings totals some EUR 567 m and some 856 m in the second case.

If, as he said, salaries decrease by 10% linearly and pensions progressively, savings of RSD 49 billion would be generated.

Kovacevic mentioned and example that in the case of linear salary cut of 15% and progressive cut in pensions, the budget would save RSD 74 billion.