27/01/2022 - Slovenia should encourage people to work longer and reform its pensions system in order to make it financially sustainable while preserving pensioners’ living standards, according to a new OECD report.
OECD Reviews of Pension Systems: Slovenia says that population ageing has started to accelerate and is projected to increase rapidly until the mid-2050s, driven by health improvements at older ages and low fertility rates over the past several decades.
Under current rules, public pension expenditure is projected to increase sharply from 10.0% to 15.7% of GDP between 2019 and 2050. As a result, only Italy would then have a higher expenditure ratio in 2050, at 16.2%, while in the European Union it would increase from 11.6% to 12.6% on average. Such high pension expenditure would lead to steep increases in tax or contribution rates, or public savings in other areas, which could be avoided by a significant and timely pension reform.
Today, old-age income inequality is much lower in Slovenia than in most OECD countries, while relative income poverty rates among older people are similar to the OECD average. However, employment after age 60 is very low, with only 25% of Slovenians aged 60 to 64 in employment in 2019, half the OECD average.
The low labour market participation of older workers is related to Slovenia’s pension eligibility conditions, which are among the least restrictive in the OECD and the gap in the retirement age relative to other OECD countries is set to widen: the normal retirement age will remain at 62 years in Slovenia based on labour market entry at age 22, while it will increase for the OECD on average from about 64 years today to about 66 years for someone entering the labour market now.
Working longer is critical if Slovenia wants to preserve retirement income levels and finance them in a sustainable way, according to the report. Effective retirement ages have increased substantially from very low levels over the past decades and more should be done to extend this trend. The minimum retirement age of 60 years should be increased to at least 62 and then linked to life expectancy. The reference contribution period to retire without penalty should be increased from the current 40 years to at least 42 years and the rule lowering the minimum retirement age based on childcare periods removed.
To rein in pension spending, it will be difficult to avoid reducing the indexation of pensions in payment, gradually moving towards price indexation. Price indexation is one way to preserve pensions when retiring while ensuring that standards of living do not fall during the retirement period. Many OECD countries mainly index pensions to prices.
The report recommends simplifying pension rules and adjusting accrual rates as needed to stabilise pension levels on average, by increasing the reference period from the best 24 years to lifetime earnings. Increasing the transparency of pension finances is key.
To boost coverage of retirement savings plans, compulsory or automatic enrolment in occupational plans should be introduced for all workers. The financial incentives to contribute to supplementary schemes should be modified, so lower income earners are better encouraged to save for retirement, such as through fixed nominal subsidies or matching contributions.
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