15 November 2012

IPE: Financial crisis too big for Central, Eastern Europe's second pillars

The financial crisis and resulting downturn in economic output was "too big" for the second pillar to survive unscathed in Central and Eastern European (CEE) countries, the World Bank has argued.

World Bank chief economist Heinz Rudolph said that the introduction of the second pillar in many CEE countries – mandated by the European Union for Member States – was subject to a tension between short- and long-term fiscal objectives. He said this was particularly the case as the systems would take between three and four decades to mature, and the contributions were funded by a set component of existing payroll taxes being diverted away from each country's state pension pillar.

Rudolph noted that, in many cases, taxation income that has since fallen away in the economic downturn was earmarked to compensate for the shortfalls this would create in pay-as-you-go systems – resulting in these deficits now necessitating increased state borrowing.

"What is the motivation for asking countries to keep second pillars alive when the main parameters for assessing the eurozone do not take into consideration their efforts?" he asked, echoing concerns previously raised by nine Member States that argued in favour of measures to account for the additional debt incurred.

Speaking generally of the CEE countries' measures – including the region's largest economy Poland – to divert contributions back to the first pillar, he said: "It is very difficult to blame them for reducing the contributions to second-pillar pensions".

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