Pension Reform: Who Pays for the Feast?

05 10 2017

Having made its decision to disburse the next tranche under the extended financing program this April, IMF has brought an issue of reforms to the attention of our government this time again. Now the reforms have had to touch upon the pension system of Ukraine. There is nothing to wonder about as, according to the recently published researches, Ukraine has about 12 mln pensioners for about 12.3 mln payers of the single social contribution. More so as the average daily pension just slightly exceeds the poverty rate of USD 1.9 per day.

Therefore, active discussions of the pension reform started in spring 2017 and, yet on 3 October 2017, the Verkhovna Rada (Parliament) of Ukraine adopted the Law on Amendments to Certain Legislative Acts of Ukraine for Increase of Pensions (draft law No. 6614) The pension reform might have been as quick as lighting, but coincided with the other reform, the judicial one. Thus, lawmakers had to deal with the draft law on pension and draft procedural codes at the same time.

So, what changes does the pension reform provide for? According to the government, the pension reform would enable to increase pensions by UAH 200 to UAH 1,000. The minimum pension is expected to be increased up to UAH 1,452. But, how is it possible to increase pensions considering that Ukraine has one payer of the single social contribution per pensioner? Again, according to the government, such increase is possible by differentiating pensions depending on the length of pensionable service. Furthermore, they intend to improve the pension system and cut down non-relevant expenditures.

However, what is actually behind the differentiation of pensions depending on the length of pensionable service? Thus, pensioners will have the right to the minimum retirement pension if they have 35 years of pensionable service for men and 30 years of pensionable service for women. If the necessary length of pensionable service is not available, the minimum retirement pension will be proportional to the available length of pensionable service. For each full year of pensionable service in excess of 35 years for men and 30 years for women, the pension will be increased by 1 percent, without limitation of the extra length of service.

In addition, the law provides for a stage-by-stage increase of the length of pensionable service necessary to have the retirement pension. Thus, persons who have attained the age of 60 are expected to be entitled to the retirement pension and have, as of 31 December 2017, the length of pensionable service of at least 15 years. As far as women are concerned, the law keeps the rule that the retirement age will be gradually increased from 55 to 60 as the previous wording of the law required. However, starting from 1 January 2018, the length of pensionable service that will give a right to the retirement pension will be 25 years and then will be gradually increased to 35 years by 2028 (by 12 months of pensionable service each calendar year).

Furthermore, notwithstanding that a person may not have 25 years of pensionable service as of 1 January 2018, such person will still be entitled to the retirement pension if he or she has attained the age of 63 and his or her length of pensionable service is from 15 to 25 years. Persons who will not have necessary 25 years of pensionable service as of 1 January 2019 will also be entitled to the retirement pension if they have attained the age of 65 and their length of pensionable service is at least 15 years. Moreover, the necessary length of pensionable service will be increased with respect to both categories of persons to have the retirement pension gradually by 12 months of the pensionable service each calendar year until 2028.

Thus, according to computations of the Ministry of Social Policy of Ukraine, only 55% of Ukrainians who have attained the age of 60 will have the length of pensionable service of 35 years in 2028. Consequently, pensions will be increased not at the expense of the next increase in the burden of the Pension Fund, but by reducing the number of persons who will be entitled to claim the full pension.

Published: Yurydychna Gazeta, October 04, 2017

Author: Valeriya Savchuk