We need 37.5% insurance to pay pensions – Bulgaria

Pension contributions must more than double their current level to cover pension costs. Currently, actual contributions to the State Social Insurance (DOO) amount to 16.3%, as more and more people are also covered by the second pillar (that’s why 5% of total contributions go to the second pillar). In order to balance the system’s revenues and expenses, the required contributions in 2023 will be 37.5%, i.e. more than 20 percentage points higher. This is written in the new annual actuarial report of the National Institute of Social Sciences, published today.

These analyses are among the most important for the insurance system, as they make assumptions and forecasts for the coming decades until 2070, which apply to all of us – both as workers, pensioners and taxpayers. In them, various alternatives for the development of the system are usually proposed – for example, by increasing insurance or retirement age, or by limiting the growth of pensions and thus limiting costs. Due to the major changes caused by the pandemic, no actuarial report has been published since 2019. This makes this year’s actuarial report even more interesting.

Overall, the forecasts of NIH experts are more pessimistic than those expected in 2019, despite the improvement in demographic and macroeconomic conditions. In the years following the pandemic, pensions have improved significantly, but most of the costs of these measures have been paid through central budget transfers, rather than from the insurance system’s own revenues. “The result, the authors of the report note, is inevitably a widening of the gap between DOO’s revenues and expenditures, as well as its dependence on the state budget”.

How pensions will grow

Forecasts show that in the coming years, Swiss regulations will modernize pensions at an increasingly slower pace. If pensions rise by 11% from July 1 this year, the increase will be 8.7% next year, 4.6% in 2026 and then continue to decline to 2.6% in 2070. In recent years, pensions will be better relative to insurance income in the coming years. In 2023, the average pension will be 55% of the average insurance income – this is the so-called replacement rate. In the coming years, it will reach or even exceed 56%, but this will also be its highest value.

In the long term, the income replacement rate will fall to around 43-44%, reaching 43.1% in 2060. This also means that the pension system will be less generous. Experts point out several reasons for this, such as the inclusion of insurance income for the entire working life of people who started working after 1999, and not just the “golden” years. The Swiss rule itself will also have a negative impact, as can be seen from the forecast data, because it takes into account the growth of insurance income and inflation, which is why pensions will grow slower than average insurance income (it assumes that low inflation will pull them back).

An important factor in the size of the state pension is the adjustment (reduction) for those who receive a second pension from the universal fund. This correction is necessary because, in their insurance path, the state pension fund receives a smaller amount of insurance contributions for these people. The reduction will not hurt them – they can still receive additional payments from the second pillar. This year, the DOO pension for people born after 1959 was reduced by 10 to 11%. This share will increase and reach around 20% by 2040 and around 25% by 2052, since the entire accrued pension service of retirees after 2040 will cover the period after 2001 and be provided by the universal pension fund, NOI explains.

What will be the next pensioner?

Under the conditional, the number of people receiving long-term service and age pensions will continue to decrease, while the number of people receiving disability pensions and insufficient service and age pensions will increase. Although the number of disability pensions has been decreasing in recent years, it has reversed from the beginning of 2023 and the number has begun to increase. Actuaries at the Norwegian National Institute for Health and Welfare recalled that the reason is the changes in the medical profession regulations in 2023.

The forecast shows that if pensioners who received personal disability pensions accounted for 18.6% of the total number of pensioners who received labor pensions last year, this proportion will reach 24.5% by 2040. In other words, one in four pensioners will be disability pensioners, rather than pensioners with full insurance experience and full age.

Nothing good is waiting for us in terms of the dependency between the insured and the pensioners. In 2023, 68 out of every 100 insured persons will receive a labor activity pension. After 2040, due to factors such as the aging of the population, an increase in average life expectancy and a decrease in the number of employed people, the value of this indicator will rise significantly. According to the forecast results, in 2060, there will be 81 pensioners receiving a labor activity pension for every 100 insured persons, i.e. fewer and fewer workers will have to support an increasing number of pensioners.

Two situations

The actuarial reports propose two alternative courses of action. They were developed for informational purposes.
What are the consequences of possible decisions to improve the system balance in the coming decades?

One scenario is to gradually increase insurance contributions For those born after 1959, the proportion of insurance income has increased by 1 percentage point from the beginning of 2025 to 15.8%. After that, it will continue to increase by 1 percentage point each time. It will increase every five years until it reaches 19.8% of insurance income in 2045, which is a total of 5 percentage points higher than the current level of 14.8%.

The impact of the increase in insurance contributions on the income of limited liability companies will be significant. By 2025, the income of limited liability companies will increase from 6.4% of GDP to 6.7%. At the end of the period, the proportion of insurance contribution income to GDP will increase from the current insurance level of 6.2% to 7.7%.

The amount of transfer payments from the state budget to fill the funding gap is expected to exceed 48% of total expenditures by 2027, a decrease of 2.4 percentage points. By 2025, insurance contribution income from the Pension Fund will cover 70% in the medium term and 68% of the Pension Fund’s pension expenses by the end of the period.
This is shown by LLC labor activity, which is a very healthy level, especially in the context of current imbalances.

The second case allows changes to be made in Art. 100 The provisions of the Social Security Act (Swiss Rules) update pensions only according to the consumer price index, instead of half its increase and half the growth of insurance income. This will slow down the growth of pensions, because the modernization rate will be lower. Pension costs will fall, but pensions will also lag further behind income, because the increase will be 2.4% next year, 2.8% in 2026 and 2% each in the following years. In this case, the generosity of the pension system is expected to deteriorate,
The National Statistics Office said that income replacement rates are falling. Under these assumptions, budget transfers to cover the gap would fall to around 44% by 2027, and income from insurance contributions to the pension fund would fall to around 44% by 2040.
It will cover 67% of the pension costs of DOO labor activities and 62% at the end of the period.

suggestion

Analysts point out that the main challenge in the coming years will not be to curb the growth of pension costs, but to find suitable sources of financing. However, they point out that the possibilities of increasing social security revenue in this area are limited given demographic changes and the decline in the number of insured persons.

The report also said that extending the insurance period before exercising pension rights would have a positive impact not only on the long-term financial situation of the system, but also on the adequacy of pensions. However, it also stressed that by 2037, age and seniority will continue to increase, so introducing stricter retirement conditions will seriously deteriorate pension access.

As a possible solution, experts suggest reviewing some existing provisions that lead to an increase in the average duration of pensions without a longer insurance period. They also suggest that practices that undermine rather than strengthen the “contributory rights” relationship need to be reconsidered. Almost all legal changes in the past year or two have been in this direction.

The report does not call for an increase in insurance. Its authors consider that such a measure would be a very unpopular decision that would have a negative impact on people’s disposable income and the competitiveness of our economy. Instead, they point out that a better balance could be sought between the social security and insurance functions of limited liability partnerships, without neglecting the adequacy of pensions. One of the solutions outlined in this context is the determination of a minimum pension that would protect pensioners from falling into poverty, but also involve other social protection systems in our country. It also points out the need for a predictable mechanism for updating the pension cap so that all pensioners are updated.

Diliana Dimitrova,Now“