EUROPE – The financial crisis and resulting downturn in economic output was "too big" for the second pillar to survive unscathed in Central and Eastern European (CEE) countries, the World Bank has argued.
Addressing the WorldPensionSummit in Amsterdam this morning, World Bank chief economist Heinz Rudolph noted that the introduction of the second pillar in many CEE countries – mandated by the European Union for member states – was subject to a tension between short and long-term fiscal objectives.
He said this was particularly the case as the systems would take between three and four decades to mature, and the contributions were funded by a set component of existing payroll taxes being diverted away from each country's state pension pillar.
Rudolph noted that, in many cases, taxation income that has since fallen away in the economic downturn was earmarked to compensate for the shortfalls this would create in pay-as-you-go systems – resulting in these deficits now necessitating increased state borrowing.
"What is the motivation for asking countries to keep second pillars alive when the main parameters for assessing the euro-zone do not take into consideration their efforts?" he asked, echoing concerns previously raised by nine member states that argued in favour of measures to account for the additional debt incurred.
"People say 'This is nothing personal, there is nothing wrong with the second pillar, it's just that the crisis was too big'," he said, pointing to the double-digit decline in GDP suffered by some countries such as the Baltic states.
"Countries with second pillars are disadvantaged compared with the rest of the countries that do not have second pillars," he said.
Lithuania's pension fund association in late 2010 sued its government over proposals to reduce second-pillar contributions to offset budget deficits, and the government later confirmed a 2% contribution cap and the ability to opt out.
Hungary effectively nationalised the second pillar last year, while concerns are now also being raised by Bulgarian pension fund officials.
Speaking generally of the CEE countries' measures – including the region's largest economy Poland – to divert contributions back to the first pillar, he said: "It is very difficult to blame them for reducing the contributions to second-pillar pensions."
However, Rudolph noted that the problem facing the region was a demographic trend in line with the rest of continent, and that many countries were ignoring the implicit debt of unfunded pension systems over concerns of explicit debt in the public markets.
"Decisions of policymakers are very focused on the short term, [so] they can get elected," he said.