Economic Policy Review ISSN 1313 - 0544

Pension Calculator

Author: Adriana Mladenova / 09.10.2008
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For years the Institute for Market Economic (IME) has been urging for reforms of the state social security system by its full privatization and moving to capital accumulating pension system, similar to the one in Chile in 1981. Under the conditions of aging population the state cost covering system could not provide adequate pensions, while the social security payments are an excessive burden both for the employees and the employers. Significant part of the problems of the present system of social security, related to the small pensions, is the existence of a relatively large non-formal labor market, financial instability, inequality between the  various groups and high degree of political risk, could be resolved by moving to an entirely capital accumulation pension system.

With the pension calculator you could compare the pension which you would get under the cost covering and the capital pension systems. The calculations are an example and depend on the assumptions made, but the difference between the two systems is sufficiently big and could convince everybody, which one is the better alternative. With the capital pension system, based on personal accounts against much smaller payments and greater available income the pension is several times greater!

For example, let us compare the pensions of a man, who at present is 35 years old and has 8 years of working experience. According to the current conditions, he would retire at the age of 63 years and until than he would be working all the time. Let the gross salary of that person be at present 1200 levs. Under the cost covering system the pension, which he would get, would be 36% of his salary before retirement and the payments to the social security system would be 22% of his monthly salary. If he is paying social security to an entirely capital pension system and the payments are only 10% of his salary with a personal account, under the same conditions, his pension would be 47% of the salary before retirement - i.e. 31% higher pension against 2.2 times smaller payments! If the person decides to pay to the system 22% of his salary to the capital system (the same as at present with the cost covering system) his pension would be three times greater, than under the current system!

In addition - with the capital pension system and 10% contributions at the end of his career the person would have accumulated 369 thousand levs in his personal account. These funds are in reality savings and the relatives have right to inherit.  Under the cost covering system the person does not accumulate personal funds. The pension which he would get depends entirely on the political will of the government, from the economic development of the country and the demographic structure. The contingency is very significant, which makes the connection between the personal contribution and the size of the pension fuzzy.

Which system would you prefer to pay social security to?

To the pension calculator