MBS Blog

Unlike their peers in most European countries, Ukrainian pensioners are too poor to enjoy retirement.

The MacDonalds of Scotland and the Zhornyaks of Ukraine are two retired couples. Both sets are highly educated, hard-working and looking forward to summer. But they lead vastly different lifestyles because of the retirement benefits each country offers.

While the MacDonalds hope for sunny weather so they can make a trip abroad and attend jazz festivals, the Zhornyaks want enough rain to produce a big harvest on their land plot. They will need the food to survive the winter.

Retirement is one of the many huge divides still separating richer Western nations from poorer Ukraine.

It’s not that Ukraine doesn’t spend a large share of its national wealth on pensioners, though. To the contrary, the nation spends a greater share of its gross domestic product than most nations. The problem is that the money just doesn’t amount to much. Moreover, a steady demographic decline is creating an even more onerous burden on working taxpayers just to maintain the tattered social safety net that exists.

The consequence is that retirement, considered part of a person’s “golden years” in more affluent nations, is a hardship for many of Ukraine’s 14 million pensioners, almost a third of the nation’s population. With average monthly pensions of roughly $100, they can afford only basic food and medicine.

“Before retirement, we lived like humans. We were able to afford summer holidays and pretty much anything we wanted,” said Nadia Zhornyak, 63, who worked as an engineer in central Ukraine’s Cherkasy. “But now we are beggars relying on potatoes and cabbage from the dacha.”

The MacDonalds, by contrast, relish retirement.

“My pension, combined with that of my wife’s, is adequate for our needs and is sufficient to allow some foreign travel. But we have to be careful how we spend it,” said James MacDonald, 73, who taught geology. The family’s income – combining various pensions and investments – is “more like 70 percent of my final wages,” MacDonald said.

In Ukraine, the Zhornyaks rely primarily on a state pension because they have little in the way of private savings or investments. They have enough to pay for one week of food and the monthly bills for their subsidized electricity, water, gas and heating.

But even these paltry sums may be endangered. The recession is biting hard at Ukraine’s economy and, in turn, budget and pension fund receipts. President Victor Yushchenko sounded the alarm bells in April, warning of a potential Hr 10 billion deficit in the Ukraine’s annual Hr 164 billion pension fund. In an attempt to keep citizens calm, Labor Minister Ludmyla Denysova insisted that there’s enough money to pay everyone in full and on time.

But independent experts side with the president’s bleaker assessment. Ludmyla Kotusenko, of the Case Ukraine Center of Socio-Economic Research, projected an Hr 8 billion “hole” in the pension fund this year.

The Zhornyaks get their monthly $200 on time for now. But as employment and wages are cut across Ukraine, and with as much as half of the economy off the legal radar, economists say the pension system is in deep trouble. The demographic trends – a shrinking and aging population – exacerbate the financial situation. “Each worker has to support one pensioner,” Kotusenko said. “And with the growing number of elderly, it will get worse.”

The result, as the International Monetary Fund has pointed out, is that benefits will most likely have to be cut or revenues increased, or a combination of both.

Pension fund expenditures will this year increase from 15 to 16.5 percent of GDP, among highest in the world, according to Ceyla Pazarbasioglu, the head of the IMF mission in Ukraine. But revenues add up to only 11 percent of GDP, leaving a deficit that is covered by the state’s general fund revenues, Pazarbasioglu noted.

“In this context, the IMF recommended measures to avoid a further deterioration of the finances of the pension fund,” she said. Pazarbasioglu said that, over the past three years, the average pension has increased by 140 percent, more than the rate of inflation.

“Pensions were growing faster than average salaries and the economy, which led to a huge deficit during the crisis,” said portfolio manager Alexander Tulko from Troika Dialog Ukraine.

Operating on the pay-as-you-go principle, employers contribute 33 percent of the total wage pool to the pension fund. The remainder comes directly from the state and compulsory 2 percent contributions from individual salaries. “However, this is a road to nowhere, because this money is used to finance only existing pensioners, and you don’t know what your situation will be like in 20-25 years from now,” Tulko said.

Besides having economies flusher than Ukraine’s, many European countries also give people a greater range of private investment options with their mandatory deductions. Many private companies in these nations also offer private pensions to their workers.

The financial turmoil, however, has drastically cut investment returns on private funds. The MacDonalds said that many retirees in Scotland “are faced with a much less comfortable existence in retirement than they had anticipated – no new car, fewer or no foreign holidays, difficulty in finding buyers for their large houses if they want to move to smaller ones, etc.”

But private, company-sponsored pension funds and individual private investment portofolios are rarities in Ukraine.

Improvements in Ukraine’s state pension system – either from the point of view of beneficiaries or the state – are not expected anytime soon because of politics. Ukraine’s next presidential election is likely in January.

Analysts at the International Center for Policy Studies explain that the state can’t afford to let people divert some of their state-fund contributions to private investments – not if government wants to keep pensioners such as the Zhornyaks from slipping more deeply into poverty. “Obviously, no one will dare institute [the reform] in 2009 or even in 2010, while attempts to introduce it later will stumble on worsening demographic trends,” analysts said in their pension system overview in December.

The IMF and World Bank have suggested that Ukraine might want to increase its retirement age. Ukrainian women currently are pension-eligible at 55 and men at 60, while most Europeans leave work at 60 and 65, respectively.

Tymoshenko dismissed the change out of hand, noting Ukrainians’ shorter life expectancies. According to the World Health Organization, Ukrainian men can expect to live to 61 years and women to 74.

Some demographers disagree. “It’s a common delusion,” said health expert Olena Paliy of the Kyiv-based Institute of Demography, who favors raising the retirement age as part of the solution. “Life expectancy at birth is sensitive to the rate of deaths in the early years of life. Those who reached 60 are expected to live another 14 years.”

Meanwhile, in Scotland, the MacDonalds write books, play in a jazz band and plan their next foreign trip while the Zhornyaks of Ukraine will be getting their hands dirty growing their own food – putting their faith in the land, rather than the state.

(from the Kyiv Post)