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Pension reforms in Slovakia: background summary (update April 2019)

Characteristics of the pension system

  • The Slovak pension system consists of three pillars: mandatory pension insurance, a funded old-age pension scheme, and a voluntary supplementary pension saving scheme.
  • The insurance-based mandatory pension scheme is defined as a ‘pay-as-you-go system’. This component is financed primarily through pension insurance contributions that are paid by the economically active persons: those in employment relationship or similar employment contract (for example a contract on working activity); self-employed persons whose annual income exceeds 50% of national average wage in 2016, i.e. €5,472. Also insured are persons caring for a child or persons receiving Attendance Service Benefit, persons performing Personal Assistance Service monthly for at least 140 hours and persons receiving Maternity Benefit (MISSOC 2018).
  • Employees contribute 4% and employers 14%. However, if the employees simultaneously participate in the second pillar (with a so-called ‘mixed pension plan’), 4% of the employers’ contributions are redirected to the employee’s personal pension account (European Commission and Social Protection Committee 2015). Self-employed persons contribute to the old-age pension scheme with 18% of monthly declared earnings. They might also divert 4% of contributions to the second pillar.
  • The minimum contribution period for pension entitlements in the mandatory scheme is 15 years.
  • This pension component mixes both solidarity and earning-related principles. Whereas the maximum value of the contribution is limited, low-income workers are protected by a minimum assessment base (OECD 2015). The old-age pension is annually indexed.
  • In addition to the standard mandatory pension scheme, there is a special social security system that covers exclusively such public services as soldiers, policemen, customs officers, firemen, and rescue workers. It is funded both by contributions paid by the relevant workers and by direct state budget subsidies (European Commission and Social Protection Committee 2015).
  • The voluntary supplementary pension saving scheme is open to all residents aged 18 and over. The supplementary voluntary old-age savings scheme is financed by contributions of participants and employers. The pension is based on defined contributions (MISSOC 2018). Certain arduous work and artistic professions are mandatorily covered by this scheme, which moves the scheme towards occupational pension schemes. However, standard occupational schemes do not exist in Slovakia.
  • Workers in arduous occupations are obliged to enter the third pillar, and the employer is obliged to contribute for such workers (2% of the employee's assessment base). In other cases, employers may contribute to their employees' savings accounts as a form of benefit, usually under terms specified in collective agreements.
  • Workers employed in arduous occupations are entitled to benefits paid from the voluntary system after 10 years of work in such jobs and from the age of 55 years (European Commission and Social Protection Committee 2015).
  • The contributions to the old-age pension funded scheme are paid by employers, employees and the State. Old-age pensions from the second pillar are paid only in combination with a pension from the first pillar.
  • Membership in the second pillar is voluntary up to 35 years of age. After entering the second pillar, the pension saving becomes mandatory and along with the first pillar constitutes a basic pension scheme (MISSOC 2018).
  • The amount of old-age pension benefit is generally determined by the amount of employment income insured through contributions during the entire insured life and duration of the insurance period.
  • The calculation of the monthly benefit from the mandatory 1st pillar is based on Average Personal Earnings Point x Number of insurance years x Current Pension Value. The Average Personal Earnings Point is determined as a proportion of the multiplication of personal points achieved during particular calendar years (during the decisive period) by the periods of pension insurance. The personal earnings point is determined as a proportion of the gross yearly income of the insured to the national average yearly wage. The ceiling of the personal earnings point corresponds to a value of 3, whereas the ceiling of Average Personal Earnings Point equals a value of 2.44. The Current Pension Value is declared each year by the Ministry of Labour, Social Affairs and Family. For calculating the benefits in 2018, the current pension value was €11.9379 (MISSOC 2018).
  • The average solo old-age-pension benefit in 2017 was €482, which is 44.9% of the average monthly wage in Slovakia (MLSAF 2018). The gender old-age-pension gap was 19.7% to the detriment of women (MLSAF 2018a). Old-age Pension is paid 12 times per year without taxation.
  • In the 1st pillar, the amount of old-age pension benefit is annually adjusted (1st January) by the alteration of the “Current pension value”  according to the average development of gross earnings  and of “Pension benefits” according to the increase of consumer prices of pensioner households; though by a minimum of 2% of the national average amount of the old-age pension (MISSOC 2018).
  • The amount of the benefit from the 2nd voluntary pillar depends on conventional insurance principles. There is a possibility to choose between Life Annuity, or Programmatic Relief with Life Annuity, with the possibility to draw sooner the surplus on disposal, or Provisional Pension with Life Annuity – where the provisional pension is paid monthly during 5, 7 or 10 years. The average amount of the Life Annuity pension (to most popular choice) was €24.58 in 2017(MLSAF 2018).
  • There is a special supplement to the old-age pension, a so-called Christmas Bonus paid for those with pensions (old-age pension, early old-age pension, invalidity pension, social pension, widow pension, widower pension and orphan pension) below 60% of average national wage. Maximum amount in 2017: €100 (MISSOC 2018).
  • The minimum old-age pension from the 1st pillar stands for 136% of the subsistence minimum when reaching at least 30 qualified years of insurance; for each additional year of insurance, the sum increases by 2 percentage points, and by 3 percentage points after 40 years of paid contributions. The minimum pension is not means-tested. From the 2nd pillar, no statutory minimum pension is set (MISSOC 2018). From 1st January 2019, the amount of the minimum old-age pension benefit is for at least 30 qualified years of insurance is €278.90 monthly (Social Insurance Agency, 2019).

 

An overview of pension reforms in Slovakia since the 2000s

Reform of the pension system started as early as 2000. Its goal was a revision taking into account growing pension expenditures and tackling the perceived unfairness of the old system. Between 2000 and 2005, several important measures were introduced:

  • The first and the third pillar were modernised, and a new second pillar came into force. The scheme was introduced by Act No. 43/2004 Coll., on old-age pension savings and is operating since 2005 (see, e.g. Bednárik 2015).
  • The pensionable age was gradually increased between 2004 and 2014 from 60 years for men and 53-57 years for women (depending on the number of raised children) to 62 years for both genders. For women with several children, the pensionable age should be levelled before 2024 (OECD 2015).
  • From 2017, the legal retirement age gradually increased depending on the increase in average life expectancy in the reference age for both men and women. In 2018, it was 62 years and 139 days. In the case of women who raised children, the retirement age will be gradually increased to match the retirement age of men by 2024 (MISSOC 2018).
  • The basis of calculation for the pension passed from the 5 years of highest income to the last 10 years prior to retirement.
  • In 2015, an amendment of Act No. 43/2004 Coll. on old-age pension savings introduced the payment of the benefits from 2nd pillar – old-age funded scheme, so-called ‘annuity amendment’ (MLSAF 2016).
  • Since 1 July 2015, a minimum old-age-pension was introduced by the amendment of Law on Social Insurance No. 461/2003 Coll. The purpose of the minimum pension is to provide an income of the insured person at a level that will not make the insured person dependent on assistance in material need (Social Insurance Agency 2019).
  • Since 1st January 2019, a new mechanism is in force to determine and announce the retirement age annually for the period of five years in advance and recalculate to years and months (not years and days as before) (TASR 2018).

A number of changes were introduced in the subsequent period in order to further improve the long-term sustainability of the pension system (cf. European Commission and Social Protection Committee 2015; OECD 2015; Bednárik 2015):

  • In order to help the self-employed during the crisis, their level of pension contribution was temporarily decreased between April 2009 and December 2010. Subsequently, the amount of contributions gradually increased again by raising the minimum assessment base for the self-employed. The increase in contributions was introduced with the consent of representative bodies of self-employed as this measure is meant to improve social security of self-employed.
  • Since 1 January 2013, the principle of solidarity related to the mandatory scheme has been strengthened over the transition period 2013 – 2018. The replacement rate has been increased for new pensioners who earned low wages during their working career and decreased for high-wage earners.
  • The tax incentives for the voluntary supplementary pension saving scheme were suspended between 2011 and 2013. They have been reintroduced since 1 January 2014 but are less generous than the initial ones.
  • Since 2013, pension insurance contributions have been paid not only from the earnings coming from employment contracts and self-employment but also from agreements on work performed outside an employment relationship. This partial reform was motivated - besides the effort to increase the resources of the social security scheme - by the intention to cover persons working under such agreements by benefits paid from social insurance systems similarly to employees (European Commission and Social Protection Committee 2015).

Modifications of the private old-age pension funded scheme

  • The initial contribution rate was set at 9% of the gross wage. However, it was lowered to 4% as of September 2012 in reaction to the economic crisis. The contribution rate shall be increased again by 0.25% every year between 2017 and 2024 to reach 6% (European Commission and Social Protection Committee 2015; OECD 2015; Bednárik 2015).
  • Since its introduction, the enrolment principle changed several times. The participation was initially mandatory for workers entering the labour market for the first time whereas other workers aged up to 47 had the possibility to choose to join the mixed scheme by 30 June 2006 or to remain in the public scheme only. From January 2008 to March 2012 the participation was on a voluntary basis. It became mandatory again for all new entrants to the workforce from April 2012, although they were able to opt out within the first 2 years of employment. In total, the personal account scheme was opened temporarily four times to enable participants to opt out. Since 1 January 2013 new entrants to the social security system are automatically enrolled only in the first pillar, but up to the age of 35 might voluntarily apply for membership in the second pillar (OECD 2015; European Commission and Social Protection Committee 2015).
  • The minimum contribution period for pension entitlements in the second pillar was initially set at 15 years. However, since April 2012 it has been reduced to 10 years and since 1 January 2015, there has been no minimum contribution period (see European Commission and Social Protection Committee 2015; OECD 2015).

Recent changes:

The automatic increase in the retirement age in line with life expectancy will be stopped and capped for men and childless women at the age of 65, women with one child at 64 and women with two and more children at 63 years. This is expected to be ratified by an amendment of the constitutional law that was submitted to parliament in February 2019 and supported by the trade unionists by a petition signed by more than 230,000 people (TASR, 2019). The ministry of finance and economics opposes the proposal, forecasting a worsening of the long-term sustainability of public finances and estimating the cost at 900 million per year (1% of GDP) in upcoming 50 years (CBR 2019). However, the amendment of the constitutional law was approved on 28 March 2019. The retirement age was set at the age of 64, women with one child of 63,5 and with two children of 63 years, with three and more children of age 62,5 years old. The condition of the retirement is still 15 years of insurance.