In a recent interview, Deputy Minister of Social Policy Darya Marchak noted that today’s workers have to take care of their pension in the future on their own. This is explained by the demographic situation in Ukraine, namely the decrease in the total number of the population and the increase in the number of pensioners. We already have the ratio: 1 working tax payer = 1 pensioner. And here it is difficult to argue with the official, but there are interesting definitions in her words. “those who work now pay taxes to provide for current pensioners,” says the deputy minister. And these words of hers are strange.
The fact is that in the budget of any organization, institution, enterprise, etc., there is such a line, it is called FOP – it is not an individual entrepreneur, but a wage fund. It includes: actual salary, deductions to the pension fund and deductions to the social insurance fund. In other words, all the funds included in the FOP are the funds of the employee who pays them. Salary is the money that a person receives every month for his work, and deduction is a deferred part of his salary to provide it after the end of work and to finance benefits during temporary incapacity for work (hospital days). And the key here is the definition that a deduction is not a tax. Logic suggests that the worker saves money for himself, and not for the current pensioner, unknown to him. Therefore, the state must act adequately, or accordingly.
It is necessary to gradually move to financing pensions from other sources, and those who are working now should be helped to preserve their funds and possibly increase them. The funds in the pension fund are, or should become, a huge investment fund, if only because they will be there for many decades, and the money should not lie as “dead weight”, it should work. The use of these funds would be most expedient to be used for lending to state projects with a possible lower cost of credit – lower interest rates for using loan money. Then the income received from the loans would be distributed between the owners of the funds (working) and ensuring reliability in the repayment of loans.
The gain in this situation is not even double, but triple: today’s workers will not only be provided with pensions in the future, but also their personal pension funds will be indexed with part of the interest received from lending. Secondly, the cost of projects will be lower thanks to inexpensive loans. And thirdly, the correct interpretation of deductions to the pension and insurance funds, not as taxes, will encourage employees to receive their salary “in white” in full, because it will be in their direct interest. This will lead to an increase in working people and tax payers, which means that the state will benefit as a whole.
Incorrect interpretation of deductions to funds has already taken place in our modern history. In the early 90s, some of our entrepreneurs in their interviews complained about excessive taxes, sometimes citing a figure of almost 90%. But was it true? Those “cunning” entrepreneurs accounted for 20% VAT, 30% income tax, deductions to the pension fund – then 32.3%, and deductions to the insurance fund – 4%, and they got 86.3%. In fact, VAT was not paid from 100 percent of income, just like income tax, and together they could amount to 25-30% of the total income of the enterprise. As for deductions from the PF and insurance, the difference was much greater there: salaries then were around 7-10 percent of income, which means that 32.3 + 4 = not 36.3, but a maximum of 3.63; %. In total, the amount of payments was no more than 33.63% and was determined to be one of the lowest in Europe.
This distortion of the real situation and the government’s “silent game” contributed to the economy’s drift into the shadows, which further weakened the state and its budgetary capabilities.
If the officials of the Ministry of Social Policy were professional and correctly interpreted the term “deduction to pension and insurance funds”, then their attitude towards the system of providing for citizens would be correct. Instead, they advise working people to take care of their own retirement and save money in various private financial institutions. This means (in legal terms) that the state wants to withdraw from guaranteeing the preservation of funds for pension provision to citizens, and let them think about their old age on their own. This is all the more surprising, because everyone knows that the majority of Ukrainians’ salaries are barely enough for living and they have nothing to save. One should also take into account the unstable situation in the country and the banking system, which can lead to the fact that when a person retires, it is not known where his saved money will go.
The government of Ukraine hopes for international financial support to provide Ukrainians with pensions, and not for the development of its own economy. It will soon be necessary to regularly subsidize the pension fund, which will not have enough money for current pension payments. Prime Minister D. Shmyhal repeatedly emphasized the difficulties with pension provision, saying:
“In 15 years, the state will not be able to pay pensions.”
Statistics have disappointing forecasts. Court cases surrounding the pension system have already cost the state tens of billions of hryvnias in additional expenses, and the debts of the Pension Fund, according to court decisions in the undeclared war of pensioners against the state, exceed UAH 70 billion and continue to grow.
During the years of independence, our financial system has experienced more than one crisis, and inflation levels sometimes nullified all income in banking institutions, so the advice of the deputy minister may lead to a large-scale social disaster in the future, which will affect the fate of millions of citizens and it will be impossible to correct the situation due to its huge size. Is this what the Ministry of Social Policy, which is called, first of all, to protect the interests of citizens, seeks?
The following passage is also surprising:
“As a society, we must prepare for the fact that each of us will earn a living, be economically and socially active, as long as we can. Citizens should retire when they cannot physically support themselves” – says the deputy minister of social policy.
How to understand such words? To work until they are kicked out? In addition, officials at the Ministry of Social Policy should understand that a retired person is not a physically exhausted, infirm old man, but also a socially active person who has the right to devote more of his time to personal needs. And at the same time, a pensioner should not automatically turn into a very poor person who needs various benefits and assistance. Is this possible? So, in developed countries, retirees are among the most active travelers, they can pay more attention to their hobbies. Pensioners are not a written-off human resource, but people who have worked hard enough for public interests and have been given the opportunity to “enjoy life.”
Regarding the wishes of our citizens to keep themselves active as long as possible, officials should be reminded that the insurance fund should become the basis of the transformation of our medicine into insurance, when a person can receive quality medical care in hospitals where highly qualified specialists work with competitive salaries, and the medical institutions should be well equipped with everything necessary. Is it possible to do so? Of course you can. But if deductions of 4 percent to the insurance fund become personal and each working person will have his own account in that fund. Such an approach will once again increase the “white salary” in the economy – the personal interest of citizens will work for the public interest.
In pension provision, the experience of Sweden is interesting, where there are three levels of pension provision. According to the second level – the accumulation system, the employee deducts 2.5% of the salary to an individual pension account. At the same time, he can choose one or several private pension funds where he places his savings. But the state does not lose its controlling function, but it has introduced many restrictions for investments that reduce risks, that is, guarantee the preservation of pension funds. These funds of pensioners are supervised by the Ministry of Finance of the country, which reports to the Parliament based on the results of the annual financial audit.
Will there be enough funds to finance insurance medicine at the expense of the insurance fund? If this year the average salary in our country should reach a little over 20 thousand hryvnias, and the total number of employees will be at least 11 million people, then 4% of 220 billion hryvnias (total salary) is 8.8 billion hryvnias — not for a year, but in a month. In annual terms, the amount will be equal to 105.6 billion hryvnias. In addition, deductions to the pension fund can amount to more than UAH 400 billion per year, which is also more than a large investment fund capable of becoming an “engine” of the economy and contributing, in particular, to an increase in jobs.
There is one difficult problem in the personal (probably fairer) pension and insurance system introduced above – how to move from financing current pensioners to those who are currently working? Huge funds are needed to solve it. But various sources can help here, such as money from reparations from the Russian Federation, funds from offshore accounts that are actually stolen from the state – offshore accounts receive parts of income on which taxes have not been paid. In this case, we should not forget about corruption, which “eats up” huge sums of the state budget.
Currently, all Ukrainian pensioners run out of pension money on the day of their death, although such a personal event may occur shortly after the person’s retirement. That is, the amount accumulated by this person in the pension fund is not taken into account at all. In the case of applying the personal pension system described above, the funds do not disappear, but like other property of the deceased, they are inherited by his/her descendants. Isn’t that socially just? A similar picture can be in the insurance system, when unused funds will remain with the children and will be useful to them in case of need for serious treatment.
The ability to inherit savings in these funds will not increase inflationary processes – money from the funds will either continue to be saved until old age, when they will be gradually issued in the form of a pension, or will be spent to pay for medical facilities and the financial potential of these facilities will gradually grow. Under such conditions, the system of pension provision and medical care will turn from a heavy burden on the country’s budget into a self-supporting system that will also stimulate the development of the state’s economy and improve the quality of life (insurance medicine).
To compare the operation of pension systems, you can take the system that operates in Great Britain (in this country, the payment of pensions was started as early as 1908, when pensions were not even thought of in other countries). Is the British system the most perfect? There are three types of pensions in this country: state, basic – they do not depend either on a person’s work experience or on the amount of his earnings, but these pensions are insufficient for a normal life, their amount is 3 thousand pounds per year for one person and 5 thousand pounds for married couple Such pensions can be received by all citizens without exception. The second form is a state retirement pension. The size of the citizen’s earnings is important for its size, and this pension is much larger. Under this form, a person receives a basic small pension plus an additional pension that depends on his seniority and earnings.
Recently, the third type of pensions – the payment of pensions under a non-state scheme – is gaining more and more popularity. Here, the employee himself regulates the size of his pension and does it primarily by increasing or decreasing accumulated contributions. Today it is almost 70%; British people of retirement age use such a scheme.
As you can see, no one is left without pensions in Britain, but the size of the provision can seriously vary. The stability of the financial system of Great Britain speaks in favor of the third scheme, which is difficult to say about Ukraine, our finances, and together with them, financial institutions can experience “collapse” from time to time, which makes them unreliable guarantors for long-term storage of funds for pension provision. Therefore, the organization of pension and insurance funds should be under the strict control of the state until financiers prove their solvency over long periods.
