Cover:Cee Pressure

Illustration by Bill Mayer

“The Greying Europe” is already an old figure of speech, but as long as the European economies were growing, the demographic imbalances across the EU states seemed only a subject for scaremonger analysts. Double-digit growth rates recorded by the Central and Eastern European (CEE) member states encouraged policymakers not only to disregard the problem’s seriousness, but to use pensions as an electoral tool and, in the process, increase spending on public pensions to unsustainable levels.

The very low living standard of large cohorts of retirees across the region gave moral legitimacy to these efforts, but in the wake of the global financial crisis, many of the CEE governments have responded by introducing a wave of austerity measures, affecting both the public and the private pillars of the pensions systems. Besides that, they have been made aware of the imperative need of addressing the demographic challenge.

Challenging Times 

According to the European Commission’s prognosis, countries like Romania and Slovenia will experience, by 2060, a more than twofold increase of their pensions related expenses as a share of Gross Domestic Product (GDP). For Lithuania, Slovakia, Czech Republic and Bulgaria, the estimated growth rate is less dramatic but still substantial, while Poland and Estonia are the only exceptions, with a lower share of the pension expenditure in the GDP. The adverse demographic evolution is the main driver of this alarming trend, aggravated in some cases by high rates of youth emigration.

According to the latest Eurostat projections, not far from now—already in the ’20-’30 decade—in most of the CEE countries, people 65 and older will represent 20% to 25% of population, while the oldest-old, those 80 years old and older, will outnumber the youngest generation. But the “grandparent boom”, as Eurostat depicts the future decades, means in economic terms a ‘mission impossible’ task for the current designs of the social security systems.

The financial drought brought by the economic crisis in the state budgets left uncovered the ‘stones on the bottom of the river’; in this case, the structural deficiencies of the public pensions systems. One of the most significant examples is the financial burden imposed by early retirement. Pressed to cope with a sharp increase in unemployment during the transition years, especially among the older age segment of the population, governments in the region have tolerated, or even discreetly encouraged, the use of early retirement as a palliative for the weak offer of the labour markets. The same motivation has, over the years, led to the abuse of the disability pensions facilities. As a result, countries such as Hungary, Romania and Bulgaria witnessed a massive deterioration of the balance between the social security systems’ contributors and beneficiaries. On top of that, the economic crisis determined major difficulties in social contributions collection, due to increasing unemployment and the weakening financial status of the employers.

In the Czech Republic, the social security budget covered the ground from a €300m overplus to an almost €1bn deficit in only two years (2008–10). Croatia’s public pensions budget constantly needs about a €2bn injection from the state budget, while in Bulgaria, the pensions deficit reached the 6% of GDP threshold. In Romania, the social insurance deficit reached a historic high of €2.55bn in 2010, 46% higher than in 2009.