Economics Department

Economic Survey - Slovak Republic 2004: Are social security systems viable?

 

Results will be particularly critical in the pension system...

The pension reform applicable from 2004 will enhance the public pay‑as‑you‑go (PAYG) balances by increasing the statutory retirement age from previously 60 for men and 55 for women to 62 for both genders, which is a major step towards improving the viability of the scheme. The system remains nevertheless financially unsustainable in the long term. The planned defined benefit scheme with its strict link between contributions and benefits should, upon completion, transform workers’ perception of pension contributions from quasi‑taxes to quasi‑savings. Further changes in the PAYG system are desirable, notably the standard retirement age should be raised progressively to 65 for both genders. A funded second pillar is planned to complete the system and to bring the necessary top‑ups to the PAYG benefits which will decline as a percentage of average wages. Replacement rates will decrease sharply for low wage earners at the end of a three-year transition period, and authorities should check if trend wage growth will be sufficient to provide a minimum retirement income for all. A special issue related to the phasing‑in of the second pillar concerns the fiscal compensation of the main pillar from the state budget, for the diversion of PAYG contributions. These may amount to about one per cent of GDP per year in the short-term and will likely increase in the following decades. As long as no agreement is reached with the European institutions for the exclusion of such compensation from current expenditures, Slovak authorities will be faced with a difficult choice between postponing or downscaling the second pillar reform, delaying convergence with Maastricht rules, or seeking yet further spending cuts.

Financial balance of the public pension system relative to the GDP 2000 2050

Source : MLSAF.

… and in the health sector

The health care system is also being reformed with the primary aim of ensuring its financial viability by making all stakeholders accountable for their decisions, at least partially. Patients are to be presented with a clearly‑defined basic benefit package and a structure of co‑payments, both of which have been absent in Slovakia. The ownership of hospitals is being devolved to lower levels of government, and service providers are to face financial discipline imposed by for‑profit insurance companies that compete for subscribers. While reform intentions are admirable, much will depend on the detail of the reform design and implementation, including the breadth of the basic benefit package, the size of co‑payments and the regulation of insurers to generate incentives for improved efficiency rather than risk selection. Moreover, the deregulation of health prices and decentralisation will reduce the policy levers for costs control available to the government. It would therefore be prudent not to precipitate reform in this area nor to expect large near‑term fiscal savings from it.

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The complete version of the OECD Economic Survey for the Slovak Republic  is available from:

Return to the OECD Economic Survey - Slovak Republic 2004 homepage

 

 

 

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