Social Inclusion during Retirement in Three exYugoslav Countries by ERSTE Foundation

2009â&#x20AC;&#x201C;2010

ERSTE Foundation Fellowship for Social Research Ensuring Income Security and Welfare in Old Age

Social Inclusion during Retirement in Three ex-Yugoslav Countries: Slovenia, Croatia and Serbia Compared Igor Guardiancich

PENSIONS AND SOCIAL INCLUSION IN THREE EX-YUGOSLAV COUNTRIES: SLOVENIA, CROATIA AND SERBIA COMPARED

I. Guardiancich* European University Institute

Abstract Building upon the research by Meyer et al. (2007), this study employs risk biographies to evaluate how three ex-Yugoslav pension systems cope with the risk of social exclusion for the elderly. The article simulates pension entitlements in Slovenia, Croatia and Serbia and comes to two broad conclusions. First, the three pension systems that originate from a common legislative base now radically diverge in almost every aspect. Hence, further research should analyse the entire retirement microcosm of former Yugoslavia and delve deeper into the mechanisms of institutional evolution. Second, the study expounds the pros and cons of the three schemes and argues that none is immune to further reforms. Slovenian public pensions are excessively generous and will consequently require fiscal cuts, the Croatian funded tier is too small to adequately complement lower overall benefits, and Serbian arrangements should be seen as a temporary sacrifice to cope with fiscal austerity. The paper complements a traditional overview of the three systems by analysing the problems of each risk biography. It concludes by giving a number of prescriptive recommendations for the future wellbeing of the elderly in the region. Keywords Croatia, social inclusion, pension reform, risk biographies, Serbia, Slovenia JEL classification H55

Acknowledgments This research was conducted with the support of the ERSTE Foundation Social Research Fellowship “Generations in Dialogue” and of its organisers Prof. Reiner Münz and Franz Karl Prüller, whom I thank for all their help. My debt of gratitude goes to the experts and practitioners who helped me with the nitty-gritty of ex Yugoslav pension systems and in particular to Sabina Vranec of ZPIZ, Ljiljana Marušić of HZMO as well as to Nada Ć urin, Radomir Gjković, Marija Komadina and Zoran Josipović of PIO.

Introduction This study compares the performance of the Slovenian, Croatian and Serbian old-age and disability pension systems. It does so by building upon the work by Meyer et al. (2007), which employs risk biographies in order to delve deeper into the flaws and merits of five Western and one Eastern retirement schemes. The study has therefore a double purpose. First, it is meant to provide a more nuanced picture than comparative studies based on few stylised career paths (e.g. Holzmann and Guven 2008; SPC 2006; Whitehouse 2007). Second, it is the starting point to a broader study involving all ex-Yugoslav republics. These represent the most variegated pension system microcosm in the world, and the only one originating in a common legislative base. Since none of these countries is a private pensions veteran, the case study selection defies the logic behind Meyer, Bridgen and Riedmüller’s research.1 Slovenian, Croatian and Serbian retirement systems are diametrically different: Slovenia maintained defined-benefit public pensions, complemented with patchy supplementary private pension coverage (à la United Kingdom); Croatia introduced mandatory funded pensions and combines them with a public ‘basic pension’ based on a point system; Serbia opted for a combined solution, a point system and voluntary pensions. Thus, the three represent an invaluable testimony to how institutional arrangements evolve and that ‘speciation’ may sometimes occur. In addition to addressing these obvious differences, this research simulates “entitlements of complex rather than simplified biographies, because they are closer to the lives that people lead, and they are more likely to show where the weaknesses of public and private pension regimes are with regard to social inclusion” (Meyer and Bridgen 2007: 1718). The risk biographies are presented in Table 1 and the details in the Appendix. The simulations compare pension benefits actualised at age 65 for all participants.

Figure 1 Slovenia

The approach expounds the dissimilar treatment of periods falling out of standard employment: maternity and parental leave, unemployment, elderly care, years in university or vocational training. Furthermore, it calculates the additional savings needed to reach social inclusion for those at risk of old-age poverty. Ultimately, it addresses the effects of marriage and divorce upon retirement.2 The results are striking for two reasons. First, the systemsâ&#x20AC;&#x2122; performance could not vary more: whereas Slovenian pensions are generous to the point of being fiscally unsustainable, Croatian and Serbian public retirement benefits have been squashed. In the former case they are insufficiently compensated by the mandatory funded schemes and the latter is a temporary budget-saving arrangement, which does not provide social inclusiveness in old age. Second, the strictness of these arrangements goes hand in hand with their simplicity. A possible explanation is the â&#x20AC;&#x2DC;conspiracy theoryâ&#x20AC;&#x2122; that attributes this inverse relationship to the power exerted by the Bretton Woods institutions during reforms (based, for example, on their fiscal weakness).

The paper proceeds as follows. After briefly highlighting certain common assumptions, the main body of the text separately analyses the three case studies. Each evaluation is identically constructed: the current retirement system is dissected in its constituent components and thoroughly described. Simulations of benefits for individuals and couples are presented, followed by the description of how the schemes deal with periods outside an employment relationship. Finally, the amounts of additional savings needed to be socially included are calculated. The second section is dedicated to the comparative conclusions. A broad evaluation of the three systemsâ&#x20AC;&#x2122; performance precedes a series of prescriptive suggestion on how to ameliorate each scheme. Common assumptions Three sets of assumptions are discussed: the adaptation of biographies to public PayAs-You-Go (PAYG) schemes, the functioning of private (mainly voluntary) arrangements and the role of taxation. Public schemes still provide the bulk of benefits (less so in Croatia); hence, the nine biographic groups are entirely adapted as to fit national rules (e.g. not only benefit formulae but also eligibility and fruition restrictions). In addition, all of the countries apply contribution minima, which clash with the biography of the carer and informal worker (3a and 3b), due to excessively low, undeclared income. So, more realistic, revised biographies are studied (3aR and 3bR). These women do not contribute when their income falls below a national minimum threshold. As for supplementary voluntary individual and occupational schemes, these are, according to Eatwell et al. (2000: 141), always potentially present and cannot be considered as a distinctive feature of any reform. They are, however, relevant to evaluate a pension systemâ&#x20AC;&#x2122;s capability to lift people from social exclusion. Being newcomers, Slovenia, Croatia and Serbia only recently introduced voluntary arrangements and their development is 6

hampered by high mandatory social security contributions. Only Slovenia displays the distinctive features of a two-tiered labour market, where middle and high income workers in large enterprises have occupational insurance. In case Serbia does not introduce mandatory funded schemes, I assume similar, future patchy occupational insurance coverage, i.e. for biographies 4a, 4b, 6a, 6b, 7, 8a and 8b. This excludes all women due to low earnings, the employees in small and medium enterprises who are uninsured and the migrant worker who prefers to send remittances. The Croatian fate is also uncertain, due to two contrasting effects. On the one hand, occupational schemes have the greatest tax advantages among the three countries. On the other hand, it is unclear whether the contributions diverted to the mandatory pension schemes will double in the coming years (cf. Government RH 2006: 44). This would definitely hinder the expansion of voluntary arrangements. Hence, I calculate them only for the high earners 7, 8a and 8b.3 All the insured start paying supplementary contributions at 25. Finally, taxes on pension benefits are being ignored in this study, because they are hardly relevant for the final results. In Serbia, the reason is obvious: both the public and private schemes (in the case of annuitisation) are Exempt Exempt Exempt. In the case of Slovenia and Croatia, the situation is different: pension benefits are taxed, but the exemptions are substantial. In 2009, Slovenia starts taxing pensions to people over 65 at EUR 1,230.64 per month, circa 137% of the average net wage. Since July 2008, the Croatian tax administration levies taxes on monthly pensions over HRK 3,200, that is 62% of the average net wage. This means that of all, only Croatian high earners are taxed. Slovenia: still generous despite reforms The Slovenian pension system underwent two reforms during the 1990s. The 1992 package is described by Stanovnik (2002: 26) as â&#x20AC;&#x153;too little, too lateâ&#x20AC;?, as the system continued to be used as buffer for labour market redundancies. The public retirement scheme started to

generate high deficits after 1996, when the employer contribution rate was slashed almost by half. The 1999 Pension and Disability Insurance Act started as a progressive project with the â&#x20AC;&#x2DC;White Paper on the Reform of the Pension and Disability Insurance in Sloveniaâ&#x20AC;&#x2122;, which did not exclude the introduction of a point system benefit formula and of a medium-sized private funded pillar. After harsh opposition by the social partners, both systemic elements were shed and the executive put in place a parametric, path-dependent reform. Table 2 schematically summarises the current Slovenian pension system. Soon after the legislative phase, Fultz and Ruck (2001: 40) praised the 1999 Act for curtailing some 25% of benefits (mainly through accrual rate adjustments). However, this stabilised expenditures only in the medium term and the system currently needs a renewed round of reforms. On the positive side, public pensions remained relatively generous, especially if compared with the two other cases, Croatia and Serbia. This does not mean that specific categories are not exposed to the risks of social exclusion. Single women (with interrupted work histories) have the worst income prospects upon retirement (Stanovnik and Kump, 2008). Notwithstanding, safeguards are in place, giving credit that Slovenia still qualifies as a social-democratic exception in Central, Eastern and Southeastern Europe. The following paragraphs present more detailed aspects of the Slovenian retirement system as it operates in 2009 and benefit simulations for the nine risk biography clusters.4

Figure 2 Slovenia

The Slovenian pension system Zero pillar â&#x20AC;&#x201C; state pensions The state pension is a departure from the Bismarckian nature of Slovenian retirement and has a markedly universalistic character. It was introduced in 1999 and is unique in the region. It represents a safeguard of last resort for those unprotected categories that fall out of general pension systems (domestic and foreign). To be eligible, the person has to be 65, be a resident of Slovenia and must have resided in a Member State for 30 years when aged 15-65. It is means-tested (income both as flow and stock): those eligible have to earn less than 81.6% of the previous yearâ&#x20AC;&#x2122;s minimum pension assessment base per month. The state pension is equal to one third of the current minimum assessment base, thereby granting in 2009 a replacement rate of 18.3% to the average net wage.

First pillar â&#x20AC;&#x201C; PAYG defined benefit The Institute for Pension and Invalidity Insurance (ZPIZ) is an autonomous public finance agency, a monolithic institution that is almost entirely responsible for running the Slovenian public retirement system. In addition, the Tax Administration (DURS) collects social security contributions. Public pension insurance is compulsory for all employees and self-employed and can be joined on a voluntary basis. ZPIZ disburses a wide array of benefits (EPC 2007: 306): pensions covering old-age, disability, survivor risks; benefits related to disability (rehabilitation); supplementary allowances, such as the disability or assistance and attendance allowances; other benefits, in particular the recreation grant. These are financed through social security contributions levied on gross wages, which equal, since 1997, 8.85% for employers and 15.5% for employees, covering slightly more than 70% of total outlays in 2007 (Ministry of Finance RS 2008: 52-53). Failure to systemically overhaul public retirement in 1999 led to the accumulation of outmoded norms. Eligibility rules are complex and should be simplified (Stanovnik, 2002: 31). The pension qualifying period is the period used towards the calculation of the pension base. It is composed of: i) years of service, during which the beneficiary was insured and contributions paid, ii) purchased period, not covered by insurance but whose contributions have been paid by the employer (up to five years) or employee (university education and military service), iii) special qualifying period, such as participation to the partisan movement. (i) and (ii) combined are called the insurance period. Finally, the added qualifying period does not count towards the base and is only relevant for eligibility. Failure by the employer to contribute does not affect the employeeâ&#x20AC;&#x2122;s qualifying period. Once the transition period is over, the requirements to be eligible for a public pension are: age 63/65 for women/men with 15 years of insurance period; age 61/63 for women/men

with 20 years of pension qualifying period; age 58 with 38/40 years of pension qualifying period for women/men. Under Yugoslavia the latter two represented the full pension qualifying period, for which there was no age criterion to retire. The assessment base is simpler and offers considerable guarantees to the insured. First, it is calculated as the actualised average salaries of the best 18 consecutive career years. The safeguards here include: a minimum pension base equal to 57.5% of average net wage (in 2008); non-discrimination of part-time periods, as the income earned is annualised. There is some redistribution from high- to low-earners: contributions are not capped, whereas the maximum pension base is four times the minimum. Systemic obscurity is not relegated to eligibility rules: valorisation and indexation are almost unintelligible. Stanovnik (2007: 6-7) duly explains that, in order to keep pension expenditures under control, wage indexation froze between October 1990 and June 1991. This violated the horizontal equity of the system (between different cohorts). Hence, since 1992, individual salaries are valorised according to the indexation of pensions, rather than to wage growth. So, the pension base was equivalent to just 75.1% of the 18-year wage average by 2008. Notwithstanding, indexation still represents the most expensive item in Slovenian public pensions. It is tied to net wage growth and performed twice a year (February and November), the second time retroactively. Continuing pensions are equalised with new ones, since these employ a different set of parameters, especially progressively lower accrual rates. Hence, a coefficient of reduction is applied each February. The qualifying period affects the calculation of pension benefits: 38% and 35% of the base for women/men for the first 15 years and 1.5% for each additional one. Maintaining valorisation constant, the full qualifying period entitles to 54.4% of the pension base.

There are bonuses and decrements. Bonuses are of two kinds: if the qualifying period is longer than the full one before reaching statutory retirement age, then each additional year is worth more towards the base (up to 3.6% in total); if the age of retirement is higher than the full one, then each month increases the whole pension benefit by a percentage (up to 7.2%). Decrements are of one type only. If an insured retires before the full pensionable age and has accumulated less than the full qualifying period, then his benefits are permanently cut by a variable amount (up to 18%). Second and third pillars â&#x20AC;&#x201C; supplementary pension insurance Supplementary pension provision exists since the early 1990s, but low tax incentives hampered its development. The 1999 Act and a 2001 amendment gave greater impetus. There are voluntary occupational and individual schemes and, since 2004, mandatory pension insurance for public pension employees. Notwithstanding, Slovenian supplementary pension provision is burdened by numerous flaws: i) an unintelligible institutional structure, the result of indulgence towards the financial service industry; ii) excessive guarantees leading to herding behaviour; iii) crowding out effects due to the monopoly on public employee insurance; and, most importantly, iv) low premia and patchy coverage, which reflects an increasingly two-tiered labour market (see Berk and Skok 2005). Different providers are allowed to offer private pension plans: mutual pension funds, pension companies, insurance companies and the public pension fund facility Kapitalska druĹžba. These entities are subject to different laws, they are supervised and licensed by different agencies, they have a different legal status, they evaluate assets differently. As a consequence, neither their products nor their status are comparable, thereby disrupting the level playing field. For simplification purposes, the simulations concern mutual pension funds, which levy an upfront fee up to 6% of contributions and a management fee up to 1.5% of the net asset value. 12

In 2001 collective from individual schemes were separated. The schemes are Exempt Exempt Taxed. Collective pension schemes are prioritised, as deductions first apply to employer contributions and later, up to the ceiling of 24% of total mandatory pension insurance contributions and 5.844% of the gross wage, to the employee. Finally, low premia and inadequate coverage are problematic (for a detailed discussion, see Majcen and VerbiÄ? 2009). Altogether, the 12 providers collected EUR 1.05 billion by December 2007. Coverage is insufficient, as only 50% of the active population seems to be insured (predominantly through collective plans). Premia are relatively paltry, since they amounted in 2007 to less than EUR 33 for public employees insured with Kapitalska druĹžba and circa EUR 46 per month for those collectively insured (in pension companies). That is circa 3.6% of the average gross salary. Most alarming is that even these sums are too high for labour-intensive industries, whose employees are not registered in the third pillar. Disability pensions Slovenian legislation recognises three invalidity categories, which grant a pension (in either case, there needs to be at least a 30% loss of working capacity). For occupational diseases or work-related injuries, benefits are paid regardless of the individualâ&#x20AC;&#x2122;s period of contributions. For other causes, individuals must have contributed for a third of the period between age 20 and the date of their disability. Disability benefits are calculated as old-age pensions, thereby using the 18-year calculation base. Disability pensioners are entitled to an added qualifying period: two thirds of the time between the disability and 58 and half of the period between 58 and 61/63 for women/men. The insured has the right to choose whether to draw disability or old-age benefits, whichever is higher. Additionally, disability pensions cannot be lower than 48%/45% for women/men of the minimum pension assessment base. 13

Special schemes A spate of working categories is excluded from the reformed pension system. Special laws continue to regulate budget-financed pensions for Second World War veterans, policemen, customs officers. Those categories that qualified for an extended insurance period (up to 18 months per year) are guaranteed participation to the Compulsory Supplementary Insurance Fund, a small state-run funded scheme. Contributions are paid by employers and are at least equal to the aforementioned bonus. Protection of individuals and couples

Figure 1: Slovenia

As shown in Figure 1, there is little chance in Slovenia to be socially excluded, even as individuals. The worst performing biographies are the (revised) married carer and informal worker (3aR and 3bR), who either draw the state pension or have short accumulation. This finding confirms that in Slovenia single women have the worst income prospects upon retirement. They usually enjoy lower benefits than men. Neither the unqualified retail sector workers (1a and 1b,c) nor the qualified ones in welfare (2a,c and 2b) reach the comfortable

social inclusion line. What determines the differences between women is the length of the qualifying period. The married carer (3a) earns higher benefits than the better qualified workers in welfare (2a,c and 2b), who have 10 to 20 years shorter accumulation. Men are all above the comfortable social inclusion line. Even the incomplete resident (9) only slightly falls off, due to short accumulation. The place of employment is crucial: small and medium enterprises and less qualified jobs are unlikely to be included into supplementary collective pension arrangements. In fact, the unqualified worker in the car industry (4a) earns a cumulative benefit similar to that of the intermittent worker (5a,b) only by virtue of the employerâ&#x20AC;&#x2122;s size. Both the unemployed and disabled workers (4b and 5c) are adequately protected. None of the higher earners bears any exclusion risks. The Slovenian pension system does not have any special treatment for couples. Therefore, a married status maintains a relatively high household income or it improves it in case of women with short accumulation periods.

Figure 2: Slovenia

According to Figure 2 the only two couples that fall below the comfortable social inclusion line are those between the married carer, entitled to the state pension only, and the unemployed or disabled workers (3aR&4b and 3aR&5c). State pensions Slovenian legislation on minimum wages clashes with the biographies of the married carer and informal worker (3a and 3b), who are assumed to pay contributions on minimum wages when their income falls below that. This distorts the simulation. Hence, those years are simply excluded from the two revised biographies (3aR and 3bR). Consequently, 3aR draws a state pension due to only 12 years of pension qualifying period, meaning that she gets 18.3% of the average net wage. Although 3bR still draws an old-age pension by ZPIZ, her net replacement rate tumbles to 40.1%, just above social inclusion. Unemployment benefits The Employment Office calculates and disburses the benefits due. The duration ranges from three months with 1-5 years of insurance to 24 months with over 25 years of insurance and age not lower than 55. In addition, for people whose benefits expired but have less than three years to their pension, the Office pays contributions until retirement â&#x20AC;&#x201C; as with the unqualified worker who becomes permanently unemployed (4b). As for the benefits, during the first three months, these amount to 70% of the previous 12 monthsâ&#x20AC;&#x2122; average salary, 60% after that. Compensation for unemployment is limited between 45.56% of the minimum gross wage and three times that amount. If one is registered but not receiving benefits, then the period counts as added qualifying period, so only towards eligibility. Elderly care The married carer (3a) has to look after a disabled family member for five years. According to Slovenian legislation, the home carer is a recognised professional category since 16

2004. These people are budget-financed and get full-time benefits, amounting to the minimum wage. Maternity leave All of the mothers have children and take two years of parental leave. This is divided into two: i) birth leave, which lasts 105 days and is usually reserved for the mother; ii) childcare leave lasting another 260 days, where the parents decide how to share it. Finally there is also the paternity leave for the father, up to 90 days before the child is aged three. No male among the biographies gets any time off. Contributions are paid for the entire period: by the employer, if the person was in a working relationship; by the budget if she was unemployed. The parent is entitled to an income supplement, which is based on the income of the last 12 months. If the parent worked less than that, then the rest is calculated as 55% of the minimum wage. Replacement is full and comprised between 55% of minimum wage and 250% of the national average wage. Vocational and tertiary education Qualified workers 7, 8a and 8b purchase four years of compulsory contributions for their university studies. These years do not enter the 18-year base, but they constitute the purchased period and fully count towards the pension qualifying period. The others, that is the qualified part-time worker in the welfare sector (2a,c and 2b) and the intermittent worker in the car industry (5a,b and 5c), cannot buy back their vocational education years. They needed to be voluntarily insured. Disability pensions The intermittent worker in the car industry (5c) incurs an accident outside work at 54. Hence, he is entitled to an invalidity pension. According to Slovenian legislation he

contributed for 31 years before becoming invalid and he is assigned 4.5 years of added qualifying period. Pension supplements The simulations include two supplements: i) the yearly supplement, which is flat rate and is higher for those whose pension benefits are lower than the minimum pension with full retirement age; ii) pension support, which is means-tested and represents a service-related top up to the pension benefit up to 81.6% of the minimum pension base. This same amount is then used as the following year’s monthly income ceiling. Pension support is drawn by biographies 1a, 2a,c, 3b and 3bR. The foreign male worker (9) is also entitled. Supplementary pensions Apart form the self-employed, those who are insured have occupational plans in mutual pension funds. The second pillar lifts the unqualified worker who retires early (4b) above the comfortable social inclusion line. This does not significantly change the picture: high-income earners and large enterprises are insured, thereby only aggravating a pre-existing two-tiered situation in the labour market. The only person below the social inclusion line (3aR) should save more than 40% of her declared income in order to buy an annuity worth 40 percent of the average net wage. Croatia: private schemes unable to compensate public shortcomings Due to the Homeland War, the Croatian pension system was exploited during the 1990s to provide a social safety net for the displaced, the unemployed and particular interest groups, such as former combatants. In order to prevent spending from exploding, the Croatian Democratic Union (HDZ) government implemented the so-called Valentić decrees – an austerity package named after premier Nikica Valentić – in 1993. This severely reduced the average replacement rates of pensioners and gave rise to the so-called ‘old pensioner debt’, 18

which was settled a decade later. Furthermore, Valentić planned a paradigmatic reform of Croatian retirement, discontinued after hyperinflation subsided. Restructuring re-entered the agenda during 1995. Under the guidance of the World Bank, the Plenipotentiary’s team (established in 1998) overhauled the existing old-age pension system, as shown in Table 3. The new first pillar has two tiers. The PAYG public tier started operating already in 1999, whereas a deep recession forced policymakers to postpone the introduction of the mandatory funded tier until 2002. Nonetheless, USAID declared that (Hurd 2003: 3): “the new Croatian Pension System […] is viewed as a tremendous success and one of the best reforms in Croatia to date.” As I argued elsewhere (Guardiancich 2007), more sobriety is needed to assess the 1998 pension reform. Policymakers overemphasised the fiscal aspects of reforms (Anušić et al. 2003: 66), thereby jeopardising the pension system’s fundamental goal of protecting the weakest categories from destitution. A number of questionable policy solutions lower substantially the projected public PAYG benefits. On top of that, the funded tier is too small and investment too conservative to supplement the shortfall. As the discrepancy between the benefits of ‘old’ and ‘new’ pensioners widens, subsequent governments introduced corrective measures, which partly clash with the underlying logic that inspired the 1998 reform. In fact, by solving the problem through ad hoc increases undermines systemic consistency and it does not improve the situation of prospective pensioners, who are excluded from these palliative ameliorations. After a decade of policy meddling, it is time to rethink the government’s reform strategy. Benefit simulations for the nine risk biography groups follow a detailed description of the current Croatian pension system.7

Table 3: Croatia

The Croatian pension system Zero pillar – social assistance Croatia has a universal social assistance scheme, the ‘stalna pomoć’. It is means-tested and budget financed. The income threshold to assess eligibility is low and determined in an ad hoc fashion. It depends on household size, residual ability to work and a person’s autonomy. In 2008, the individual threshold was raised to HRK 500 per month, to HRK 750 for households with two persons and 1,200 for households with three persons (9.7%, 14.5% and 23.2% of the average net wage). Approximately 170 thousand Croatian citizens receive this assistance on a permanent basis. First pillar – public tier Croatian public pensions are managed by the Croatian Pension Insurance Institute (HZMO), which was established in 1999 by merging three autonomous republican funds (for

workers, for self-employed artisans, caterers and carriers and for self-employed farmers). The tax administration collects social security contributions. The Institute provides a number of benefits: old-age, early, disability, survivor, minimum and basic pensions; as well as professional rehabilitation, compensation in case of physical damage, and various reimbursements (no supplements are relevant for the simulations). Old-age pension contributions amount to 20% of the gross wage and are, since 2003, entirely paid by employees to raise awareness (Guardiancich 2007: 104). They are split between the public (15%) and private tiers (5%). Contributions cannot be paid from bases lower than 35% of the average gross wage and are capped at 600% of this amount. The minimum pension base is the only first pillar guarantee that is left. Those people who retire after 1999 without participating to the funded schemes still enjoy a minimum pension. This is calculated by multiplying the previous year’s average Croatian wage with 0.825% for each year of insurance. If an individual’s benefit falls below this threshold, the state budget tops it up. This guarantee is more generous than just calculating pensions using a minimum base. Additionally, ‘new’ pensioners receive compensation for their lower benefits depending on the year of retirement – a maximum 27% increase is assigned to the 2010 cohort (see Puljiz 2007). These safeguards are gone for the participants to funded schemes. A redistributive element from rich to poor is still present but never triggered. In fact, second tier participants’ first tier benefits are lower than the maximum pension, i.e. 3.8 pension points multiplied by the individual’s insurance period. Eligibility rules are simpler and more restrictive than in Slovenia, Apart from the periods of insurance under a regular employment relationship, the qualifying period consists of few alternative insurance sources. In the case of disability, the additional insurance periods are relatively generous.

In general, the requirements for a HZMO pension are: age 60/65 for women/men with 15 years of qualifying period. Early retirement is still possible. The minimum retirement age gradually increases to 55/60 for women/men with 30/35 years of qualifying period. The permanent decrements for early retirement were halved in 2008 to 0.15% for each month missing before reaching full retirement age, up to 9% for five years. There are no bonuses. The calculation of public tier benefits employs a two-part formula. The basic pension consists of: a semi-flat, service-related component and a defined-benefit point-based part. Basic pension = 0.25%*W*Y + 0.25*APV*PP*PF. The semi-flat part: W = average Croatian gross wage of the preceding year, Y = years of qualifying period. The point formula: APV = Actual Pension Value, PP = Personal Points, PF = Pension Factor. A Personal Point indicates the proportion of an individual’s wage relative to the national average wage, and the average takes into account the best 40 insurance years. The Actual Pension Value was a determining factor in diminishing overall pension expenditures, since in 1999 it was set at an excessively low value. In addition to this ‘obfuscation device’ (Guardiancich 2007: 137), other elements penalise ‘new’ pensioners with respect to ‘old’ ones. Valorisation and indexation are unfavourable. Croatian policymakers went beyond Swiss adjustments: they valorise the Actual Pension Value and index benefits to 50% price and 50% wage growth. Hence, the replacement rates of both entry and continuing pensions decrease in time. The only moderating factor is the semi-flat benefit, which is indexed to wages. The result was a collapse in the average net replacement rate (41.4% in March 2009, including the latest corrective hikes). First pillar – private tier Croatia is the only case that introduced a fully funded mandatory tier, which is regulated by the Croatian Financial Services Supervisory Agency (Hanfa). The Central 22

Registry of Insured Persons (Regos) manages the data. The establishment of the second tier ran smoothly since 2002. The market is almost consolidated and it consists of two bigger (AZ and Raiffeisen) and two smaller funds (Erste Plavi and PBZ-CO), which insured some 1.6 million participants at the end of 2008. If the funded component were meant to compensate for lower public benefits, this objective has been missed. The second pillar is small, raising oligopoly concerns. Policymakers did not heed the World Bank’s recommendation to gradually increase the contribution rate to 10% and deal with the deficits afterwards. Instead, the 1999 Funds Act froze the contribution rate at 5%, which is inadequately low to compensate for falling replacement rates. In general, the funded tier’s performance has been satisfactory, however, its potential was not exploited for three reasons: minimum investment limits, excessively high administration fees and, limitedly so, a relative minimum return guarantee. Not to overshoot the budget, policymakers required the investment of minimum 50% of mandatory pension fund assets into state and Croatian National Bank (HNB) bonds, which is unprecedented in the region. The minimum was an effective way to avoid excessive budget deficits, but it simultaneously resulted in a de facto redundancy of the funded schemes – less than 2% of gross wages is invested into non-state securities. Recent developments partially offset the funded tier’s marginalisation and minimum limits will be lifted upon accession of Croatia to the European Union. The acquis communautaire obliges member states to comply with the free movement of capital. The Funds Law had initially an irrational fee structure and barriers to entry. Consequently, in 2003, licensing requirements were relaxed, the switching fee drastically reduced and the success fee repealed. However, as a compensation for the low contribution rate, the management fee stood at 1.2% of net asset value. Anušić (2007) valued the long-term

reduction in assets at an excessive 26%. Failure by the industry to self-regulate and moderate costs forced Hanfa to gradually reduce the maximum applicable management fee to 0.8% and in 2009. The upfront fee is capped at 0.8%. Finally, the minimum relative return guarantee is based on the weighted average threeyear return of the four funds (slightly different than the benchmark rate Mirex) minus 6%. The reference period has been extended in 2004. Although no guarantee was triggered yet (even during disastrous 2008), it breeds herding behaviour. As for the annuities market, there is only one licensed pension insurance company, Reiffeisen. Annuitisation (four types) is mandatory and price-indexed. Life expectancy tables are unisex, hence they redistribute from men to women. In general, pension insurance companies are entitled to a 10% upfront fee on the sum transferred from pension funds. Reiffeisen decided to keep it at 5%. Second and third pillars â&#x20AC;&#x201C; supplementary pension insurance The supplementary pillars are a partial disappointment. Despite generous tax incentives for employees â&#x20AC;&#x201C; HRK 12,000 yearly tax exemption on contributions and budgetfinanced support equal to 25% of the amount paid in (up to HRK 1,250) â&#x20AC;&#x201C; various design flaws and low public awareness prevented the voluntary funds to take off. By the end of 2007 there were six open-end and twelve closed-end voluntary funds on the Croatian market. The former totalled 104 thousand affiliates, while the latter had 12 thousand members. There are only around 15 large enterprises (e.g. Hrvatski Telekom) that offer occupational schemes. Given that further development entirely depends on the fate of the mandatory funded schemes, my simulations comprise supplementary pension benefits just for high earners (7 and 8,a,b). The upfront fee is 7% and the management fee 2%.

Disability pensions The 1999 pension reform encompassed disability pensions, which now apply the formulae used for old-age benefits. The differences lie in the qualifying period and different Pension Factors. If disability occurs, the amounts accrued in the funded tier are either used to pay out the benefits or are returned to HZMO. If the disabled is older than 50 and has contributed for longer than five years, then the combined first and second tier benefits are compared with a full public pension. If the latter guarantees higher pensions (for now, but not for long, the almost totality of cases), then the contributions are transferred back to HZMO. Pension Factors have been raised in 2008: 1.00 for general disability with no residual capacity to work entails; for professional disabilities, 0.5 if the person is still employed, 0.67 if it is still employed and the disability is a consequence of professional illness or workrelated injury, 0.8 if the person does not work. The contributory period is irrelevant if the disability is a consequence of work injury or professional illness. Otherwise, the person must have contributed for one third of the period between age 20 (23 after professional training, 26 after university studies) and the moment when the disability occurred, minus military service and unemployment periods. Towards the calculation of benefits, the qualifying period consists of the insurance period and of the additional period. This is calculated as two thirds of the period from the occurrence of the disability until 55 plus one half until 60. Special schemes There were 177 thousand merit pensioners in 2007, i.e. almost 16% of total retirees, whose benefits are budget-financed. Homeland War combatants are the fastest growing category and a favoured constituency of the governing conservative Croatian Democratic Union. Despite some attempts to monitor regional committees responsible for assigning privileges, disabilities among veterans multiplied, often as a result of Post-Traumatic Stress 25

Disorder. Hence, some half million relatively young men are entitled to very high taxfinanced benefits, which is socially unfair, distortional and financially detrimental (AnuĹĄiÄ&#x2021;, 2007). Their average insurance period is only twelve years and average net replacement rate in March 2008 was 112%. Moreover, their benefits were recently redrawn: the minimum pension cannot be lower than 45% of the average net wage and they are entitled to supplements between 10% and 30% for insurance periods shorter than 40 years (depending on the time spent fighting). Protection of individuals and couples

Figure 3: Croatia Already at first glance, Figure 3 is extremely different than that of generous Slovenia. The two main dissimilarities are: i) the growing importance of the private tier, whose benefits, despite the small size, represent between 89% and 214% of the PAYG benefit; ii) neither women nor men are well protected against social exclusion under the new arrangements. Only four biographies, the intermittent worker (5a,b), the small entrepreneur (6a,b), the chemical

provider (7) and the middle manager (8a,b) obtain benefits above the comfortable social inclusion line. Women are consistently discriminated against: none of them reaches the lower social inclusion line. The main reason is low salaries. Longer accumulation periods do not seem to solve the problem. Short insurance periods carry greater risks for men. Both the unqualified and the intermittent workers in the car industry show this difference in full. Whereas the ones who become unemployed before retirement (4b) or disabled (5c) fare well below social inclusion, the others (4a and 5a,b) are either just below the comfortable inclusion line or slightly surpass it. Short accumulation also prevents the incomplete resident (9) to be adequately protected. Again, there are almost no provisions for couples in Croatian legislation, such as shared pension points during marriage, as in Germany. Hence, the household income is just the sum of the two individual pension benefits. This, of course, lifts some of the families out of social exclusion.

Figure 4: Croatia

Figure 4 reveals that four out of 15 couples (driven by the unemployed and disabled workers, 4b and 5c) fall below the social inclusion line for couples. Three households are just there (3a&4b, 3aR&5a, 3aR&6a). Of course, this lower protection follows the fact that the informal carer 3aR loses the ‘stalna pomoć’ due to a lower threshold for couples. Social assistance As in the previous case, the construction of risk biographies clashes with the Croatian minimum contribution base (35% of the previous year’s average wage). Therefore, if we exclude the income of the informal workers and carers when it falls under this minimum, then 3aR cannot draw a public pension due to only 7 years of qualifying period. Her overall benefits fall well below the 9.7% replacement rate, which is the assumed social assistance threshold. She gets a budget-financed top up. Although biography 3bR still draws a public pension, her net replacement rate sinks from 21.9% to just 14.8%, well below social inclusion. Unemployment benefits The only case when registered unemployment is counted as qualifying period and towards the pension base is when the insured fulfils the age requirement for old-age pensions but does not fulfil the insurance period condition. In that case, unemployment benefits of up to 5 years are considered, however, according to HZMO officials, just to fulfil the minimum requirement of 15 years to retire at full pensionable age. The person most affected by this provision is the unqualified worker who becomes unemployed at 57 (4b). He then retires at the lowest possible age, 60, losing 9% of permanent benefits.

Elderly care Elderly care does not guarantee in Croatia either a longer qualifying period or any kind of benefits; hence, 3a gets nothing. There is an exception for the â&#x20AC;&#x2DC;negovateljiâ&#x20AC;&#x2122; of Homeland War combatants, who earn a budget-financed salary entitling to pension insurance. Maternity leave Since January 2009, Croatian policymakers divided childrearing leave into birth leave (rodiljni dopust) and parental leave (roditeljski dopust). The former is furthermore split into an obligatory part, expressly dedicated to mothers. Otherwise the parents can agree to split the other periods. As a rule, birth leave lasts until the baby is six months old and parental leave lasts another six months for the first and second child, 30 months for twins and three or more children. Maternity benefits are since 2008 the average salary during the last six months before birth for the birth leave, and capped for the additional parental leave (up to circa half of the average net wage). One new provision is unfavourable to parents: in order to obtain the parental leave, the employer has to agree, thereby endangering even this right. Vocational and tertiary education Buyback of years out of employment (e.g. years in university) is disallowed and hence one should be insured under the extended insurance scheme, which requires the voluntary payment of contributions. To simplify things, I excluded this option for all. Disability pension The car industry worker (5c) who becomes disabled at 54 interestingly shows that the relevance of the private tier will grow in the future. I assume him to have a professional disability that prevents him to work. He is hence entitled to a Pension Factor of 0.8. In this case, the pure point formula yields lower benefits (16.9% net replacement) than the new basic 29

pension plus funded annuity (24.6% net replacement). Neither choice, however, saves the person from social exclusion. Supplementary pensions Since occupational pensions are still underdeveloped and their future uncertain, additional benefits have been calculated only for the chemical provider and middle manager (7 and 8a,b). Apart from raising their pensions by some 25%, the relevance for social inclusion is negligible. It is interesting to calculate how much additional savings (in the mandatory tier) ensures minimal social inclusion to each individual falling below the threshold.

Figure 5: Croatia

Figure 5 expectedly shows that more women than men would need to save to avoid social exclusion during old age. The two revised cases (3aR and 3bR) are not included, because their biographies would need further amendments. As an indication, they would

probably have to contribute respectively over 20% and 17% of their income to get anywhere near to social inclusion. For the other biographies, the situation is not unbearable. The prefigured expansion of the funded tier to a 10% contribution rate (provided consistent long-term returns) could lift half of these people out of social exclusion. This would in itself be a great achievement. Given, however, the Croatian financial distress, it is not currently a viable option. Serbia: a temporary, fiscally constrained system The Serbian pension system remained unchanged for a decade after the collapse of Yugoslavia. Due to delayed transition, the usual problems affecting post-socialist schemes (lax eligibility criteria, insufficient contribution coverage) were here particularly felt. Between 1995 and 2000, only during one year were all 12 monthly pension benefits paid out (Lisica and Malbašić 2009: 355-356). The motivation for reforms was high deficits (6.3% of GDP in 2002). Two unsustainable strategies were used before 2000. Contribution rates on gross wages skyrocketed to 32% and other taxes (on petrol, car and weapon licenses) were introduced to pay for the booming costs. Unfair retrenchment was also used: between April 1994 and June 1995 benefits were not indexed, thereby creating a huge debt that was recently repaid (Petraković 2007). Only after the collapse of the Milošević regime, were reforms seriously considered. Three packages have been legislated so far. At the end of 2001, parametric restrictions were on the agenda. The statutory retirement age increased by three years for all in one go and contribution rates were cut to 19.6%, thereby covering only 55% of pension expenditures in 2002 (Arsić 2005: 62). Quarterly Swiss substituted monthly wage indexation and minimum pensions were lowered. Policymakers passed a paradigmatic pension reform in mid-2003. Instead of a best 10year defined benefit formula, a point system calculated on lifetime contributions is now in 31

place. The contributory base was broadened to close evasion channels and eligibility was restricted to disability as well as pensions with bonuses. Finally, a third round earned Serbia a conspicuous World Bank loan. The 2005 reform introduced voluntary private individual and occupational pension schemes, further eligibility restriction and full price indexation; see Table 4. Finally three separate funds (for employees, self-employed and farmers) merged into the Republican Fund for Pension and Disability Insurance (PIO) in 2008 and their financial consolidation (planned for 2011) was accomplished in 2009. A Central Registry for all social security and tax-related data is slowly being established. The following section presents more detailed aspects of the Serbian pension system and the simulations for the nine risk biography groups.11

Table 4: Croatia

The Serbian pension system Zero pillar – family financial support People who do not have a sufficient insurance record to participate to the public schemes are eligible for the Family Financial Support (MOP – Materijalno obezbedjenje porodice). MOP varies according to household composition and the budget tops up the difference between the threshold and the household’s income. In March 2008, the minimum social welfare threshold was 15.7% of the net average wage for one-person, 21.5% for twoperson, 27.4% for three-person, 29.3% for four-person households, and 31.3% for households with more than four persons. Although it is indexed to prices, I assume that its replacement value remains constant in time, lest it falls to unsustainably low levels. The World Bank criticised MOP’s low coverage and expenditures – only 3% of households in 2005 costing 0.14% of GDP (World Bank 2006: 2). First pillar – point system PIO is responsible for old-age, disability and survivor pensions as well as for the disbursement of other benefits (professional rehabilitation, compensation for physical damage etc), which are irrelevant for the simulations. Old-age pension contributions amount since mid-2004 to 22% of the gross wage and are equally split between employers and employees. The minimum base equals 35% of the average gross wage and the ceiling 500%, allowing for some redistribution from rich to poor in combination with maximum pensions. Eligibility has been considerably tightened: the statutory retirement age is 60/65 for women/men with 15 years of qualifying period (effective as of 2011); 53 with 35/40 years and at any age with 45 years of qualifying period. Since this period is capped at 45 years, the car industry worker (4a) and the small entrepreneur (6a,b) retire earlier. The middle manager

(8a,b), who did not save voluntarily during university years, retires three years later to have 40 years of qualifying period. This positively affects his public and private pension benefits. The pension formula is simple: PC*GP*Y, where PC = Personal Coefficient, GP = General Point and Y = years of qualifying period, with each year above 40 counting as half – of course discouraging further employment. For social justice reasons, the system awards women 15% of their standard benefit at retirement. Mothers with three children are granted two years of bonus. The benefits are subject to upper and lower boundaries. The previous minimum pension benefit, based on the qualifying period, was repeatedly changed. In January 2006 it was set to 25% of that year’s net average wage. Indexation to prices erodes its replacement value (already down to 21% in 2008). If price indexation stays, the simulated value sinks to 8.5% by 2055. The maximum pension is a combination of two factors: the Personal Coefficient is limited to four and the years of qualifying period to 42.5. In March 2009, the absolute maximum benefit was RSD 102,767 – roughly three times the average net wage. Second and third pillars – supplementary pension insurance Serbia introduced its second and third pillars in October 2005, and opted for an ex ante strict regulation of the funds. The Law on voluntary pension funds and pension schemes requires an initial capital of EUR 1 million for managing companies and pre-emptively caps the upfront fee to 3% of contributions and the management fee to 2% of the net asset value. The National Bank of Serbia supervises the market. Annuitisation during decumulation is voluntary, however, it has specific financial advantages as it renders the schemes Exempt Exempt Exempt. Occupational schemes enjoy a high tax exemption, RSD 3,528 in 2009, i.e. more than 10% of net average wages. In the absence of a mandatory funded component, I assume a development of occupational schemes similar to that of Slovenia. 34

Disability pensions Eligibility to disability pensions is in Serbia very restrictive, and is reserved only for people who permanently lose the capacity to work (100% disability). All the others are obliged to fulfil the criteria for old age. The calculation is identical to old-age pensions, however, if the disability results from an accident at work or professional disability, then 40 years of qualifying period are counted; if not, 2/3 of the years missing until 53 and one half of those missing until statutory retirement age. Eligibility depends on the insurance period: for people who incur disability after 30, five years of qualifying period are sufficient. Special schemes Privileged pensions are severely limited in Serbia, as they are awarded only to those with particular artistic merits and to Second World War veterans. Unlike in Croatia, combatants in recent wars do not earn special benefits. As an exception to the rule, additional benefits are granted to those professions under specific (hard or unhealthy) circumstances that benefit from an extended qualifying period, where each year is counted up to 18 months. The retirement age is accordingly reduced, at most to 53.

Protection of individuals and couples

Figure 6: Serbia

As Figure 6 eloquently shows, Serbia has the worst benefit prospects. The only persons whose pensions lift them above the social inclusion line are those high earners with a supplementary pension plan (7 and 8a,b). The small entrepreneur (6a,b) is almost there. Neither women nor men insured just in the public pillar can possibly draw anything near the 40% net replacement rate. The carers and informal workers (3a, 3aR and 3bR) fall below the MOP line and receive Family Financial Support. Price valorisation erodes benefits to the point that the migrant worker (9) with 29 years of contributions reaches a net replacement rate of just 18%. Being the Serbian pension system clearly temporary (until economic conditions improve), these simulations have to be taken cum grano salis. The exercise indicates the implausibility that coefficients are not adjusted and that their relative value drifts for as long as 40 years. A sensible policy measure would be to maintain the value of minimum pensions constant to net average wages (25% as in 2006). This would mitigate and not solve the

problem of social exclusion – this minimum is still under the social inclusion line – but, at least, the comparison with Croatia would become less discrediting. There are no advantages for couples in Serbian legislation. The point system works autonomously for each individual and the household income is just the sum of both benefits.

Figure 7: Serbia

Figure 7 shows that the Serbian situation is particularly unfortunate: since social assistance is tied to family income, the carers and informal workers (3a, 3aR and 3bR) stop receiving the MOP, due to their husband’s salaries. This implies that all of those couples are socially excluded. In general, just two families are lifted above the social inclusion line (1a&7 and 2c&8a). At least, some of the others are relatively near to it. Beside this catastrophic outlook, not all is doom and gloom. Certain, individual features give some hope that more redistribution is still on Serbian policymakers’ agenda.

Family financial support As in the previous cases, the informal workers and carers (3a and 3b) contribute 35% of the average gross wage when their income falls below that. As this distorts the results, those years are eliminated for 3aR and 3bR. The former is not entitled to a public pension due to only 7 years of insurance. The latter’s benefits sink way below the social assistance threshold, from an anyway meagre 17.5% replacement rate. The budget tops up both incomes through the MOP, which equals to 15.7% of the average net wage. Unemployment benefits Unemployment benefits are in Serbia better protected than in Croatia. The National Employment Service covers social security contributions during the period when benefits are drawn. The amounts are lower than in the other cases: 50% of the average wage in the previous 6 months. The benefit is constrained between 80% and 160% of the monthly minimum wage (i.e. between 31.5% and 63% of the average net wage in 2008). The length of fruition varies between three months for those insured 1-5 years to 12 months for those insured over 25 years. In case the unemployed person is within two years of retirement eligibility, then the Employment Service grants 24 months of benefits. This provision is favourable for the unqualified worker (4b) who becomes unemployed at 57. He is entitled to 18 months of unemployment benefits, until he reaches 40 years of qualifying period. Elderly care Similarly to Croatia, the informal carer (3a) gets nothing, as elderly care does not warrant any additional benefits. A different story is the ‘domačica u kuči’, who is sent by

local centres of social care to help those elderly who need assistance. But that is a profession in its own right. Maternity leave Childbearing women enjoy in my simulations two years of leave. Maternity leave lasts up to three months. Upon the expiry of this period, the mother or father of the child may be on paid leave for infant care for a total of 365 days. Compensation is 100% of last yearâ&#x20AC;&#x2122;s salary, if the mother is insured more than six months, 60% between three and six months and 30% if sheâ&#x20AC;&#x2122;s insured less than that. For the third child a mother is automatically entitled to two years of leave. The benefit is constrained between the minimum and five times the average wage. Vocational and tertiary education Again, the buyback of years out of employment is disallowed. None of the biographies is voluntarily insured during university studies or vocational training. Disability pension It is assumed that the car industry worker (5c) becomes disabled and incapable to pursue further employment for causes unrelated to work. He is hence entitled to five more years of qualifying period, i.e. 36 in total. Given that disability benefits are calculated as oldage ones, the disabled pensioner is socially excluded. Supplementary pensions The main assumptions to simulate supplementary pension entitlements for Serbia is that the market develops similarly to the Slovenian one. Since none of the insured who do not save in the supplementary pillars enjoy public pension benefits anywhere near to the social inclusion line, the expansion of voluntary insurance to both genders and all income strata is fundamental.

Figure 8 indicates that low public pillar benefits are the real problem for all, but for the car industry workers who are neither unemployed nor disabled (4a and 5a,b) and the selfemployed (6a,b). The additional saving rates after the age 25 needed to reach social inclusion are prohibitively high, up to 20.4% for the mother and informal carer (3b). Including the rectified biography 3bR would even worsen the picture, as she would require an astounding savings rate of 38.5% to escape social exclusion.

Figure 8: Serbia Comparative conclusions The study concludes with a comparison of the systemic design of the three schemes and their impact on the risk of social exclusion. What Table 5 clearly shows is that three systems, which started in 1991 from a common legislative base, now radically diverge. Considerations on path-dependence and institutional development are beyond the scope of this paper. However, the study of the retirement microcosm that originates in ex Yugoslavia could shed light on various parallels between evolutionary theory and institutional structures.

Three interesting characteristics are revealed. First, all three countries are still â&#x20AC;&#x2DC;machoâ&#x20AC;&#x2122; societies, where the traditional role of women is reflected in the differential retirement age. Hence, a first step to improve formal equality and their benefit prospects is to increase female retirement age everywhere. Second, only Croatia shifted all social contributions onto the employee, thereby explicitly signalling pension costs to workers. It would be good if the other two countries moved into the same direction. Third, there is a striking positive relationship between the simplicity of each system and its strictness, from very low (Slovenia) to very high (Serbia). In light of a dissimilar degree of fiscal strains and international status at the time of reforms, it is (in my opinion) plausible to attribute these differences to the varying exposure of each country to the Bretton Woods institutions.

Table 5: Croatia

As for the generosity of each system, it was made clear that Slovenia still guarantees fair replacement rates and is followed at great distance by Croatia and excessively strict Serbia. Figure 1 Simulations for individual risk biographies in Slovenia5

Figure 2 Simulations for risk biography couples in Slovenia6 Figure 3 Simulations for individual risk biographies in Croatia8 Figure 4 Simulations for risk biography couples in Croatia9 Figure 5 Additional savings rate Croatia10 Figure 6 Simulations for individual risk biographies in Serbia12 Figure 7 Simulations for risk biography couples in Serbia13 Figure 8 Additional savings rate Serbia14 Figure 9 provides a glimpse of the situation for individual risk biographies.

Figure 9: Comparative

The Slovenian system is generous for Central European standards, despite the reductions in replacement rates. Continuing pensions are fully indexed, atypical work and non-contributory periods are treated fairly. Unemployment benefits are long and generous,

parental leave entitles to full income replacement and family care is a recognised working category. The buyback of university years or military service is allowed. The same cannot be said of either Croatia or Serbia. The Croatian system lies between two extremes. It is strict, since indexation and valorisation are ungenerous, the Actual Pension Value is set unjustifiably low and minimum pensions have been practically abolished. However, low public benefits are at least partially supplemented by the mandatory funded tier. Serbian pensions are the least liberal in the region. Price indexation and valorisation will, ceteris paribus, push most elderly into destitution. Notwithstanding, Serbian retirement schemes are slightly more redistributive than Croatian ones. The minimum pension is in Serbia low, but at least it exists. Non-contributory periods are treated better. Serbian laws guarantee full income replacement for one year of parental leave and limitedly cover spells of unemployment. In Croatia, unemployment periods are irrelevant and family care is recognised only for Homeland War veterans. Neither country allows buying back periods out of employment. The situation for women is in all three countries worrisome. Despite the systemâ&#x20AC;&#x2122;s overall generosity, Slovenian single women enjoy low levels of protection. A (meagre) universalistic state pension is their safeguard of last resort. In Serbia, women automatically receive 15% higher benefits, but this does not significantly improve their income status. Worse still, all Croatian women in the simulation are socially excluded and no corrective measures are in place. Couples fare marginally better everywhere; however, in none of the countries do marriage and divorce bear any effect. In sum, each of the systems has its pros and cons; however, none is immune against further reforms. The Slovenian public pillar suffers from excessive complexity (valorisation indices, dual indexation) and will generate severe fiscal strain in the future. Hence, public benefits should be trimmed and supplementary pensions need to fully develop: coverage is

still only 50% and contributions are excessively low. Croatian PAYG pensions are simpler than in Slovenia, but there are a plethora of exceptions that should be eliminated, such as merit pensions. The funded mandatory tier should expand to the originally planned 10% contribution rate. Finally, the Serbian public pillar is the simplest of the three and there are very few exceptions to the rule. Encouragingly, its parsimony is perceived as temporary, not to end with automatic stabilisers as the Federation of Bosnia and Herzegovina or Republika Srpska. Supplementary pensions are totally underdeveloped and should be seriously considered as an alternative to the introduction of a mandatory funded pillar, given the current and foreseeable fiscal situation.

Appendix 1 Risk biographies 1a to 4a Old-age Childrearing

Unemployment

Vocational and Elderly care

retirement Year

Age

Bio 1a

Bio 1b,c

Disability Further training

graduate studies Bio 2a,c

Not resident retirement

Bio 2b

Bio 3a

Bio 3b

Bio 4a

W-t

E/a

W-t

E/a

W-t

E/a

W-t

E/a

W-t

E/a

W-t

E/a

W-t

E/a

2008

1.00

0.50

1.00

0.50

0.00

1.00

0.60

1.00

0.60

1.00

0.65

2009

1.00

0.50

1.00

0.50

0.00

1.00

0.60

1.00

0.60

1.00

0.65

2010

1.00

0.60

1.00

0.60

1.00

0.60

1.00

0.60

1.00

0.60

1.00

0.70

1.00

0.70

2011

1.00

0.70

1.00

0.60

1.00

0.60

1.00

0.60

1.00

0.60

1.00

0.75

1.00

0.70

2012

1.00

0.70

1.00

0.60

1.00

0.65

1.00

0.65

1.00

0.60

1.00

0.75

1.00

0.75

2013

1.00

0.70

1.00

0.60

1.00

0.65

1.00

0.65

0.00

1.00

0.75

2014

0.00

1.00

0.70

1.00

0.70

0.00

1.00

0.75

2015

0.00

1.00

0.70

1.00

0.70

1.00

0.13

1.00

0.35

1.00

0.80

2016

0.50

0.35

0.50

0.30

0.00

1.00

0.13

1.00

0.32

0.00

2017

0.00

1.00

0.13

1.00

0.32

1.00

0.75

2018

0.00

0.60

0.42

0.60

0.42

1.00

0.13

1.00

0.32

1.00

0.75

2019

0.00

0.60

0.42

0.60

0.42

1.00

0.13

1.00

0.40

1.00

0.75

2020

0.50

0.35

0.50

0.30

0.00

1.00

0.13

1.00

0.38

1.00

0.80

2021

0.50

0.35

0.50

0.30

0.00

1.00

0.13

1.00

0.31

1.00

0.80

2022

0.50

0.35

0.50

0.30

0.50

0.38

0.50

0.38

1.00

0.13

1.00

0.32

1.00

0.80

2023

0.50

0.35

0.50

0.30

0.50

0.38

0.50

0.38

1.00

0.13

1.00

0.35

1.00

0.80

2024

0.50

0.35

0.50

0.30

0.50

0.38

0.50

0.38

1.00

0.13

1.00

0.36

1.00

0.80

2025

0.50

0.35

0.50

0.30

0.50

0.38

0.50

0.38

1.00

0.25

1.00

0.40

1.00

0.85

2026

0.50

0.35

0.50

0.30

0.50

0.38

0.50

0.38

1.00

0.25

1.00

0.40

1.00

0.85

2027

0.50

0.35

0.50

0.30

0.50

0.38

0.50

0.38

1.00

0.25

1.00

0.45

1.00

0.85

2028

0.50

0.35

0.50

0.30

0.50

0.38

0.50

0.38

1.00

0.25

1.00

0.50

1.00

0.85

2029

0.50

0.35

0.50

0.30

0.50

0.38

0.50

0.38

1.00

0.25

1.00

0.50

1.00

0.85

2030

0.50

0.35

1.00

0.60

0.50

0.60

0.50

1.00

0.25

1.00

0.45

1.00

0.85

2031

0.60

0.45

1.00

0.60

0.50

0.60

0.50

1.00

0.25

1.00

0.50

1.00

0.85

2032

0.60

0.45

1.00

0.60

0.50

1.00

0.70

1.00

0.25

1.00

0.50

1.00

0.85

2033

0.60

0.45

1.00

0.60

0.50

1.00

0.70

1.00

0.25

1.00

0.50

1.00

0.85

2034

0.60

0.45

1.00

0.60

0.58

1.00

0.70

1.00

0.25

1.00

0.50

1.00

0.85

2035

0.65

0.50

1.00

0.60

0.58

1.00

0.72

1.00

0.25

1.00

0.40

1.00

0.85

2036

0.65

0.50

1.00

0.60

0.58

1.00

0.72

1.00

0.25

1.00

0.30

1.00

0.85

2037

0.65

0.50

1.00

0.60

0.58

1.00

0.72

1.00

0.25

0.50

0.45

1.00

0.85

2038

0.65

0.50

1.00

0.60

0.58

1.00

0.72

1.00

0.25

0.50

0.45

1.00

0.85

2039

0.65

0.50

1.00

0.60

0.58

1.00

0.72

1.00

0.25

0.50

0.45

1.00

0.85

2040

0.65

0.50

1.00

0.60

0.58

1.00

0.74

1.00

0.25

0.60

0.50

1.00

0.85

2041

0.65

0.50

1.00

0.60

0.58

1.00

0.74

1.00

0.25

0.60

0.50

1.00

0.85

2042

0.65

0.50

1.00

0.60

0.58

1.00

0.74

1.00

0.25

0.60

0.50

1.00

0.85

2043

0.65

0.50

1.00

0.60

0.58

1.00

0.74

1.00

0.25

0.60

0.50

1.00

0.85

2044

0.65

0.50

1.00

0.60

0.58

1.00

0.74

1.00

0.25

0.60

0.50

1.00

0.85

2045

0.65

0.50

1.00

0.62

0.60

0.58

1.00

0.74

0.00

0.60

0.50

1.00

0.80

2046

0.65

0.50

1.00

0.62

0.60

0.58

1.00

0.74

0.00

0.60

0.50

1.00

0.80

2047

0.65

0.50

1.00

0.62

0.60

0.58

1.00

0.74

0.00

0.60

0.50

1.00

0.80

2048

0.65

0.50

1.00

0.62

0.60

0.58

1.00

0.74

0.00

1.00

0.80

2049

0.65

0.50

1.00

0.62

0.60

0.58

1.00

0.74

0.00

1.00

0.80

2050

0.65

0.50

1.00

0.62

0.60

0.58

1.00

0.74

1.00

0.25

0.00

1.00

0.80

2051

0.70

0.50

1.00

0.62

0.60

0.58

1.00

0.74

1.00

0.25

0.00

1.00

0.80

2052

0.00

1.00

0.62

0.00

1.00

0.74

1.00

0.25

0.00

1.00

0.80

2053

0.00

1.00

0.62

0.00

1.00

0.74

1.00

0.25

0.00

1.00

0.80

2054

0.00

1.00

0.62

0.00

1.00

0.74

1.00

0.25

0.00

1.00

0.80

2055

0.00

Source: adapted from Meyer et al. (2007). W-t = average working time. E/a = average earnings.

Appendix 2 Risk biographies 4b to 9 Old-age Childrearing

Unemployment

Vocational and Elderly care

retirement Year

Age

Bio 4b

Disability Further training

graduate studies

Bio 5a,b

Bio 5c

Not resident retirement

Bio 6a,b

Bio 7

Bio 8a,b

Bio 9

W-t

E/a

W-t

E/a

W-t

E/a

W-t

E/a

W-t

E/a

W-t

E/a

W-t

E/a

2008

1.00

0.65

0.00

1.00

0.50

0.00

2009

1.00

0.65

0.00

1.00

0.50

0.00

2010

1.00

0.70

1.00

0.80

1.00

0.80

1.00

0.50

0.00

2011

1.00

0.70

1.00

0.80

1.00

0.80

1.00

0.50

0.00

2012

1.00

0.75

1.00

0.85

1.00

0.80

1.00

0.50

0.00

2013

1.00

0.75

1.00

0.85

1.00

0.85

1.00

0.00

2014

1.00

0.75

1.00

0.85

1.00

0.85

1.00

0.75

1.00

0.90

1.00

1.10

0.00

2015

1.00

0.80

1.00

0.90

1.00

0.85

1.00

0.75

1.00

0.90

1.00

1.10

0.00

2016

0.00

1.00

0.90

1.00

0.90

1.00

0.75

1.00

1.10

0.00

2017

1.00

0.75

1.00

0.90

1.00

0.90

1.00

0.75

1.00

1.40

0.00

2018

1.00

0.75

0.00

1.00

0.75

1.00

1.10

1.00

1.40

0.00

2019

1.00

0.75

1.00

0.85

0.00

1.00

0.75

1.00

1.10

1.00

1.40

0.00

2020

1.00

0.80

1.00

0.85

1.00

0.85

1.00

0.80

1.00

1.20

1.00

1.50

0.00

2021

1.00

0.80

1.00

0.90

1.00

0.85

1.00

0.80

1.00

1.20

1.00

1.50

0.00

2022

1.00

0.80

1.00

0.90

1.00

0.90

1.00

0.90

1.00

1.20

1.00

1.50

0.00

2023

1.00

0.80

1.00

0.90

1.00

0.90

1.00

0.80

1.00

1.20

1.00

1.50

0.00

2024

1.00

0.80

0.00

1.00

0.80

1.00

1.20

1.00

1.50

0.00

2025

1.00

0.85

0.00

1.00

0.90

1.00

1.20

1.00

1.55

0.00

2026

1.00

0.85

0.00

1.00

1.20

1.00

1.55

1.00

0.65

2027

1.00

0.85

1.00

0.80

1.00

0.00

1.00

0.90

1.00

1.20

1.00

1.55

1.00

0.70

2028

1.00

0.85

1.00

0.80

1.00

0.80

1.00

0.90

1.00

1.20

1.00

1.55

1.00

0.70

2029

1.00

0.85

1.00

0.80

1.00

0.80

1.00

0.85

1.00

1.20

1.00

1.55

1.00

0.80

2030

1.00

0.85

1.00

0.90

1.00

0.80

1.00

1.10

1.00

1.25

1.00

1.60

1.00

0.80

2031

1.00

0.85

1.00

0.90

1.00

1.25

1.00

1.60

1.00

0.80

2032

1.00

0.85

1.00

1.10

1.00

1.25

1.00

1.60

1.00

0.85

2033

1.00

0.85

1.00

1.10

1.00

1.10

1.00

1.25

1.00

1.60

1.00

0.85

2034

1.00

0.85

1.00

1.10

1.00

1.10

1.00

0.90

1.00

1.25

1.00

1.60

1.00

0.85

2035

1.00

0.85

1.00

1.20

1.00

1.10

1.00

0.80

1.00

1.25

1.00

1.65

1.00

0.85

2036

1.00

0.85

1.00

1.20

1.00

0.80

1.00

1.25

1.00

1.65

1.00

0.68

2037

1.00

0.85

1.00

0.90

1.00

1.25

1.00

1.65

1.00

0.80

2038

1.00

0.85

1.00

1.10

1.00

1.25

1.00

1.65

1.00

0.80

2039

1.00

0.85

1.00

1.10

1.00

1.10

1.00

1.25

1.00

1.65

1.00

0.80

2040

1.00

0.85

1.00

1.10

1.00

1.25

1.00

1.65

1.00

0.80

2041

1.00

0.85

1.00

1.20

1.00

1.25

1.00

1.65

1.00

0.80

2042

1.00

0.85

1.00

1.20

1.00

1.10

1.00

1.25

1.00

1.65

1.00

0.80

2043

1.00

0.85

1.00

1.10

1.00

1.10

1.00

1.25

1.00

1.65

1.00

0.80

2044

1.00

0.85

1.00

1.30

1.00

1.10

1.00

1.10

1.00

1.25

1.00

1.65

1.00

0.80

2045

1.00

0.80

1.00

1.20

0.00

1.00

1.30

1.00

1.70

1.00

0.80

2046

1.00

0.80

1.00

0.00

1.00

1.30

1.00

1.70

1.00

0.80

2047

0.00

1.00

0.90

0.00

1.00

1.30

1.00

1.80

1.00

0.80

2048

0.00

1.00

1.10

0.00

1.00

1.10

1.00

1.30

1.00

1.80

1.00

0.80

2049

0.00

1.00

1.30

0.00

1.00

0.80

1.00

1.30

1.00

1.80

1.00

0.80

2050

0.00

1.00

1.30

0.00

1.00

0.80

1.00

1.30

1.00

1.80

1.00

0.80

2051

0.00

1.00

1.30

0.00

1.00

0.80

1.00

1.30

0.00

1.00

0.78

2052

0.00

1.00

1.30

0.00

1.00

0.80

1.00

1.30

0.00

1.00

0.78

2053

0.00

1.00

1.30

0.00

1.00

0.80

1.00

1.30

0.00

1.00

0.78

2054

0.00

1.00

1.40

0.00

1.00

0.80

1.00

1.30

0.00

1.00

0.78

2055

0.00

Source: adapted from Meyer et al. (2007). W-t = average working time. E/a = average earnings.

Notes *

Mailing

address:

via

Commerciale

76,

34135,

Trieste,

Italy.

email:

igor.guardiancich@eui.eu tel/fax: +39 040 420817 mobile: +39 349 1656421 1

They try to evaluate how countries that embraced private arrangements at different points in

time cope with the risk of social exclusion. 2

Given the individualisation of pension systems in the three countries, this point has only

marginal relevance. 3

To standardise the calculi, I assume: 4% gross wage contributions from age 25 onward, 4%

real return rate during accumulation and 2% during decumulation, price-indexed mandatory annuitisation, 5% upfront fee for the annuity provider. I use constant UN age-specific life expectancy tables for Slovenia (2005-06) and Serbia (2006) and national ones for Croatia (calculated in 1998). What differentiate the schemes are the fees charged during accumulation (upfront, management and others â&#x20AC;&#x201C; 0.05% on the net asset value) and additional tax advantages. 4

Social Inclusion during Retirement in Three ex­Yugoslav Countries

Social Inclusion during Retirement in Three exYugoslav Countries