Accruing national debt to pay pensions? The IMF warns of problems in Bulgaria

The six parliamentary elections that took place in the last three years in Bulgaria led to a sharp increase in the size of pensions. Thus, in 2024, the state found itself in a situation where it must supplement the retirement plan system with over 5 billion euros, which is half of the amount needed to cover the pension payments. This, however, represents an increasing fiscal burden for the Bulgarian state, which may have to be covered by taking on new debt or by giving up on other more productive expenses. This is the conclusion made by the International Monetary Fund (IMF) in its new analysis dedicated to pension systems.

Growing pensions

The global institution, headed by the Bulgarian Kristalina Georgieva, pays special attention to the growth of pensions in recent years and the fact that it was accompanied by no efforts to increase revenues to the retirement system. For the IMF, the so-called COVID supplements introduced during the pandemic, created a distortion of the pension model in Bulgaria.

The measures against COVID-19 have affected the financial sustainability of the pension system. Pension spending reached an all-time high in 2023 and is expected to continue to grow in the coming years," the IMF said.

The COVID supplements were introduced at the beginning of the pandemic by the government (led by the GERB party at the time) and the measure accounted for more than half of the state fiscal support linked to the pandemic, even though economically speaking retirees were not among the most affected by the pandemic restrictions on work activities. However, since it is difficult to take something back once given - in 2022, after the resignation of the Petkov government (which followed the GERB-led one) and again in the context of an election campaign, Bulgarian politicians made the pandemic supplements a permanent part of the monthly retirement payments.

Together with the growth of pensions, their state-sanctioned upper limit was also significantly increased, reaching 1,700 euros in 2022. Thus, according to calculations by the IMF and the Bulgarian Ministry of Finance, only less than 0.1% of pensioners are limited by that limit, that is in practice it "de facto disappeared" as it shows no effect on capping the state’s cost burden.

The funding

In Bulgaria, the pension system cannot go into debt because its deficit is covered by the state. But whereas before the top-up coming from taxes was significantly smaller, it now accounts for around half of pension costs.

The growing deficit of the pension system is a fiscal burden. Its deficits could lead to higher public debt in the absence of other compensatory measures," the IMF points out.

Proposals

In simple words, explains the IMF - in the current situation, a person born in 2000 can expect to receive a small pension, but even so it will be about twice his working life contributions.

The IMF then puts forward proposals for changes in the Bulgarian pension system in search of sustainability.

One of them is a change in the pension formula. Currently, the amount of the pension is calculated on the basis of the duration of the social security payment period and the gross income, and not on the actually paid contributions. This, according to the IMF, reduces people's incentives to provide for their own retirement and encourages their participation in the shadow economy.

According to the international institution, if the pension formula is changed to take into account everyone's actual contribution, it will also be possible to increase the amount of pension contributions in Bulgaria. According to IMF data, currently, it is among the lowest in the European Union.

Another proposal is to remove the upper limit of pensions, which is practically non-existent at the moment, and increase the maximum limit of the social security contributions. The IMF proposes that it is temporarily tied to the growth of wages in Bulgaria until it is gradually removed.

Translated by Tzvetozar Vincent Iolov