Pension reforms as a permanent global issue and design of thepension system – the case of Croatia

The aim of this paper is to connect the actual fiscal conditions and the results of the implementation of the pension reform according to the model of the World Bank in Croatia in the period 2002–2019. Since 2002 the Croatian pension system has been based on three pillars: pay-as-you-go (I), mandatory pension funds (II) and voluntary pension funds (III). Fiscal and demographic reasons were cited as key reasons for implementing pension reform. Current results show that the state of the pension system has deteriorated compared to the period before the reform. Pension expenditures in the first pillar continuously grow and exceed revenues, which is covered by transfers from the budget. The transition cost due to the second pillar is rising, burdening public finances and is several times higher than the income of mandatory funds. There are no permanent sources to cover the transition cost. Formally, private property on the private accounts of members is used as public assets. Governments once use the assets of funds to finance the budget deficit by allowing some members to transfer assets and transition from pillar II to pillar I. The other time, at agreed auctions of the central bank, government bonds are purchased from the assets of the funds in order to purchase new issues of the central government. In the third case, the central bank, in agreement with the government, lends to pension funds that then buy government bonds, creating a financial whirl of helicopter money. While deficit of pillar I and transition cost of pillar II are steadily growing, the long-term design of the fiscal and economic sustainability of the pension system is only a secondary goal compared to short-term political goals. Is it time for re-reform?