Is Serbia’s pension and salary contribution system sustainable?
Although Serbia’s population is ageing and the number of working-age citizens is declining, the pension system can continue functioning for a long time yet, Professor Mihail Arandarenko told Insajder.
However, he warns that the main problem is not the sustainability of the system itself, but the fact that an increasing number of pensioners will have incomes insufficient for a decent and dignified life. According to him, growing pension inequality is already becoming visible through rising poverty among elderly citizens.
Professor Arandarenko believes that Serbia’s pension system can survive for a long time despite unfavourable demographic trends, but he warns that the key issue is no longer the sustainability of the system itself, but rather the adequacy of pensions.
“Sustainability is a smaller problem, particularly in the relatively short term (say, until 2050), than adequacy, which could soon become an acute issue, yet is being ignored both by the authorities and by the professional public. The problem of adequacy refers to the fact that pensions for an increasing number of pensioners will not be sufficient for a decent life above the poverty line. Poverty among pensioners and elderly people is already increasing, despite the fact that pensions have risen much faster than the cost of living over the past five years. Once that trend slows down, the problem of adequacy will emerge in an acute form, because the rules governing pension calculations in our pension system, combined with the employment histories of new and future pensioners from the 1990s and 2000s, are generating ever greater inequality,” Arandarenko believes.
He assesses that freelance work and insecure forms of employment currently have very little impact on the sustainability of Serbia’s pension system.
Speaking about younger generations, Arandarenko says there is no reason to fear that they will one day be left without a pension, but he warns that the question of the pension amount is far more serious.
“Those with below-average incomes may doubt whether they will have an adequate pension that will allow them to enjoy a decently secure old age above the poverty line,” he states.
The employee/pensioner ratio is still problematic, but before than before
When it comes to the ratio between the number of employed people and the number of pensioners, Arandarenko considers it problematic, but points out that the situation today is nevertheless more favourable than it was around ten years ago.
Another question that arises is whether Serbia will have to further raise the retirement age. The Insajder interviewee believes that that will inevitably happen in the future.
“Probably in the future, perhaps in 20 years or more, but differentiated retirement age limits should then be introduced, so that the retirement age is not extended for occupations carrying greater health risks or involving shorter life expectancy,” he stresses.
Professor Arandarenko also believes that importing labour will be necessary if Serbia is to mitigate the consequences of demographic decline on both the pension system and the labour market.
“Importing labour can and must alleviate the problem, because without it, maintaining the current level of employment will be impossible, and that is essential in order to slow the worsening ratio between the number of employed people and pensioners. Every year, Serbia loses between 50,000 and 60,000 people of working age simply because the generations of sixty-five-year-olds are that much larger than the generations of twenty-year-olds. This will soon decline somewhat, but even so, our working-age population will soon fall below 4 million (it is currently around 4.1 million), whereas only 15 years ago it stood at 4.9 million,” he points out.
Professor Arandarenko believes that private pension savings are not yet a necessity for younger generations, but primarily an option available to citizens with higher incomes and adds: “In its current voluntary form, private pension saving is useful for those earning above-average incomes, but for the majority of the working population it remains an unattainable luxury.”
The state is lagging behind with reforms
Asked whether the state is lagging behind with labour market reforms and contribution system reforms, he answers in the affirmative and adds that the contribution system is a bigger problem than labour legislation.
“Our contribution system has, practically speaking and conditionally put, been copied from the German system, in terms of the rules determining the amount of someone’s pension, but with two major differences. The first difference is that the German system includes, on the side of minimum and maximum pensions, a somewhat fairer solution than ours, in the sense that minimum pensions are protected and increased, while higher pensions are additionally taxed – that is, pensions are subject to progressive taxation just like any other income. In this way, pension inequality is reduced somewhat,” says Professor Arandarenko.
“In fact, when I say that the pension system is currently flawed, I mean that this is primarily and above all because of pension inequality,” he emphasises.
As the second major difference between the German and Serbian systems, Professor Arandarenko cites the fact that, in both West and East Germany, the majority of citizens were formally employed throughout their working lives and maintained continuity in paying contributions, regardless of their level of earnings. As he explains, it was precisely long employment histories and stable formal careers that enabled such a model to function far more evenly than it does in Serbia.
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