Pension deficit in Ukraine
In 2016, the Ukrainian government made a controversial decision to reduce the unified social tax (UST) almost two-fold. This tax, among other purposes, funds retirement benefits. Thus, if during the last year employers had to pay 41% in taxes on top of stuff’s wages, in 2017 they pay only 22%.
Officials hoped the drop in tax could assist in de-shadowing of the economy. It is believed that the shadow economy in Ukraine comprises about 40-50% of the total economic activity.
The change was meant to stimulate employers to raise workers’ wages by the amount of reduction in taxes and therefore eliminate black wages. Unfortunately, the expectations have proven to be overly optimistic.
The situation with wages remained almost the same, while the “hole” in the budget began to escalate. As Segodnya.ua reports, the country’s pension fund loses 1.5 billion hryvnia (USD$55 million) each month.
10 working contributors for 9 pensioners
Irina Kovlashko, the director of the provision department of Ukraine’s Pension Fund, revealed that currently 10 workers support 9 pensioners, Finance.ua reported.
Kovlashko added that “employers prefer to pay the tax from the minimum [monthly] wages, or [contribute] 704 hryvnia [$26] while the fund has to maintain minimum disbursements at the level of 1,247 hryvnia [$46].”
You don’t need to be a math genius to see that there is a giant deficit between what the fund collects and what it has to pay out.
Yes, the minimum monthly pension in Ukraine is only USD$46, which some seniors have to survive on. The minimum monthly wage is 3,200 hryvnia ($119), which gives the contribution amount of 704 hryvnia, mentioned by the Pension Fund’s official. The minimum wage in the country was doubled in January 2017.
Kovlashko underlined that if in 2016 the level of expenses remained the same and the rate of UST was not reduced by half, they would have completely eliminated the deficit and be in surplus.
In other words, the drop in tax created a giant hole in the budget, which otherwise would be profitable. It’s another pressing issue that the current administration will have to solve.