The great pensions theft in Eastern Europe

Friday 13 April 2007, by Adam NOVAK

In pension provision, like in taxation, several New EU member states have become guinea-pigs for ultra-liberal experiments that replace the insurance and solidarity-based retirement system with individual savings accounts, managed by commercial banks and stock brokers. In the following lines, we attempt a «non-technical» description of the
different pension schemes existing in the new post-communist member states of the European Union, and the underlying dynamics of the neo-liberal offensive. In the second part of this article, we look at the challenges the unions are facing in those sectors, both at the national and European levels.

There is great variety in the retirement pension systems across Eastern Europe, and most schemes appear quite complex. But we cannot leave this question to "experts" or "technicians" - because our choice of pension system is a central element of the type of society we want to build. Do we accept an individualistic, “financially-oriented” society, or do we prefer a society made for people, based on social cohesion and solidarity?

The first pillar

First introduced in Germany at the end of the 19th century, at the initiative of chancellor Bismarck, pensions based on the principle of social insurance are the most common form of pensions in the European Union - East and West. They are compulsory for salaried workers, and (depending on the country) for some categories of self-employed persons.
The amount of these pensions is individualised, because they vary according to the contributions paid.

Nevertheless, these pension schemes introduce solidarity mechanisms within and between generations. For example, several countries guarantee minimum pension amounts or take into account periods of full-time education, unemployment, sickness, or maternity leave. Women receive pensions on the same basis as men, though their life expectancy is longer.
The main threats to this system in the new member states are the massive expansion of part-time work (particularly for women) and job precarity for young people. As a consequence, many working people, particularly women, no longer make regular contributions throughout their working life, and these gaps in insurance cover lead to lower final pensions.

The massive growth in precarity also has a dramatic impact on the total amount of pension savings. In Slovakia, almost 20% of working people are notionally self-employed, usually because their sole employer wishes to avoid labour code restrictions on firing and overtime, and to reduce contributions to the social security system, including the employers’ contribution to retirement pensions. The self-employed person is required to pay pension insurance at a much higher rate, corresponding to the ’employer’ and ’employee’ contributions under the traditional system. There is an obvious incentive for the self-employed to falsely depress their declared income, so as to enjoy a higher take-home salary, at the cost of lower tax and social security coverage. With low wages and high unemployment, many NMS workers have accepted, even internalised these risks. The impact - in low pensions when they retire - is something they often prefer not to think about...

The common point between the various ’first pillar’ types of pension is that they are managed within the framework of a distribution system. This means that the desired pension level is fixed politically, and the necessary contributions are actuarially calculated over the working life, and for the entire working population. With constant re-adjustments as our political idea of solidarity with the older generation evolves. The system is funded on a "pay as you go" basis - those of us working today pay the pensions of today’s retired, and rely on future workers to continue paying in the future, when we will receive our retirement pensions.

Even though some convergence policies are being introduced at the European level between the different Members States there is no “harmonization” of the amount of pensions. Rather, these amounts depend on negotiations inside each Member State. They depend however, largely on the available “wealth” that each Member State allocates to the pensions paid out; and on the salaries received and the contributions paid into the “social insurance” systems.
The annual minimum pensions in the post-communist NMS are among the lowest in Europe , ranging from €612 in the Czech republic to €1,752 in Poland . In comparison, Portugal’s minimum is €2,679, while Austria guarantees €8,280 for a single person and €12,671.88 for a couple with supplements for dependant children.

Most European countries require both employers and employees to contribute to old age pensions. The ratio varies from 40:60 in France or Hungary to 50:50 in Germany, Austria and Poland. Some New Member States are considering removing or drastically reducing the employer contribution, but at current wage levels, this would be impossible without dramatically increasing the number of working poor.
The percentage of gross salaries allocated to pension systems varies between the NMS, but is comparable to Western European countries. Poland (19.52%), Germany, (19.5%) Austria (22.80%), Hungary (26.5%) and Czech Republic (28%) For some countries we did not find specific data on retirement pensions, but even here, the global contribution to Social Security as a % of gross salaries is comparable to Western Europe: Latvia: 33.09%, Portugal: 34.75%. The lowest level of contribution is in Cyprus (12.4%) and the highest in Belgium (47.37%).

Each country fixes a minimum legal age at which workers have the right to retire. EU countries are gradually aligning on 65, and ending the system of lower retirement ages for women. Many NMS, including Slovakia and Hungary, had lower levels, but are gradually raising these limits. In socialist Czechoslovakia and several other countries, women enjoyed a lower minimum retirement age, as well as the right to draw a pension one year earlier for each childbirth. These systems are already being gradually eliminated.

The second pillar

In addition to the basic pension paid by the public social security scheme, all new EU member states have now introduced "occupational" "vocational" or “supplementary" pensions. In the neo-liberal model this is the "second pillar" of retirement pensions. The goal of these supplementary schemes is to allow higher-paid workers to accumulate pension savings above the minimum, and thereby to shift responsibility for pensions towards the individual.

Some old EU member states still enjoy “defined benefits” systems, where the employer undertakes to grant a benefit (a supplementary pension) whose amount is pre-defined. Most of the time this corresponds to a defined percentage of final salary, depending on the number of years worked in the company. Such systems are either directly managed by employers or by an intermediary financial institution.

In theory at least, companies make reserves to cover their pension commitments, In this type of scheme, there is an internal solidarity system between all the contributors; for the same contribution paid, each beneficiary holds the same right to a supplementary or vocational pension, at the time of the payment of the contribution, regardless of age or gender. This type of supplementary scheme based on “defined benefits” is largely widespread in those countries with a long tradition of occupational pension funds, like the UK (despite the post-Thatcher era wave of liberalism), Ireland, the Netherlands and the Nordic countries.

Employers and governments have been trying for many years to shift the risk and responsibility for pensions to the workers, leading to the gradual replacement in all countries of "defined benefit" with "defined contribution" supplementary pension scheme, where employers guarantee not a final amount of the supplementary pension but a fixed contribution to be paid (as a % of the gross salary). These schemes are being introduced mainly in Southern Europe and, because of pressure from international financial institutions, the World Bank, the International Monetary Fund, in all of the new Member States.

In Western Europe, the share of workers covered by supplementary pension schemes varies greatly from country to country, and is the result of negotiations and historical factors. In many cases, supplementary schemes provide a small part of final pension income, and their main function is to allow specific groups of well-paid or unionised workers and supervisors to accumulate additional savings for their retirement. However, in a growing number of new Member States, these "supplementary" schemes have been imposed on most or all workers through laws.

The death of pension solidarity

In an enormous triumph of neo-liberal ideology, individual pension savings accounts are being imposed as the main pillar of the retirement pension system. Solidarity within and between generations is abolished, and workers face the risks of financial management.

In reality, the "second pillar pension" is a system of compulsory individual savings, without any element of solidarity. The final benefit is not and cannot be guaranteed. And while in the “defined benefits schemes” the risk is carried by the company, in the case of the “defined contributions schemes” the risk is carried by the contributor, which means that he is responsible for making sound decisions regarding his investments, throughout his working life...

The abolition of solidarity between contributors has an immediate effect on women, since they have a longer life expectancy. When a woman decides to convert her "defined contribution" pension capital accumulated during her career into an annuity, she will receive a lower amount than her male counterpart, reflecting her longer life expectancy.
The shift to "second pillar" pensions also contains an enormous anti-democratic manipulation. As explained above, the "first pillar" was funded on a "pay as you go" basis - there are no accumulated savings to pay today’s basic state pensions, so today’s workers pay for today’s pensioners, and expect that tomorrow’s workers will pay when today’s workers retire. This was certainly the system in Slovakia. In contrast, the second pillar is comprised of individual savings accounts. So today’s workers are saving into their pension accounts, and hope that they will save enough through their career to pay for a decent retirement. In the second pillar, there is no mechanism to pay the pensions of those who are already retired, or will retire before they have had time to build up a "second pillar" pension.

This creates an enormous hole in the social security system: some Slovak economists think we will need to find additional funds equivalent to 20 years of pension income under the old system. The neo-liberal Dzurinda government introduced the "second pillar’ shortly before voters replaced them with a social democratic-populist-nationalist coalition that promised a more socially responsible management. Following the advice of the World Bank, Dzurinda’s plan was to fund the current-pension shortfall through privatisation receipts for the first few years, so that the unsustainability of the system would become apparent only after most younger workers had become familiar with and attached to their individual pension saving schemes. The World Bank advisors predicted that it would then be too late to go back to the old pension system, and that future governments of any political colour would be obliged to either continue privatising or to make massive cuts in public services. Eastern Europe’s relatively good health and education systems would be cannibalised and privatised, just as in those African countries where the international financial institutions have managed to dictate economic policy.

What to do?

The future of pensions is a challenge beyond national borders. Despite national specificities, the social protection systems, including retirement pension systems, face the same challenges in all the industrialised countries. Several New Member States, particularly Slovakia, Estonia and Romania, play an important role as testing ground for extreme anti-social policies like the flat tax and the ’second pillar’ of pension reform, never previously attempted within the core capitalist countries. Other countries are pushed to respond, in a ’race to the bottom’, while the representatives of the guinea pig countries become an ideological lobby for neo-liberalism at the European level.

The European Trade Union Confederation (ETUC) Congress in Prague in May 2003 identified three major challenges for the trade unions and the public authorities in the Member States and at the European level.

 The priority lies in the reinforcement of the legal pension schemes because these are based on solidarity and because they are elements of social cohesion. The introduction of supplementary schemes should not be performed to the detriment of ’first pillar’ Social Security schemes, as has already happened in most of the New Member States.

 Unions and progressive forces should oppose the freezing or slow-down of pensions on the basis of manipulated statistics, or through irresponsible tax reductions or social security contribution reductions, or through reducing the obligation of employers to contribute to pension systems.

 Successful reforms to which all concerned populations would adhere, should be implemented through social dialogue that includes social partners, in transparency, and with respect to the principle of equity among individuals of the same generation but also of different generations.
Of course, the challenge facing the progressive movement is to propose our own solutions for guaranteeing sustainable financing for the social protection systems we want, and concretely for the pension systems.

Because although pension expenses represent 48% of total social protection expenses and absorb 12.6% of European wealth (GDP), a growing number of people already receive inadequate pensions. In the 15 old EU member states, 17% of people above 65 receive retirement benefits below their national poverty line. Most of these concerned are women. The situation in the New EU Member states is even worse. Retirement benefits in these countries are generally 40% lower than the EU-15 average.

Protect the right to work

The durability of pensions financing is undermined by changes at both ends of our working life: young people are entering the labour market later and later, while older people are leaving the labour market earlier and earlier.
The security and amount of tomorrow’s pensioners’ benefits depend on present conditions and situations. As well as dealing with the acute issues of pension reform, we must embody “acts of prevention” into the framework of public employment policies, within the corporate sector and in the framework of social dialogue. Prevention means taking a new approach to employment policies for young people, particularly as regards access to the labour market. Today, it is increasingly difficult for young people to enter the labour market, even though their average level of school qualifications is rising (the proportion of young Slovaks with a university degree has more than doubled since 1989). But once they enter the market, these young people are often offered precarious contracts or "trainee" positions, together with mediocre salary conditions. No wonder that hundreds of thousands of young Poles, Slovaks and Lithuanians in particular have emigrated to Britain, Ireland and Sweden since 2004.

Meanwhile, less than half of all EU residents age 55 to 65 are still economically active, most of the time because they have been sacked too early, i.e. before the legal age of retirement. Across the new member states, the situation is even worse. Those who were trained in the socialist system have found it harder than the younger generation to adapt to the logic of the new system. And poor working conditions, low hygienic standards and security concerns across Eastern Europe mean that more workers are injured or exhausted earlier... In addition, most bosses have a clear policy of age discrimination.

In many cases older workers are in work only because they are able to accept cut-rate wages, either because they have no choice, or because the reproduction of their labour power is less expensive (they own their own accommodation or occupy an apartment benefiting from controlled rent, they have none of the mortgages or credit cards or other forms of modern debt that already burden the post-socialist generation.) In any case, with most older people already outside the workforce, why increase the legal age of retirement? Why not think of ways to offer older people meaningful work, which corresponds to their strengths (experience, reliability) and their physical limitations. Of course, that would require a revision of investment policies, and greater investment in research and development and in modernizing production equipment and processes, for example...

In any case, the ’prevention’ principle means that quality jobs for everyone should be developed today; rather than the plethora of fixed-term or part-time, temporary jobs, and undesirable contract situations that are in vogue from Tallinn to Sofia. The right to training throughout our working lives should become a reality. And the fight for gender equality and equal pay for women must remain at the centre of our concerns. In other words, opportunities beyond mere uncertainty of employment should be offered. Because the poor workers of today are the poor pensioners of tomorrow.

This article draws on discussions at the seminar on pensions in South-East Europe, organised on 15-17 September 2006, in Radovljica, Slovenia, as part of a Balkan labour networking project supported by Alternatives-International and the Slovenian Confederation of Trade Unions (ZSSS). We particularly thank Henri Lourdelle of the European Trade Union Confederation, who’s training presentation provided both the structure and many of the statistics on which this article is based.

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