Policy Documentation Center

Antal, Judit et al.

MNB Quarterly report on inflation - September 2012

Badun, Marijana

 1          PRESS RELEASE     l     No. 35     l     Institute of Public Finance                doi: 10.3326/pr.2012.35 
The challenge of public pension  
system reforms 
 
MARIJANA BAĐUN, MSc, Institute of Public Finance, Zagreb 
 
 
In the paper entitled „The Challenge of Public Pension Reform in Advanced and Emerging 
Economies“1, International Monetary Fund (IMF) experts emphasize that public sector 
reform will be one of the key challenges for public policy makers, both in advanced and 
emerging economies. According to their projections, the share of public pension 
expenditure in GDP between 2010 and 2030 will grow by 1 percentage point and between 
2010 and 2050 by 2.5 percentage points on average. Although the appropriate reform 
measures depend on country circumstances and preferences, the IMF team gives particular 
prominence to the numerous advantages of increasing retirement ages. 
At the end of 2011, IMF's Fiscal Affairs Department published a paper dealing with an analysis of 
public pension systems. As many economies will have to undergo fiscal consolidation, and given the 
already high levels of taxation, the focus will be on expenditure rationalisation, i.e. on public pension 
spending which accounts for a large share in total public consumption and has been on a constant 
increase. Consequently, the IMF experts: (a) analyse the causes of public pension spending growth; (b) 
provide forecasts/projections of public pension spending for the following twenty and forty years; (c) 
assess the sensitivity of the projections to demographic and macroeconomic factors and the risks of 
reform reversal; and (d) give recommendations for curbing the growth of expenditures on public 
pension systems. Although the sample of countries does not include Croatia, this review sets out the 
main findings of the paper, because it deals with an issue, which is very topical in Croatia as well.  
Public pension spending 
Public pension expenditures account for about one fifth of total public expenditures in both advanced 
and emerging economies. Over the period 1970-2010, the share of public pension spending in GDP 
rose by 3.5 percentage points in the former group of economies (from 5% to 8.5%), and over the 1990-
2010 period by 1.5 percentage points in the latter group of economies (i.e. from 7.5% to 9% in European 
countries and from 2% to 3% in other countries)2. There are four drivers underlying the change in 
public pension spending as a share of GDP in advanced economies: population ageing, eligibility rates, 
replacement rates (the share of average pension in average wage) and labour force participation rates. 
                                                          
1 IMF, 2011. The Challenge of Public Pension Reform in Advanced and Emerging Economies, 28 December 2011. Available at: 
[http://www.imf.org/external/np/pp/eng/2011/122811.pdf]. 
2 Advanced economies include: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, 
Iceland, Ireland, Italy, Japan, Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Slovakia, Slovenia, Spain, 
Sweden, Switzerland, Great Britain and USA. Emerging economies include: Argentina, Brazil, Bulgaria, China, Chile, Egypt, 
Estonia, Hungary, India, Indonesia, Jordan, Latvia, Lithuania, Malaysia, Mexico, Pakistan, Philippines, Poland, Romania, Russia, 
Saudi Arabia, South Africa, Thailand, Turkey and Ukraine. 
No. 35 Zagreb February 17, 2012 
 11          PRESS RELEASE     l     No. 35     l     Institute of Public Finance 
From 1970 to 1990, population grew older, replacement rates increased and the statutory retirement 
age declined by 1 year, which all together resulted in an increase in public spending. This increase was 
partly offset by a rise in female labour participation, and from 1990 to 2010, it was contained by 
tighter pension eligibility conditions and a further increase in labour force participation rate. In 
emerging economies, the growth of public pension spending was mainly the result of higher 
replacement rates and population ageing. 
Public pension spending projections 
According to the IMF team projections, public pension spending will grow substantially in many 
advanced and emerging economies. The following two decades are expected to see an increase in its 
share in GDP by one percentage point, but the situation differs markedly across countries. Among 
advanced economies, increases in pension spending in excess of 2 percentage points of GDP are 
projected in Belgium, Finland, Korea, Luxembourg, the Netherlands, New Zealand, Norway, Slovenia 
and Switzerland, while decreases in spending are projected in Denmark, Italy, Japan and Sweden. As 
to emerging economies, spending growth in excess of 3 percentage points of GDP is projected in 
China, Egypt, Jordan, Russia and Turkey, whereas its fall is projected in Bulgaria, Chile, Estonia, 
Hungary and Poland. 
Risks to projection accuracy 
These projections are relatively uncertain, as they depend on numerous factors. More specifically, the 
20-year projections made so far have overestimated the fertility rates and underestimated life 
expectancy, which means that in both cases, the public pension spending projections were lower than 
the outturns. Macroeconomic assumptions also affect public pension spending projections. For 
example, lower-than-expected productivity implies lower wages, which can result in higher-than-
expected replacement rates. Projections are further influenced by policy makers' commitment to fully 
implement the pension system reforms aimed at achieving reductions in public pension spending. For 
example, raising the statutory retirement age can result in an increase in claims for disability 
pensions. Problems within the private pension schemes can also become a public fiscal problem. 
Replacement rates in the private pension system may be too low, and, although the government is not 
legally obliged to „step in“ and solve the problem, there is an implicit social obligation of the public 
pension system to ensure adequate income in retirement, especially for low-income groups. 
Public pension reforms 
Public pension system reforms affect the welfare of elderly citizens, labour force participation rate 
and private savings, and thus long-term growth, and the success of fiscal consolidation. Although it 
may be difficult to reduce public pension spending as a share of GDP, it is at least possible to stabilize 
it in order to avoid the need for cuts in other public spending. Governments should also resist 
temptation to spend potential pension system savings on other budget items. 
The authors of this study believe that increasing retirement ages has many advantages. First, it 
promotes higher employment levels, while longer working periods boost aggregate demand by 
strengthening personal consumption. Second, raising retirement ages helps avoid even larger cuts in 
replacement rates, thus affecting poverty/wealth of elderly population. Third, public acceptance of 
increased retirement ages could be higher in light of increasing life expectancies. It is often believed 
that such a measure would increase unemployment, but there is very little evidence that increased 
labour force participation of the elderly would increase the aggregate unemployment rate in the long 
run. It is essential that increases in retirement ages are accompanied by measures protecting those 
who cannot continue to work. For example, in the USA, one fourth of all workers in their sixties have 
difficulties in continuing to work due to disability or impaired health. This is especially the case for 
low-income earners. At the same time, incentives for early retirement should be reduced. 
 
 111          PRESS RELEASE     l     No. 35     l     Institute of Public Finance 
A comparison with Croatia 
Pension spending participated with 10.6% in Croatia's 2010 GDP. A comparison between Croatia and 
52 countries from the IMF sample suggests that only 7 countries had higher pension expenditures, i.e. 
Austria (13.9%), France (13.3%), Greece (12.1%), Italy (14.7%), Portugal (12.7%), Poland (11.3%) and Ukraine 
(17.7%). This confirms the urgency of pension system reforms in Croatia, and all the more so because 
the country also needs fiscal consolidation. However, as underlined by the IMF experts, country-
specific characteristic have to be taken into account, which applies to Croatia as well.  
With respect to retirement ages, Croatia, with its statutory full retirement age of 65 for men and the 
equalisation of retirement ages of men and women by 2030, does not deviate from the advanced 
economies' average. However, the problem lies in the difference between the statutory and the actual 
retirement age. Last year, the numbers of old-age and early retirement pension beneficiaries in 
Croatia totalled 16,330 and 13,3843 respectively. The average retirement age for the former category 
(both men and women) was 64 years, and for the latter category 59 years (61.5 for men and 56 for 
women). Last year, old-age pension beneficiaries totalled 513,031, and early retirement pensioners 
119,741. 
The Institute of Public Finance and the Banka magazine jointly organised a series of round tables last 
year, on the issue of the Croatian pension system4. Among the topics discussed was the increase in 
elderly employment. The resulting recommendations were as follows5: 
• changing the retirement practice, by making the staying in employment financially more 
favourable for both employees and employers; 
• improving access to jobs for the elderly; 
• introducing public incentives for lifelong learning; 
• improving the efficiency of public health care and safety at work; and 
• developing social care services for the elderly and children (given that women often retire in 
order to look after their parents or grandchildren). 
 
                                                          
3 Croatian Pension Insurance Agency, 2011. Statistical Information. February 2011. Zagreb. 
4 A Collection of papers presented at the round tables is available at the Institute of Public Finance's website at:  
[http://www.ijf.hr/upload/files/file/AMS/zbornik.pdf]. 
5 The recommendations were published in a special issue of the Banka magazine - Analiza mirovinskog sustava (Pension System 
Analysis), October 2011, p. 57. 


Press release no. 35. The challenge of public pension system reforms

English

The national economy of Latvia: a macroeconomic review

Bronic, Mihaela

 1          PRESS RELEASE     l     No. 43     l     Institute of Public Finance     l     ISSN: 1848-4085     l     doi: 10.3326/pr.2012.43 
The Revision of the Croatian State Budget for 
2012 : Why are the expenditures of the State 
Budget rising? 
 
 
MIHAELA BRONIĆ, PHD, Institute of Public Finance, Zagreb 
 
 
On November 15, the Croatian Government sent the Parliament a revision of the state budget for 
2012.1 Revenues for 2012, after the revision, came to 110.3 billion kuna (1.4 billion more than had been 
planned), and expenditure to 120.3 billion kuna (or 1.5 billion more than had been planned). The 
budget deficit now comes to about 10 billion kuna, which is 94 million kuna more than was planned 
earlier (Table 1). Since revenues and expenditures rose by similar amounts, the revision did not have 
any very significant impact on the state budget deficit. 
 
Table 1: Total revenues and expenditures of the state budget (in millions of kuna) 
 
2011 Plan 2012 
Revision of 
2012 
Enlargement or 
reduction by the 
revision 
Revenue and expenditure account 
    Total revenues 107,417 108,950 110,343 1,393 
Total expenditures 121,425 118,841 120,328 1,487 
Deficit -14,008 -9,891 -9,985 -94 
Source: Government of the Republic of Croatia, 2012 
 
In what follows below the objective is briefly to analyse the budgetary expenditures that were most 
increased in the revision. Table 2 gives a breakdown of expenditures that increased by more than 50 
million kuna; in total they amount to almost 2.5 billion kuna. 
 
The question necessarily arises where the 2.5 billion kuna increase in expenditure via the revision of 
the budget as shown in Table 2 comes from, if at the beginning of this article we said that the 
expenditures would not be more than 1.5 billion kuna in excess of those planned earlier. Expenditures 
really will be more than 1.5 billion in excess of those planned earlier, but in the revision there is also a 
change in the structure of the expenditures previously planned. Certain items of the previously 
planned expenditures have been decreased (most of all material costs, expenditures related to non-
financial assets [i.e. investment projects] and grants), and instead of them, some other expenditures 
have been financed. For example, the Ministry of Science, Education and Sport has given up on some 
previously planned capital investments: in the pupils’ hostel in Bjelovar (5 million kuna), in the Artisan 
School in Sisak (5 million kuna) and in the Mijat Stojanović Elementary School in Babina Greda (5 
million kuna). In this way it has provided some of the money for increasing expenditures for the wage 
bill. 
                                                          
1 Government of RC., 2012. Draft Proposal for Amendments to the Government Budget of the Republic of Croatia for 2012. 61st session 
of the Government, November 15, 2012. 
No. 43 Zagreb December 5, 2012 
 11          PRESS RELEASE     l     No. 43     l     Institute of Public Finance 
Table 2: Expenditures of the state budget that were increased by more than 50 million kuna in the 
revision (in millions of kuna) 
* According to an economic classification of the budget, this expenditure is booked under payments to 
individuals and households. 
Source: Government of the Republic of Croatia, 2012 
 
The major proportion in the considerably increased expenditures analysed in Table 2 is taken by 
wages and reimbursement of employee costs (54%) (in the Ministry of Science, Education and Sport, 
the Ministry of Health, the Interior Ministry and the Ministry of Defence), expenditures on interest 
payments (15%) (for bonds issued on the American market) and subsidies from the Ministry of the 
Economy and the Ministry of Agriculture (20%) (most of it going to the shipyard in Split). 
 
 
 
  
  Spending agency Expenditure items increased by more than 50 million kuna 
Increase 
in million 
kuna 
Proportion 
of total 
increase 
(in %) 
1. 
Ministry of Health – Cro. 
Inst. Health Insurance 
expenditures for employees of healthcare 
institutions – hospital health protection* 510 21 
2. Ministry of Finance interest on bonds issued abroad 361 15 
3. Ministry of the Economy subsidies – restructuring of the ship industry 290 12 
4. Interior Ministry 
gross wages and contributions for 
administration and governance 235 9 
5. 
Ministry of Science, 
Education and Sport 
elementary education – gross wages and 
contributions 195 8 
6. Ministry of Agriculture 
subsidies – incentivising farm production and 
market interventions 139 6 
7. 
Ministry of Science, 
Education and Sport 
secondary education – gross wages and 
contributions 128 5 
8. Ministry of Finance  
pensions fund – payment of the last instalment 
of the debt to retirees* 100 4 
9. 
Ministry of Science, 
Education and Sport 
elementary education – reimbursement of 
employee costs 80 3 
10. 
Ministry of Labour and the 
Pensions System old age pensions* 79 3 
11. 
Ministry of Science, 
Education and Sport 
tertiary education – U. of Zagreb - gross wages 
and contributions 74 3 
12. 
Interior Ministry 
gross wages and contributions for 
administration and governance of the system of 
the state borders 68 3 
13. Ministry of the Economy 
payments to individuals and households – 
shipbuilding* 61 2 
14. Ministry of Finance grants to areas of special national concern 60 2 
15. Ministry of Defence 
reimbursement of employee costs – 
peacekeeping missions 55 2 
16. Ministry of Finance budgetary reserves 50 2 
  TOTAL   2,485 100 
 111          PRESS RELEASE     l     No. 43     l     Institute of Public Finance 
Graph 1. Structure of state budget expenditures that went up the most in the revision of the budget 
 
Source: Government of the Republic of Croatia, 2012 
 
Table 2 and Graph 1 depict fairly well the most important problems of the expenditure side of the state 
budget, the reform of which has been deferred for years (reform of wages in public services, reform of 
the healthcare and pensions systems, privatisation of the shipyards and reform of local and regional 
self-government). It would be good if the Government implemented such reforms as soon as possible, 
for this would enable a long-term reduction of the deficit, of the public debt and the debt servicing 
that are all burdens on the state budget.  
 
 
interest 15% 
subsidies 20% 
gross wages, 
contributions and 
reimbursement of 
employees’ costs  54% 
grants – areas of 
special national 
concern  2% 
budgetary reserves   
2% 
pensions fund   
4% old age pensions 3% 


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