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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 Egert

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

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.

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  • Balázs Egert, 2012. "The impact of changes in second pension pillars on public finances in Central and Eastern Europe," Working Papers hal-04141069, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141069
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141069
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    References listed on IDEAS

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    1. Edward Whitehouse, 2007. "Life-Expectancy Risk and Pensions: Who Bears the Burden?," OECD Social, Employment and Migration Working Papers 60, OECD Publishing.
    2. Chlon, Agnieszka & Gora, Marek & Rutkowski, Michal, 1999. "Shaping pension reform in Poland : security through diversity," Social Protection Discussion Papers and Notes 20852, The World Bank.
    3. Peter Jarrett, 2011. "Pension Reforms in Poland and Elsewhere: the View from Paris," CASE Network Studies and Analyses 425, CASE-Center for Social and Economic Research.
    4. Monika Queisser & Edward Whitehouse, 2006. "Neutral or Fair?: Actuarial Concepts and Pension-System Design," OECD Social, Employment and Migration Working Papers 40, OECD Publishing.
    5. Andras Simonovits, 2011. "The Mandatory Private Pension Pillar in Hungary: An Obituary," CERS-IE WORKING PAPERS 1112, Institute of Economics, Centre for Economic and Regional Studies.
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    Cited by:

    1. Ágnes Orosz, 2013. "Large-Scale Transformation of Socio-Economic Institutions – Comparative Case Studies on CEECs. Background Paper 2: Comparative Country Study Hungary. WWWforEurope Working Paper No. 18," WIFO Studies, WIFO, number 46873, August.
    2. 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.
    3. Christoph Freudenberg & Tamás Berki & Ádám Reiff, 2016. "A Long-Term Evaluation of Recent Hungarian Pension Reforms," MNB Working Papers 2016/2, Magyar Nemzeti Bank (Central Bank of Hungary).
    4. Mario Holzner & Stefan Jestl & David Pichler, 2022. "Public and private pension systems and macroeconomic volatility in OECD countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(2), pages 131-168, May.
    5. Teodoras Medaiskis & Tadas Gudaitis & Jaroslav Me?kovski, 2016. "The Effect of Second Pillar Pension to Old Age Pension: Lithuanian Case," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 5(4), pages 20-31, December.
    6. Teodoras Medaiskis & Tadas Gudaitis & Jaroslav Mečkovski, 2018. "Second pension pillar participants' behaviour: the Lithuanian case," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 6(2), pages 620-635, December.
    7. László, Csaba, 2018. "A magánnyugdíjpénztári rendszer "elszámolása" ["Reckoning up" the private pension system]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 861-902.
    8. Gál, Róbert Iván & Törzsök, Árpád, 2020. "The savings gap in Hungary," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).

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    More about this item

    Keywords

    pension reversal; defined benefit; defined contribution; public finances; Central and Eastern Europe;
    All these keywords.

    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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