VZCZCXRO8665
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0153/01 0581335
ZNR UUUUU ZZH
P 271335Z FEB 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 8619
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
UNCLAS SECTION 01 OF 02 ZAGREB 000153
SIPDIS
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON ELAB SOCI HR
SUBJECT: CROATIA'S UNBEARABLE PENSION BURDEN
1. (SBU) SUMMARY: With a quarter of its population receiving
pensions, Croatia's pension expenditures amount to 11% of GDP
and a third of the proposed 2008 state budget. The ratio of
pensioners to contributors, currently 1:1.4, is expected to
improve slightly over the next decade as employment levels
rise, but then fall to 1:1 by 2050. Many of the reforms begun
in 1998 to reduce the system's fiscal burden have been
stalled or reversed. As a result, the current system is
fiscally unsustainable and will become more so if the
government implements the measures of the Croatian Democratic
Union's (HDZ's) coalition agreement. Returning to a path of
reform will be difficult, politically and economically, but
if the government does not stabilize the pension system, it
risks hampering Croatia's economic growth and passing an even
more difficult problem to the next government. End Summary.
HIGH PROPORTION OF "YOUNG" PENSIONERS; LOW
CONTRIBUTOR-PENSIONER RATIO
2. (U) About 1.1 million people receive pensions in Croatia.
Just over half (578,500) of these beneficiaries qualify by
age. About 240,000 qualify based on disability and another
235,000 qualify as survivors. The remaining 67,700 are
Croatian army and Croatian Homeland War veteran
beneficiaries, 53,000 of whom qualify by disability. The 1.1
million pension beneficiaries represent a quarter of
Croatia's population. According to Danijel Nestic, researcher
at Zagreb's Institute for Economics, because the government
has used early retirement plans to ease the effects of job
losses due to privatization and restructuring, and because of
the high proportion of disabled beneficiaries, Croatia has
45% more pensioners than it has residents age 65 or older.
Currently, the ratio of pensioners to contributors is 1:1.4.
Nestic and other analysts expect this ratio to improve
slightly over the next decade as employment levels rise, but
longer term projections estimate a 1:1 ratio by 2050.
LOW AVERAGE PENSIONS, HIGH COSTS
3. (U) The average pension for non-military beneficiaries is
2000 HRK ($400) per month, although about half of
non-military beneficiaries receive 1,500-3,000 HRK
($500-1000) per month. The average pensions for military
beneficiaries are higher: 3160 HRK ($630) for Croatian army
beneficiaries and 5610 HRK ($1120) for Homeland War
beneficiaries. Pension payments equaled about 11% of
Croatia's GDP in 2007. Payroll contributions cover about 60%
of the payment costs, with the remainder financed from the
budget. At more than 33 billion HRK ($6.6 billion), pension
payments constitute about a third of the government's
recently proposed 2008 budget.
LIMITED SUCCESS AT REFORM
4. (U) In 1998, due to the fiscal pressure of the pension
system, the GoC began a set of reforms by adjusting the
existing pay-as-you-go (PAYG) parameters and setting the
structure for a multipillar system. Elements of the reform
included a gradual increase in retirement age, an increased
penalty for early retirement, less generous benefit
calculations, and introduction of wage-price indexation for
benefits. The government introduced the "second pillar," a
fully funded, defined-contribution plan that is mandatory for
workers age 40 and under, in 2002. When the reforms were
launched, World Bank analysis indicated that the changes to
the PAYG parameters would reduce first-pillar spending from
above 13% to below 10% of GDP by 2020 and 6% by 2040. The
deficit between contributions and benefits was expected to
decrease from 3.6% of GDP to 1.1% by 2005, thereby creating
the fiscal space to raise the proportion of contributions
going to the second pillar. However, policy interventions
(reform reversals, in several cases) introduced in the
meantime resulted in a 2007 pension deficit of 3% of GDP.
According to World Bank forecasts from January 2008,
continuing the current policies would keep pension payments
at or above 11% of GDP for 10 years and prevent the pension
deficit from falling below 2% of GDP for 20 years.
PROPOSED ADJUSTMENTS: ANOTHER BLOW TO FISCAL SUSTAINABILITY
5. (U) The coalition agreement reached by the Croatian
Democratic Union (HDZ) and its partners in January 2008
includes three pension policy measures: 1) an increase in
replacement rates for current PAYG pensioners from 41% to 50%
by the end of the government's mandate (2011); 2)
introduction of an "old-age subsidy" for elderly persons not
participating in the pension insurance system; and 3) an
increase in the minimum pension for 25 years of service.
According to Zoran Anusic, senior economist at the World Bank
Regional Office in Zagreb, the second and third measures
could have a minor fiscal impact, depending on the
yet-to-be-decided details. He estimates, however, that
ZAGREB 00000153 002 OF 002
raising the replacement rate to 50% would raise pension
expenditures to 13.6% of GDP by 2011, while the pension
deficit would rise to 5% of GDP.
6. (U) Because of changes to the system in 2007, pension
expenditures will grow by more than any other item in the
proposed 2008 budget, and they are forecast to constitute 12%
of GDP. Anusic believes even this current system is fiscally
unsustainable, and the changes dictated by the coalition
agreement would be another step in the wrong direction. The
general worsening of macroeconomic conditions in Croatia
reduces the chances the agreement provisions will be
implemented, and the proposed budget does not include funds
for implementation in 2008. However, Anusic sees little
chance the government will get the reforms back on track.
7. (U) While Anusic and other analysts caution against the
recent and proposed adjustments, the Croatian Pensioners
Party (HSU), some unions, and pensioner advocacy groups
continue to push for further changes to improve the lot of
current pensioners. Citing estimates that the average
beneficiary spends half his or her pension on housing,
leaving just 33 HRK ($6.60) per day for other expenses,
representatives of these organizations have called for
raising current pension amounts by the percentage that GDP
has grown and changing from wage-price indexation to wage
indexation.
COMMENT
8. (SBU) Although the financial situation of many current
pensioners may be difficult, increasing their benefit amounts
will likely create a fiscal burden Croatia cannot afford.
Abandoning the earlier reforms also risks penalizing future
pensioners, while reinforcing the expectations of younger
generations that they can rely completely on the state to
take care of them in retirement. Reneging on promises to
increase current pensions and returning to reform measures
will be difficult, politically and economically. But if the
government does not find a way to stabilize the pension
system, it risks hampering Croatia's economic growth and
passing an even more difficult problem to the next government.
Bradtke