‘The World Bank
‘Washington, D.C. 20433,
USA,
‘SHIGEO KATSU
Fax. (202) §22.2758
May 12, 2009
Mr. Peter Socha, President
Mr. Viktor Kouril, Vice President
ADSS
Bajkalska 30, P.O. Box 86
820 05 Bratislava 25
Slovak Republic
Dear Messrs. Socha and Kouril,
‘Thank you for your letter inquiring about the World Bank’s recommended
measures for financing the fiscal deficit of pensions systems as a result of the global
economic and financial crisis — a topic addressed at the Pensions Conference held in
Bratislava on May 4, 2009.
The list of possible measures to address the fiscal deficit of pension systems were
reviewed in the presentation made by Zoran Anusic, World Bank Senior Economist, with
a careful consideration of their advantages and drawbacks. Here are the main points of
this assessment:
- The preferred source of financing the additional short-run PAYG deficit is to
reduce expenditures elsewhere in the pension or central budget or to resort to
borrowing, where feasible:
- Temporary second pillar rate reduction has been considered by some countries as
a source of financing PAYG deficit. While this measure would bring extra
revenues to the first pillar in the short run, it would also generate sizable
additional expenditures in the long run, increase the implicit public debt and,
especially if prolonged, undermine the credibility of the second pillar and the
development of long term instruments in the capital market. On the whole,
therefore, there are more arguments against second pillar rate reduction than in
favor;
- Opening of the second pillar for exit to all contributors and new entrants, already
done by the Slovak Republic, is a measure with significant costs over and above
those enumerated above for the temporary rate reduction. These include the
irreversibility of decisions made by individuals based on short run developments
when pension policies and the structure of pension systems should be based on
long run considerations;-2- May 12, 2009
- Simultaneous introduction of voluntary opt-out from the second pillar and
reduction of the second pillar rate would seriously undermine the viability of the
second pillar and, in the case of Slovakia, damage the long-term fiscal
sustainability of the pension system.
In summary then while we understand that countries under severe fiscal duress
and few other options may need to resort to sub-optimal responses, we have serious
reservations about prolonged second pillar rate reductions, especially when combined
with a voluntary opt-out option.
Our broader messages are twofold. We would advise governments 1) to avoid
the temptation to respond hastily and make decisions now that are better made once more
information is available on the depth and the duration of the economic downturn; and 2)
to keep the focus on the long run challenges of putting in place a fiscally affordable
pension system given the demographic trends in Slovakia and many other countries in
Central and Eastern Europe which would require parametric changes to PAYG pillars.
Finally, we believe that the rationale for multi-pillar pension systems is as strong as ever,
with the case for risk diversification as a critical feature of pension systems having
received a further boost in light of the global crisis.
Let me add in closing that we will soon be finalizing a note on pension systems in
crisis in Eastern Europe and Central Asia, following a regional conference that was held
in Brussels on May 8. The note will further explore the issues that I have touched upon
above. In the meantime, you might be interested in consulting the recent World Bank's
Pension Primer Note that provides additional details. I attach the link below:
http://siteresources. worldbaik.org/INTPENSIONS/Resources/395443-
1121194657824/PRPNote-Financial_Crisis_12-10-2008.pdf
Sincerely yours, —————
eS a
Shigeo Katsu
Vice President
Europe and Central Asia Region