The Bulgarian Pension System: Caught Between Adequacy and Sustainability: Bulgaria

TheBulgarianPensionSystem:CaughtBetweenAdequacyandSustainability Jean-JacquesHallaertSIP/2024/021 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonMay10,2024.ThispaperisalsopublishedseparatelyasIMFCountryReportNo24/164. 2024 JUN ©2024InternationalMonetaryFundSIP/2024/021 IMFSelectedIssuesPaper EuropeanDepartment TheBulgarianPensionSystem:CaughtBetweenAdequacyandSustainabilityPreparedbyJean-JacquesHallaert AuthorizedfordistributionbyJean-FrançoisDauphinJune2024 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonMay10,2024.ThispaperisalsopublishedseparatelyasIMFCountryReportNo24/164. ABSTRACT:DuringtheCOVID-19pandemic,theBulgarianauthoritiesincreasedpensionssubstantiallytosupportpensioners’livingstandardsandaggregatedemand.Theseincreaseshavebecomepermanentandimprovedtheadequacyofpensions.However,notmatchedbyrevenuemeasures,theyhavewidenedthedeficitofthepensionsystem.Reformsthatincreasetheincentivestocontributetothepensionsystemandthusrevenuewouldimprovethefinancialsustainabilityofthepensionsystemandreducefiscalrisks. RECOMMENDEDCITATION:Hallaert,Jean-Jacques(2024)TheBulgarianPensionSystem:CaughtBetweenAdequacyandSustainability,WashingtonDC:InternationalMonetaryFund,SelectedIssuesPaper,SIP/2024/021 JELClassificationNumbers: H53,H55,I38 Keywords: Bulgaria,Pension,PensionAdequacy,FinancialSustainability,FiscalRiskfromPensions Author’sE-MailAddress: JHallaert@imf.org SELECTEDISSUESPAPERS TheBulgarianPensionSystem:CaughtBetweenAdequacyandSustainability Bulgaria PreparedbyJean-JacquesHallaert May10,2024 BULGARIA SELECTEDISSUES PreparedByJean-JacquesHallaert ApprovedBy EuropeanDepartment CONTENTS THEBULGARIANPENSIONSYSTEM:CAUGHTBETWEENADEQUACYANDSUSTAINABILITY3 A.AnOverviewofthePensionSystemandofPastPoliciestoEnsureFinancialSustainability3 B.TheCOVID-19PandemicMeasures:AGameChangerthatIncreasedImbalances7 C.Long-TermDemographicPressures10 D.HowtoMitigatetheProjectedIncreaseinPensionBurden?12 E.Conclusion15 BOX 1.VariousPopulationProjections11 FIGURES 1.PensionSpending4 2.PensionersandContributors4 3.ExpectedYearsinRetirement5 4.PensionLevelandWageEvolution5 5.GenerosityofthePensionSystem5 6.ContributionRatetothePublicSystem6 7.MaximumInsurableIncomeandWages6 8.ReplacementRateandElderlyPovertyRates6 9.PensionAdequacy7 10.ContributionstoPublicPensionsandBenefitRatio8 11.PaymentstoPensioners9 12.SocialContributionsinShareofPaymentstoPensioners9 13.FiscalTransferstoCovertheDeficits10 14.PensionEntitlementsinSocialInsurance10 BULGARIA 15.Old-AgeDependency12 16.ProjectedIncreaseinPublicPensionSpending12 17.ProportionalityMeasureBasedonthe2021AgeingReport13 18.ContributionstothePublicPensionSystem13 19.ContributionRatestothePublicPension14 20.FiscalRedistributionbyInstrument15 TABLES 1.COVID-RelatedFiscalMeasures8 2.PensionandIncreases9 3.MaximumInsurableIncomeandMaximumPension10 4.PopulationGrowthbyAgeGroup11 REFERENCES References17 2INTERNATIONALMONETARYFUND THEBULGARIANPENSIONSYSTEM:CAUGHTBETWEENADEQUACYANDSUSTAINABILITY1 DuringtheCOVID-19pandemic,theBulgarianauthoritiesincreasedpensionssubstantiallytosupportpensioners’livingstandardsandaggregatedemand.Theseincreaseshavebecomepermanentandimprovedtheadequacyofpensions.However,notmatchedbyrevenuemeasures,theyhavewidenedthedeficitofthepensionsystem.Reformsthatincreasetheincentivestocontributetothepensionsystemandthusrevenuewouldimprovethefinancialsustainabilityofthepensionsystemandreducefiscalrisks. 1.TheCOVID-19measuresrelatedtopensionsstructurallyincreasespending.Duringthepandemic,increasingpensionswasoneofthetoolsdeployedbytheBulgarianauthoritiestosupportdemand.Someofthemeasureswereannouncedtobetemporarybutweremadepermanentin2022.Asoffsettingrevenuemeasureswerelimited,thedeficitofthepensionsystemincreased.Thispresentsafiscalburdengiventhelegalrequirementforthestatetotransferfundstocoverthepensionsystemdeficits. 2.Asadequacyremainsanissue,reformsshouldaimatincreasingcontributions.Therecentmeasuresincreasedtheadequacyofpensions,butpensionsremainlowcomparedtowages,andpensionerspovertyremainswidespread.Thus,thereislittlescopeforreducingthegenerosityofpensions.Thispaperarguesthat,instead,reformsshouldfocusonincreasingincentivestocontributewhich,inturn,willincreaserevenue. 3.Thispaperisorganizedasfollows.Thefirstsectionprovidesanoverviewofthepensionsystemanddescribesmeasurestakeninthelastdecadetoincreaseitsfinancialsustainability.ThesecondsectionhighlightshowthemeasurestakenduringandaftertheCOVID-19pandemicstructurallyaffectthefinancialsustainabilityofthepensionsystem.Thethirdsectionshowsthattherecentmeasurescompoundthelong-termpressurerelatedtoanagingpopulation.Thefourthsectiondetailspoliciesthatcouldcontaintheprojectedincreaseinpensionspending. A.AnOverviewofthePensionSystemandofPastPoliciestoEnsureFinancialSustainability 4.TheBu