A question of rights
In the 1960 case of Fleming v. Nestor, the US Supreme Court ruled that workers have no legally binding contractual rights to their social security benefits, and those benefits can be cut or even eliminated at any time. Ephram Nestor was a Bulgarian immigrant who went to the US in 1918 and paid social security taxes from 1936, the year the system began operating, until he retired in 1955. A year after he retired, Nestor was deported for having been a member of the Communist Party in the 1930s. In 1954 Congress had passed a law saying that any person deported from the US should lose their social security benefits. Nestor sued, claiming that because he had paid social security taxes he had a right to social security benefits. The Supreme Court disagreed, saying, “To engraft upon the social security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands.”
There is no doubt that the Bulgarians are very sensitive on the issue of justice, moreover they are ardent defenders of their rights. Therefore it should not be surprising that 40 years later a similar problem was raised for public debate in Bulgaria, this time with national institutions.
It was only a couple of months after the Social Security Code came into force (providing legal grounds for first-pillar pension reform and laying the foundations of a second pension pillar as well), when 53 members of Parliament challenged 15 articles of the code at the Constitutional Court.
The much debated constitutional problem: Does social security constitute a right or an obligation? was first put forward by the lawyers in the country. The 53 members of Parliament declared that the compulsory character of social security proclaimed in the code runs contrary to article 51, paragraph 1 of the Bulgarian constitution where social security is defined as a citizens’ right. The compulsory character of social security might turn the social security contribution into an additional tax which was considered contrary to article 60 of the Constitution where the compulsory character of tax payment is regulated separate form the right to social security.
By virtue of the Constitutional Court’s ruling of 29 June the compulsory character of social security was declared in conformity with the Bulgarian Constitution. Art. 51, paragraph 1 of the Constitution proclaims the citizens’ right to social security without prescribing the order, method and principles of the system for practical implementation. Therefore it is within the competence of the legislative body to establish the legal framework for social security allowing the citizens the possibility to exercise their constitutional right.
Instead of manoeuvring along the interwoven legal meanders of whether social security constitutes a right or an obligation, retirees in the country are certain of something very simple: it constitutes a problem. Therefore they put the question in a more practical way: “What is my right to social security worthy of if first-pillar pensions are not sufficient to sustain a decent life after retirement?”. The average pension paid by the government PAYG system came up to only 32% of the average country salary in 1999 and is expected to be 37.1% in 2000.
A fully matured government PAYG pension system, where current employees pay for current retirees’ pensions hoping there will always be enough employees and contributions to secure their future retirement income, is hardly sustainable in Bulgaria under a steady decline in natural growth (from 7.2 per 1000 persons in 1970 to -4.8 per 1000 persons in 1999) (See Figure 1) and a persistent level of unemployment (12.5% in 1996, 13.7% in 1997, 12.2% in 1998 and 16.0% in 1999).
The Bulgarian population age structure as at 31, December 1999 is narrow in the highest and lowest age ranges. Currently it resembles a ‘pear-like’ shape (See Figure 2).
However the trend of a constant decline of natural growth and a relatively constant average life expectancy (See Figure 3) will lead to a gradual narrowing of the lower age ranges, until finally the age pyramid base is entirely tapered off.
That is why people are looking for additional sources of retirement income that should serve as sugar coating necessary to accept their bitter first-pillar pension rights.
The Government Social Insurance Supervisory Agency started collecting applications for licences of pension fund management companies on 17 July. The first seven licences were issued on 3 October. Since then there has been an unprecedented public interest in third-pillar pension funds.
It seems that licensing itself helps in the evolution of the common retirement opinion of the public: Within the PAYG first pillar people are entitled to pension rights which want financing at retirement, whereas within the fully funded third-pillar people are entitled to their individually accumulated capital which is a real source of their pension right financing at retirement.
Nickolai Slavchev is chief retirment schemes analyst at Allianz Bulgaria Pension Scheme in Sofia