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Pension reform, growth, and the labor market in Ukraine

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  • Riboud, Michelle
  • Hoaquan Chu

Abstract

In recent years -as a result of economic contraction, declining employment and real wages, and changes in labor market behavior- Ukraine's tax base of the social security system has declined, threatening its sustainability. About 40 percent of the labor force works in the informal sector, paying no taxes, and many members of the formal workforce underpay taxes because they also do informal work. Using a model that links the socialsecurity system, the labor market, and the macroeconomy, the authors ran simulations to assess the sustainability of the current pension system and the relevance and viability of possible reforms. All simulations assume economic reform and the resumption of growth. They conclude: (1) Economic contraction is not the only cause of problems with the pension system. To reverse current trends, most of the labor force would need to be working in the formal sector -an unlikely event, given current incentives. (2) Reform is essential. Restoring the former system would be too costly, and maintaining the status quo would make the system unsustainable. (3) Reforms focusing on short-term budgetary effects and neglecting the interactions between the social security and the labor market are likely to fail. (4) Raising the retirement age to 65 would have a significant financial impact, but would need to be accompanied by deeper structural reforms. Raising the retirement age quickly may entail the least political cost, as many old people are currently working. (5) For the deeper structural reforms needed, introducing a funded-tier should be considered. It would be an effective way to correct distortions and restore credibility. (6) Introducing such reforms will be costly and affect several generations of workers and pensioners in different ways. Tradeoffs must be carefully evaluated.

Suggested Citation

  • Riboud, Michelle & Hoaquan Chu, 1997. "Pension reform, growth, and the labor market in Ukraine," Policy Research Working Paper Series 1731, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1731
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    References listed on IDEAS

    as
    1. Barr, Nicholas, 1992. "Economic theory and the welfare state : a survey and interpretation," LSE Research Online Documents on Economics 279, London School of Economics and Political Science, LSE Library.
    2. Vittas, Dimitri, 1995. "Sequencing social security, pension, and insurance reform," Policy Research Working Paper Series 1551, The World Bank.
    3. Corsetti, Giancarlo & Schmidt-Hebbel, Klaus, 1995. "Pension reform and growth," Policy Research Working Paper Series 1471, The World Bank.
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    Cited by:

    1. Roger Charlton & Roddy McKinnon & Lukasz Konopielko, 1998. "Pensions reform, privatisation and restructuring in the transition: Unfinished business or inappropriate agendas?," Europe-Asia Studies, Taylor & Francis Journals, vol. 50(8), pages 1413-1446.
    2. Marek Gora & Grzegorz Kula & Magdalena Rokicka & Oleksandr Rohozynsky & Anna Ruzik, 2008. "Social Security, Labour Market and Restructuring: Current Situation and Expected Outcomes of Reforms," ESCIRRU Working Papers 5, DIW Berlin, German Institute for Economic Research.
    3. Marek Góra & Oleksandr Rohozynsky, 2008. "Social Security Influence on Labor Mobility: Possible Opportunities and Challenges," ESCIRRU Working Papers 7, DIW Berlin, German Institute for Economic Research.
    4. Becker, Charles & Paltsev, Sergey V., 2004. "Economic Consequences of Demographic Change in the Former USSR: Social Transfers in the Kyrgyz Republic," World Development, Elsevier, vol. 32(11), pages 1849-1870, November.

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