Aleksieiev V. S.

Oles Honchar Dnipro National University (Ukraine)

Pension Reform in Ukraine: Key Issues

The Pension reform has been recently adopted by the Ukrainian Parliament. Prime Minister of Ukraine Volodymyr Groysman at a Government’s meeting on May 7, presented the main provisions of the draft law of Ukraine "On amendments to some Laws of Ukraine on increase of pensions" offered by the Government in the framework of the pension system, which should be triggered starting 1 October 2017.

While presenting the draft law, Volodymyr Groysman stressed that the core objective for the Cabinet of Ministers has been and remains the development of the national economy and the opportunity to give citizens what is "rightfully theirs". To this end, at the beginning of the year the Government increased the minimum wage twofold and considers now the issue that will allow the Government to increase retirement payments.

"During the year we adopted a decision to increase the minimum wage twofold and we are committed to increasing pensions for retirees. The Government will prolong its endeavors towards accumulation of funds in order to improve social standards for citizens. Our seniors should receive decent pensions - compensation for their tangible input to the work. It is the restoration of social fairness as well as the abolishment of leveling which completely discourages everyone", stressed the Head of Government.

He noted that now the Government paves the way to ensure an annual automatic indexation of pensions that will increase welfare of the Ukrainian citizens as well as enhance the sense of security.

“Our essential task is to pay tribute to those people who are currently working and producing national product, who develop the national economy. At the same time we must not forget those who for decades have been working for the benefit of the country and are retired now, but most regrettably these people are facing difficult life situations now”, urged the Prime Minister.

He stressed that amendments proposed by the Government is a system work that updates the mechanisms which existed previously and provides new financial and social bases of relations between Government and citizens. Volodymyr Groysman thanked to President of Ukraine Petro Poroshenko and former Prime Minister of Ukraine Arseniy Yatsenyuk for their significant contribution to stabilizing of the economic situation in the country, which allowed the country to implement the necessary reforms.

The Cabinet of Ministers of Ukraine at its meeting approved the draft law on the proposed amendments and submitted it to the National Reform Council for further consideration. The Prime Minister appealed to the President of Ukraine with a request to hold such a meeting within the shortest possible period of time. Further, the draft law was sent to Parliament for discussion and adoption as required by the Medium-Term Action Plan of the Government and by commitments of Ukraine enshrined in the programme of cooperation with international partners.

“After the adoption of this draft law, I take full responsibility for the introduction of the aforesaid reform and for a positive result for the Ukrainian pensioners. I am committed to bearing personal and political responsibility”, summed up the Prime Minister.

Presenting the bill, the Prime Minister stressed that the pension system, under which the majority of pensioners are living below the poverty line, requires immediate change. Thus, 8 million out of 12 million seniors receive only the minimum pension of UAH 1312 (since May this year), which makes up only about 50% of the consumer basket in the actual subsistence minimum for persons who became disabled. The average pension in Ukraine is UAH 1828 (as of 1 April 2017).

Apart from that, the system for calculating pensions is unfair. The calculation formula, which involves the use of coefficients, payment of increment, sum of indexation, is unclear, and this doesn’t allow people to calculate their future pension, thus negatively affecting the incentives to pay contributions. Moreover, the differentiation of pensions depending on the income has been completely lost. Currently, 8 million persons have been assigned supplement to the minimum pension.

The current system also generates discrimination based on the year of retirement. The last updating of pensions was carried out in May 2012, while the minimum wage was increased 9 times. As a result, there exists segregation of pensioners by the year of retirement – the amount of pension with the same pension insurance record and wages can vary by over 3 times, while pensioners are sliding into poverty with time.

Unfairness in the payment of contributions to shape a pool of funds set aside for a worker's future benefit gave rise to a low level of pension insurance coverage for the employed population, 25% of the employees do not pay Unified Social Tax (16.3 million people make up the employed population). 10.5 million out of 26 million people aged 18 to 60 pay contributions on a regular basis, for 1.5 million people the state has to pay contributions.

As we see the Government initiatives to ensure the increase of pensions and the sustainability of the Ukrainian pension system were timely and necessary.

As the first step the pension reform offered by the Government provides for the modernization of pensions. With this purpose the Government introduces single rules of calculating the size of pension payments.

It introduced a new formula for calculating pensions with a uniform approach to both categories of ‘old’ and ‘new’ pensioners using the average wage level of UAH 3764.40 (previously, depending on the year of assigning pension it ranged from UAH 1197.91 up to UAH 3764,40), i.e. the basis for calculating pensions was increased almost threefold.