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The impact of changes in second pension pillars on public finances in Central and Eastern Europe

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  • Balázs Égert

Abstract

This paper studies the impact of recent changes in second pension pillars of three Central and Eastern European Countries on the deficit and implicit debt of their full pension systems. The paper seeks to answer the following questions: i) what is the impact on the sustainability of Poland’s pension system of the decrease in the pension contribution going to the second pension pillar from 7.3% to 2.3% in 2011; ii) what are the implications of the recent changes on gross replacement rates; iii) does the weakening of the Polish second pension system have a different impact on pension system sustainability than a similar move in a Hungarian-style pension system with a defined-benefit first pillar and iv) how does Estonia’s temporary decrease in pension contributions compensated by temporarily higher future rates affect pension sustainability in that country. The simulation results show that in our baseline scenario the Polish move would permanently lower future pension-system debt, chiefly as a result of a cut in replacement rates. But using a combination of pessimistic assumptions including strong population ageing, low real wage growth and a high indexation of existing pension benefits, coupled with bringing in tax expenditures related to the third voluntary pension pillar and an increase in the share of minimum pensions leads to higher pension system deficits and eventually more public debt at a very long horizon. The simulations also suggest that the Hungarian pension reversal reduces deficit and debt only temporarily, mainly because of Hungary’s costly defined-benefit first pension pillar: the weakening of the second pillar is tantamount to swapping low current replacement rates (in the defined-contribution second pillar) against high future replacement rates in the defined-benefit first pension pillar. Finally, results show that the Estonian move will increase public debt only very moderately in the long run, even though this result is sensitive to the effective interest rate on public debt.

Suggested Citation

  • Balázs Égert, 2012. "The impact of changes in second pension pillars on public finances in Central and Eastern Europe," EconomiX Working Papers 2012-25, University of Paris Nanterre, EconomiX.
  • Handle: RePEc:drm:wpaper:2012-25
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    References listed on IDEAS

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    1. Monika Queisser & Edward R. Whitehouse, 2006. "Neutral or Fair?: Actuarial Concepts and Pension-System Design," OECD Social, Employment and Migration Working Papers 40, OECD Publishing.
    2. Andras Simonovits, 2011. "The Mandatory Private Pension Pillar in Hungary: An Obituary," IEHAS Discussion Papers 1112, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
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    Cited by:

    1. Janusz Jablonowski & Christoph Müller, 2013. "3 sides of 1 coin – Long-term Fiscal Stability, Adequacy and Intergenerational Redistribution of the reformed Old-age Pension System in Poland," NBP Working Papers 145, Narodowy Bank Polski, Economic Research Department.

    More about this item

    Keywords

    pension system; pension reversal; defined benefit; defined contribution; public finances; Central and Eastern Europe;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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