The Financing of Pension Systems in Central and Eastern Europe · an Overview of Major Trends and Their Determinants, 1990-1993

The economic transformation in Central and Eastern Europe increased unemployment and pushed workers into early retirement. At the same time, the insolvency of enterprises and the growth of the informal sector reduced tax compliance and the number of contributors to the system. The resultant increase in the ratio of pensioners to contributors did not translate into an increase in pension costs relative to GDP for all countries in the region. Many countries reduced the generosity of their pension systems to mitigate or completely overcome increases in system dependency rates, and realized fairly stable of declining pension costs over the first few years of the transition. Countries that realized high and increasing costs are therefore largely those that have either raised pension payments relative to wages, or have not been able to reduce pension generosity sufficiently to counteract increases in system dependency rates. The paper concludes that decreasing the level and rate of growth of pension costs is the key to reducing pension fund deficits in evidence in nearly all countries in the region. High payroll tax rates make further increases in revenues an unrealistic scenario. The paper shows that improvements in tax compliance should help improve pension fund revenues. But even under full compliance, payroll tax rates would remain high, constraining employment and dampening economic growth. The paper finds that the source of financial problems in each pension system vary considerably across the region. It concludes that policies to improve pension fund financing cannot be generalized and should be designed to address the specific cause of high pension costs in each country.