Reforming old-age pensions systems in Central and Eastern European countries in transition

This paper investigates the need and the options for reforming the inherited public pension schemes in Central and Eastern European countries moving from a centrally planned to a market-oriented economic structure. Pension expenditure as a percentage of GDP in the former centrally planned economies are still somewhat below the (unweighted) average experienced in the OECD area. Nevertheless, the burden on the economy in the reform countries is considerable and going to rise starkly unless major reforms are undertaken. In addition, the current pension systems exhibit various deficiencies at microeconomic level (in the area of the benefit formula, retirement age, indexation procedures, financing and taxation) which need to be corrected in order to reduce distortions on individual labor supply and saving decisions. The pension models in mind by the reformers in economies in transition (ETs) range from basic public pensions (on a universal or means tested basis), to a two tier public system (consisting of a basic flat rate plus a limited earnings related pension scheme), to an earnings related public scheme targeted toward the lower and middle income levels. In all cases any additional income requirement for old-age would be covered by private provisions (on mandatory, collective or voluntary basis) under appropriate public regulations. This paper provides a preliminary assessment of three main options for going private, namely (i) the social security debt — government asset swap; (ii) the conversion option (Chilean approach); and the tax induced phasing in-phasing out option. The paper concludes that private and funded options may play some role in the solution of the public pension problem, but the scope still remains uncertain. Copyright Springer-Verlag 1993