The financial crisis has significantly impacted pension systems in the Europe and Central Asia region (ECA)* tempting governments to make policy changes in response to the increased pension deficits they are facing. The crisis exacerbates the existing financial imbalance in the public pension systems by reducing contribution revenues sharply while leaving expenditures constant or even higher. The crisis also resulted in a sharp drop in financial asset values which affects pensions provided by funded pillars. Consequently, no pension system, however structured, has been immune to the crisis.
Section 1: Impact of the Financial Crisis on Pension Systems
Pension systems in the ECA region come in all shapes and sizes, and one of the key lessons from the crisis is that no pension system is immune from the global financial and economic crisis. Most countries in the region have three pillars in their pension system, a zero pillar, typically a first pillar, but sometimes a second and a third pillar. Eleven of the thirty countries have all four pillars.
Hit with an abrupt shock to the fiscal position of the public pension scheme, countries started considering and implementing policy changes across the key pillars, as shown in Table 3. The immediate concern was improving the fiscal balance, by generating additional resources for the public pension system or by cutting expenditures. However, policymakers need to be aware that measures that generate short-term gains may involve additional costs in the long run.
Despite the pain countries have endured during the global financial and economic crisis, the impact of this crisis pales in comparison to what the countries are soon to face as the region continues to age. It is sobering to look at the impact of the most severe version of the global financial crisis next to the impact of the demographic crisis to come, as shown in Figure 5. Future pension system deficits are expected to be threefold what is currently being experienced in the worst hit countries and are expected to remain at that level for more than 20 years before slightly improving.
While the financial crisis has hit pension systems in the ECA region hard, the real crisis is yet to come. Despite the pain countries have endured during the global financial and economic crisis, the impact of this crisis pales in comparison to what the countries are soon to face with the aging demographic transition.
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