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.
- 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.
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