NCPA - National Center for Policy Analysis

SLOVAKIA'S PENSION REFORM

May 17, 2006

Politicians in Europe and America who remain in denial about the huge black holes in their state pension systems should take a look at the remarkable reforms pushed through by Slovakia, says Marian Tupy of the Cato Institute.

Under the new system, Slovakia's 2.2 million workers are given a choice: they can either remain fully reliant on the pay-as-you-go pension system or take a part of their social security contributions and invest it in personal retirement accounts managed by a number of different investment funds, says Tupy.

Currently:

  • Social security contributions in Slovakia amount to 28.75 percent of gross wages; workers can now put nine percent into their personal retirement accounts, nine percent goes to the old system and the balance covers other types of insurance or administrative costs.
  • Roughly 1.1 million people have opted for the personal retirement account and it is expected that an additional 300,000 to 400,000 people will switch over.
  • Their savings, currently worth about 8.5 billion Slovak crowns ($0.27 billion), are managed by eight investment companies, and each of those companies manages three pensions funds tailored for growth, balance and conservative returns.
  • Young workers can choose from all three funds, while older workers --15 years or less from retirement -- can only choose from the last two; the pension companies can make a majority of their investments abroad, but 30 percent must remain in Slovakia.

Moreover, reforms have gone smoothly, except for the performance of Socialna Poistovna, the state-owned social security provider, which has been charged with the collection and passing of pension contributions onto investment funds; however, once its antiquated IT system gets its long-awaited overhaul, the contributions should flow from the state coffers to the investment funds more easily, says Tupy.

Source: Marian L. Tupy, "Slovakia's Pension Reform," Cato Institute, January 24, 2006.

For text:

http://www.cato.org/pub_display.php?pub_id=5414

 

Browse more articles on Tax and Spending Issues