Ukraine is on the threshold of one of the biggest changes in the pension system in recent decades. The Ministry of Social Policy announces the introduction of a draft law that may radically change the principles of accrual and payment of pensions. It is assumed that the main goal of the reform will be the modernization of the outdated system, transparency, as well as fairness and orientation to long-term stability. But is the state ready for such changes? Will they be a relief for retirees or will they add new challenges? And most importantly, how will it affect the financial stability of millions of Ukrainians?
The state of the pension system of Ukraine
The state of the pension system of Ukraine is a litmus test of the country’s economic and social development. As of January 1, 2024, there are 10.516 million pensioners in Ukraine — this is almost 200,000 less than a year ago. Compared to 1991, when there were 13.1 million pensioners in the country, and especially in 1993, when their number increased to 14.2 million, the current figures indicate a long-term downward trend. Since 1994, the number of pensioners has been steadily decreasing by about 2% each year, which is the result of both demographic changes and a difficult socio-economic situation.
Despite the reduction in the number of pensioners, their standard of living remains a painful problem. Today, more than half of pensioners receive less than 4 thousand hryvnias per month. However, if compared with the situation of previous years, there are some positive developments. The share of those receiving pensions of less than 3 thousand hryvnias decreased from 39% to 30% in 2023. At the same time, the number of pensioners with pensions of UAH 4,000 or more has increased. This is connected both with the gradual indexation of pensions and with the increase of the average pension in the country, which as of the beginning of 2024 reached 5,385.25 hryvnias, which is 16.5% more than last year.
Regional disparities in the level of pensions remain significant. The highest average pension was recorded in the capital — 7,248 hryvnias, while the lowest — in Ternopil region, where the average pension is only 4,070 hryvnias. These differences reflect the different level of economic development of the regions, as well as differences in average earnings, which form the basis for calculating pensions.
However, the problem of financing pensions remains critical — there is less than one working person per pensioner. Ukraine currently has about 14 million working population, of which only 6.5 million are employed in legal business and pay taxes. Another 3 million are public sector employees who also pay taxes, but from funds received from the state. As a result, the entire pension system rests on a single social contribution paid by these employees, as well as on the contributions of individual entrepreneurs.
It should be noted that the aging of the population poses a threat to the stability of the pension system. If the trend continues, in the future one working Ukrainian will be forced to support not one, but several pensioners. This means that current 40-year-olds and younger should think about creating their own retirement savings.
Already today, it is clear that without additional mechanisms of the savings system, the solidarity level will not be able to provide a decent standard of living for pensioners. After all, most of the funds that come to the Pension Fund are immediately spent on payments to current pensioners, without creating a reserve for future ones. That is why the reform of the pension system, which should include the introduction of the second level – accumulative – has become a necessary condition for avoiding collapse in the future.
What the pension reform provides
The Ministry of Social Policy of Ukraine has published a draft law, which should become the basis for carrying out a large-scale pension reform. It is currently at the stage of final approval and will soon be submitted to the Verkhovna Rada for consideration.
One of the biggest problems with the current system is the lack of fairness in the distribution of pension benefits. People with the same length of service and salary, but different years of retirement, receive completely different amounts. The difference can reach up to 50%, and this is not the limit. The reason for this lies in the complex and often confusing system of calculating pensions, which only deepens inequality. The pension reform aims to eliminate this injustice.
The new approach envisages the introduction of a three-level system, which will include basic, insurance and cumulative pensions. The basic pension will be the same for all citizens and will be 30% of the minimum salary. It will guarantee a minimum level of income, regardless of seniority or salary. The insurance pension will depend on the contributions that a person has accumulated during his working life, and will be calculated according to the points system. Each year of official employment will earn the employee points that will have a cash equivalent that will be reviewed annually. This will replace traditional indexing, which often does not take into account real economic conditions.
Most of the expectations are related to the introduction of the second level – the accumulated pension. The legislative prerequisites for this were created 20 years ago, but so far all attempts have failed. This time, the government plans to make savings mandatory for working citizens under the age of 55. Part of the earnings every month will be directed to personal accounts, which will provide additional income in the future. Accumulated funds can be invested in the national economy, which will contribute to its growth.
However, this is only part of the picture. The government also plans to eliminate special pensions, which have long become a symbol of social inequality. Judges, prosecutors and other categories will be able to receive additional payments only from their own savings, not from the solidarity system. This will not only simplify system management, but also reduce the financial burden on the budget.
The question of financing the reform is critically important. In the first stages, in order to compensate for the deficit of the Pension Fund, the government plans to attract international aid and invest funds from the state budget. In addition, the possibilities of cooperation with private investors for the development of the accumulative component are being considered.
The reform also takes into account demographic challenges. Today, the number of working citizens in relation to pensioners continues to decrease. If the system is not changed, in a few years the state will simply not be able to provide even minimum payments. Therefore, the introduction of a storage system is not only a requirement of time, but also a step towards economic stability.
The government promises that the new system will be operational as early as 2025. However, for this it is necessary not only to adopt the draft law, but also to ensure its implementation. This will require significant changes in the work of the Pension Fund, training of citizens and the introduction of new technologies for accounting for contributions and payments.
Implementation of the point system
After the implementation of the pension reform, the main element of calculating payments will be the point system, which is designed to change the traditional approach to determining pension amounts. It will make it possible to clearly correlate labor activity with future payments, making them more understandable and transparent. Points will be awarded monthly to each employee who receives an official salary. Their number will depend on the level of income. So, an employee whose salary is equal to the average official salary in the country will earn 10 points per month. If the salary is higher than the average, the number of points will increase proportionally; if it is lower, it will decrease.
For example, let’s imagine an employee who receives 22 thousand hryvnias, while the average salary in the country is 15 thousand hryvnias. His income exceeds the average by 1.47 times, so he will receive 14.7 points for a month of work. Another employee with a salary of 10 thousand hryvnias (66.7% of the average) will earn 6.67 points. But a person with a minimum salary of 6,700 hryvnias will receive only 4.47 points (44.7% of the average level).
To retire, you must have a minimum of 1440 points, which corresponds to 12 years of work with an average salary. If a person has worked officially for 35 years with an average income, he will accumulate about 4,200 points. This number will be the basic guideline for determining the value of one point. For example, if in 2024 the value of one point will be 1.05 hryvnias, then a person with 4,200 points will receive an insurance pension in the amount of 4,410 hryvnias.
Let’s consider more detailed cases. An employee with an income of 20,000 hryvnias, who will proportionally receive 13.33 points every month, will accumulate 5,600 points in 35 years. At the price of one point of 1.05 hryvnias, his insurance pension will amount to 5,880 hryvnias. Another employee who received the minimum wage for 35 years will accumulate about 1,865 points, which corresponds to 1,958 hryvnias of the insurance pension.
The basic pension, which will also be part of the payments, will be 30% of the minimum salary. For example, for a minimum salary of 8,000 hryvnias, the basic pension will be equal to 2,400 hryvnias. As a result, the total amount of the pension is formed as the sum of the insurance part and the basic one. Thus, an employee with an average salary will be able to count on a total pension of 6,810 hryvnias (4,410 hryvnias insurance + 2,400 hryvnias basic). An employee with a minimum wage will receive 4,358 hryvnias (1,958 hryvnias insurance + 2,400 hryvnias basic).
Those who have already retired will not be left without attention. For them, payments will be recalculated according to new rules: previously earned points will be multiplied by their current value, and the basic pension will be added to the insurance part. Other allowances, such as compensation for special working conditions or status, will be transferred to funding from the state budget. If the new system turns out to be less profitable, the amount of pensions will remain at the previous level.
The updated system should stimulate formal employment and raise wages. It offers a clear and fair approach where each employee independently shapes their future pension, knowing that their contributions to the system are working for them. This is a reform that aims not only to modernize the payment system, but also to change the attitude to work, insurance contributions and planning one’s financial future.
Solidarity pension after the pension reform
The calculation of the size of the solidarity pension after the pension reform will be based on the sum of two components: the basic and insurance parts. The basic pension will be the same for all citizens and will be defined as 30% of the minimum salary. For example, if the minimum salary in 2024 will be 8,000 hryvnias, the basic pension will be equal to 2,400 hryvnias.
As for the insurance pension, it will depend on the number of accumulated pension points, which will be calculated on the basis of the citizen’s official income. At the same time, one point will have a monetary value, which will be revised every year. For example, in 2024, the value of one point may be 1.05 hryvnias.
Let’s consider specific examples. A person who has worked for 35 years with the average salary in the country (15 thousand hryvnias) will accumulate 4,200 points. At the value of one point of 1.05 hryvnias, the amount of her insurance part of the pension will be 4410 hryvnias. After adding the basic pension (2,400 hryvnias), the total amount will be 6,810 hryvnias.
If an employee received a salary of 30 thousand hryvnias, which is twice the average, then for each year of work he would receive 20 points (instead of 10). For 35 years of experience, such a person will accumulate 8,400 points. Their monetary value in 2024 will be equal to 8,820 hryvnias. Combined with the basic pension, its total amount will be 11,220 hryvnias.
The situation will look different for an employee who received a minimum salary of 6,700 hryvnias all his life. Since his income was 44.7% of the average salary, he would earn 4.47 points every month. In 35 years, this will amount to 1,865 points, the value of which in 2024 will be equal to 1,958 hryvnias. Along with the basic pension, such a person will receive 4,358 hryvnias.
It is worth noting that there is an upper limit for accrual of pension points. The maximum amount from which points will be calculated corresponds to 15 minimum salaries. Even if the employee earns more, points will be calculated only from this limit. This means that a person with a salary of, say, 200,000 hryvnias and 120,000 hryvnias will accumulate the same number of points if both incomes exceed the established limit.
For those who are already retired, the reform will also bring changes. All previously accrued pensions will be transferred according to the new rules. Earned seniority and contributions will be converted into points, which will be multiplied by the current value of one point. The basic pension will be added to this amount. For example, if a person currently receives 4,000 hryvnias, and after recalculation his new calculation shows 4,200 hryvnias, he will receive a larger amount. However, if the new calculation turns out to be less profitable, the state guarantees that the pension will remain at the old level.
In addition, allowances for status or working conditions will no longer be taken into account under the solidarity system. These payments will be financed from the general state budget to reduce the burden on the Pension Fund.
It is expected that after the implementation of the reform, the majority of Ukrainian pensioners will see an increase in their benefits. According to forecasts, up to 80% of pensioners will benefit from the new rules, as the system will be fairer and take into account each person’s real work achievements.
How pensions will change for current retirees
After the implementation of the reform, the size of the pension for those who already receive it will be determined based on the recalculation of previously earned benefits. This means that all work experience and contributions made to the Pension Fund will be transferred into pension points according to the new methodology. The insurance part of the pension will be calculated on the basis of these points. A basic pension will definitely be added to it, which will become a single and fixed one for all citizens, regardless of seniority or salary.
The basic pension will be 30% of the minimum wage. For example, if at the time of the reform the minimum salary will be 8,000 hryvnias, then the basic pension will be equal to 2,400 hryvnias. This innovation ensures that even citizens with minimal work experience will receive a certain level of financial support.
Other allowances, which were previously accrued for status or special working conditions, will be withdrawn from the pension system. From now on, these payments will be financed directly from the state budget, which will reduce the burden on the Pension Fund. For example, additional payments for services to the state, military or Chernobyl status will no longer be taken into account when calculating pension points. However, the state undertakes to continue their payment separately.
The key social guarantee is that if, after the recalculation, the amount of the pension turns out to be less than the one the pensioner received before the reform, the payments will remain at the old level. Thus, none of the citizens will experience financial losses as a result of the implementation of the new system.
Accumulation level of the pension system
One of the most expected and large-scale innovations will be the introduction of the second level of the pension system – the accumulative one. Although the legal framework for it has existed since 2003, actual implementation has been delayed due to a lack of political will and financial resources. The government now intends to launch it from January 1, 2026.
The peculiarity of the accumulative level is the individual nature of the contributions. Unlike the solidarity system, where funds go into a general fund for payments to current retirees, the accumulative level involves the creation of personal accounts. Funds that will be deposited into these accounts will remain the property of the citizen. A person will be able not only to dispose of them in the future, but also to pass them on as an inheritance. At the first stages of the reform, contributions to the savings fund will amount to 2-3% of the salary. Some of them will be compensated by reducing the personal income tax (PIT) and the single social contribution (USS). For example, in the first year, the employer and the employee will each pay 1%, and another 1% will be a voluntary contribution of the employee. In the second year of the reform, this indicator will increase to 6% (2% each from the employer, employee and the state), and in the third year – to 9%.
Funds from the accumulation fund will be invested in safe assets such as government bonds, bank deposits or real estate. This will allow not only to protect contributions from inflation, but also to multiply them. Four years after launch, citizens will be able to transfer their savings to private funds or insurance companies that will offer different investment strategies.
It should be noted that access to accumulated funds will be opened only after reaching retirement age (60 years). A person will be able to receive this money in two ways: as lifetime payments or as a pension for a certain period. In the case of a lifetime pension, funds can be inherited only during the first 10 years after the start of payments.
It is worth noting that the government is aware that the implementation of the reform will require significant financial resources. In particular, in the first stages, the costs of the Pension Fund will increase due to an increase in the amount of payments for the majority of citizens. For this purpose, it is planned to introduce verification of recipients of social benefits, limitation of excessively high pensions and redirection of budget funds. In addition, from 2025, payments of special pensions will be limited, in particular those that exceed 10 subsistence minimums. And the accumulated funds in the accounts of pensioners-immigrants, which have not been used for more than a year, will be returned to the budget.
The reform has the support of international partners, including the World Bank, which helped develop the model. This indicates a high level of confidence in the proposed changes and their compliance with the best global practices. The government is confident that the changes will become a new stage in the development of Ukraine’s social policy, ensuring stability and justice for all citizens.
The pension reform is a litmus test of the authorities’ professionalism and foresight. It should become an answer to the main challenge of our time: how to ensure a dignified old age for citizens in a state where the demographic crisis and the shadow economy are undermining the very foundations of the social system. The reform should not just reboot the system, but create a new, transparent and stable model that guarantees that every hryvnia deposited into the system works for the future. It will become either proof of the state’s ability to make difficult but necessary decisions, or another failure that will shake the already shaky public trust. There is no room for mistakes and political games in this matter — it is a question not only of the economy, but of the future of Ukraine as a social state.
