The issue of pension reform in Ukraine is raised regularly. And governments have reported on conducting the reporm at least three times over the past 24 years.

However, even today, pension reform is still relevant, says Oleksandra Betliy, a leading expert at the Institute for Economic Research and Policy Consulting. Why so? Previous changes to the system were point changes, such as raising the retirement age for all or for certain professions.

At the same time, the approach to calculating pensions has not been significantly changed, and most special pensions that harm the fairness of the system remain in place.

The expert spoke about all this specifically for the Ekonomichna Pravda media. We share the material with you.

First: the terms. Ukraine’s pension legislation provides for three levels of the pension system. The first level of the pension system is actually the pensions currently paid by the Pension Fund: it is the one that people most often talk about when they complain about low pensions.

There is also a second level of the pension system, the funded pillar, but it has not yet been introduced due to imbalances in the first level of the system.

The third level of the pension system is non-state: bank deposits, investments in investment funds and non-state pension funds, and life insurance: it exists today, but it is developing very slowly. However, let’s talk about the reform of the first pillar of the pension system.

One of the main challenges facing the pension system is demographic. Against the backdrop of ultra-high mortality rates and high migration, Ukraine has a high rate of population decline and aging.

As a result, today one payer of the unified social contribution (USC), which is the main source of funding, supports one pensioner. The reason for this is not only demographic, but also the fact that informal employment remains high, and therefore no unified social contribution is paid for these workers.

Thus, according to the Ministry of Economy, 3.2 million people are currently working informally, while the total number of employed people is 12.3 million. At the same time, almost 8 million people aged 15-70 are out of the labor force for various reasons. 

The situation is unlikely to improve significantly, especially in the context of a full-scale war. It is important to note that the demographic challenge is also a characteristic of the modern developed world (just at a slightly slower pace), and therefore the retirement age is being raised in most countries of the world, and we cannot avoid it either. But it is important that there is a clear link: if you work longer, you have the opportunity to receive a higher pension.

That is why measures to de-shadow employment and encourage employees to work officially longer and pay the unified social contribution are of utmost importance. Therefore, the pension reform should help restore confidence in the system in order to attract informal workers to the formal labor market and, accordingly, to pay the unified social contribution. 

At the same time, the changes should be broader, as the 8 million people who are outside the labor market should also be brought into the labor market.

In order to accomplish this task, it is urgently important to correct the system’s shortcomings, including its unfairness, contradictions, and lack of transparency.

Today, no one can actually determine exactly how much pension they will receive because the calculation is not transparent. It all depends on the law under which a person retires, in what year, etc.

Therefore, the connection between what is paid and what is received is weak. At the same time, there is little trust in the system for various reasons, which also contributes to the increase in the share of informal employment.

However, retirement under different laws and approaches also indicates the UNfairness of the system. This is not about public officials, but rather about other categories of pensioners.

In particular, we are talking about the high pensions of judges: judges who have been making unlawful decisions for years receive high pensions that are ten times higher than the average pension in Ukraine (it is understandable that it is difficult to determine in hindsight which judges were honest and which were not, but such inequality in pensions is not about justice).

Another example of injustice is the determination of pensions paid under the special Chornobyl pension law. While liquidators who have not registered a disability receive only UAH 170 in pension supplements, people who had very little to do with the accident can receive pensions of UAH 10-20 thousand. 

In particular, today there is the phenomenon of pension migrants under the Chornobyl law: people move to so-called radio-contaminated communities and receive high pensions (according to court decisions that take into account only the “legitimate expectations” approach when making decisions). 

Or these are people who have registered disability due to Chornobyl even in 2023 and 2024, although there is a question of whether it is possible to determine after almost 30 years that the disability is related to Chornobyl and not to other causes.

Another category of pensioners that can be used to demonstrate injustice is the pensions of career security officers who have never fought at war but receive high pensions tied to the amount of money paid to today’s military. 

At the same time, the law on pensions for career military personnel does not cover the definition of pensions for the military who have been defending Ukraine since 2014 and came from civilian life.

Noteworthy, changes in pension legislation sometimes face appeals to the Constitutional Court regarding their inconsistency with the Constitution. There have already been several decisions on unconstitutionality and several appeals are currently under consideration by the CCU. 

This creates high fiscal risks for the pension system. In particular, a possible rollback of one of the steps of the previous stage of the pension reform – raising the retirement age for certain categories of workers – could create an additional UAH 50 billion hole annually.

Therefore, pension reform is urgent. It should increase the transparency and fairness of the system. This, in turn, should contribute to greater sustainability of the system through greater trust in the system.

Read the original article on the website of Ekonomichna Pravda.