EffectsofPopulationAgeingonthePension

SysteminBelarus

KaterinaLisenkova*andKaterynaBornukova+

December2015

Abstract: Belarus currently has a relatively generous pay-as-you-go pension

system,butpopulationagingcoupledwithrecentproblemswitheconomicgrowth

will soon make it unsustainable. We build a rich OLG model of Belarusian

economy, which shows that without reform the Pension Fund will run into

persistent and growingdeficit,whichwill reach 9 per cent ofGDPby 2055.We

also compute the fiscal projections of several parametric pension reforms. To

avoid a deficit without reform, pension benefitswould have to be substantially

reduced. The increase of retirement age to 65 for both genders has a strong

positiveeffectonsustainabilityofthepensionsystemandkeepsthedeficitbelow

2percentofGDP.

JELcodes:C68,H55,J26

Keywords:Belarus,pensionsystem,demography,retirementage,pensionreform

BEROCWorkingPaperSeries,WPno.28

*SeniorResearchFellowattheNationalInstituteofEconomicandSocialResearch(NIESR)in

London,k.lisenkova@niesr.ac.uk

+Research Fellow, Belarusian Economic Research and Outreach Center (BEROC) in Minsk,

bornukova@beroc.by

1.Introduction

After the dissolution of the USSR, the majority of former Soviet Union states

experienced increases inmortality (Ellman,1994;BrainerdandCutler,2005)and

sharpdropsinbirthrates(Adsera,2004;Perelli-Harris,2008).Belaruswasnotan

exception,although the increase inmortalitywas lesspronounced than inother

newly independent states, as the socio-economic changes were less drastic

(Grigorievetal.,2010;Shakhotska,2007).Thehealthcrisisofthe90scontributed

tothedecline inthelifeexpectancy,especiallyamongmales(Cockerham,1997).

In1999themalelifeexpectancyatbirthwasonly62.2years(WDI,WorldBank),

thelowestforthepast50years.

In 2000s, economic growth in Belarus picked up. It was pro-poor (Haiduk and

Chubrik, 2007), and living standards improved rapidly. As economic uncertainty

subdued and incomes grew, both life expectancy and fertility increased. The

government also introduced maternity and child benefits, and these policies

contributedtoan increase in fertility (Amialchuketal.,2011).But thesepositive

developments were not enough to reverse the negative trend in population

growth.AccordingtotheWorldBank, theBelarusianpopulationdecreasedfrom

10.2millionin1991to9.5millionpeoplein2014.AccordingtotheUNpopulation

projections it is expected to contract to 8.1 million people by 2050. More

importantly for the pension system, the old-age dependency ratio (number of

personsofretirementageper100workers)willalmostdoublefrom43in2015to

82in2050(seeFigure1).

The current pension system in Belarus is a standard one-pillar pay-as-you-go

scheme. The retirement ages inBelarus are among the lowest in the region: 55

years for femalesand60formales.Thecontributionrateof29percent,onthe

otherhand,isamongthehighestinEasternEurope(ZvinieneandBiletsky,2011).

In2013 theaveragepensionbenefitexceeded thepoverty level2.54 times,and

constituted38percentofanaveragewage(Belstat,2014).

Lowpost-warbirthratesimpliedthatinthe2000sthecohortsenteringretirement

were relatively small. This favourable demographic environment allowed for a

surplusinthePensionFund.Asold-agedependencyworsened,2013becamethe

firstyearwithregisteredPensionFunddeficit.UNpopulationprojectionssuggest

that age dependencywill continueworsening until 2050when it stabilizes, and

PensionFunddeficitsmightbecomeunsustainable.

Figure1.Old-agedependencyratio

Source:2010-basedUNpopulationprojections(mediumscenario)

Manydevelopedcountriesfacesimilarchallengesastheirpopulationsareageing.

A growing body of literature is analysing public pension systems with general

equilibrium overlapping generation (OLG) models. De Nardi, Imrohoroglu, and

Sargent (1999), for instance, study social security reform in the U.S. economy;

Diaz-GimenezandDiaz-Saavedrastudytheeffectsofanincreaseinretirementage

inSpain(2009).

Zviniene and Biletsky (2011) build fiscal projections for the pension system of

Belarus using the World Bank PROST accounting model. To the best of our

knowledge,thispaperisthefirstattempttomodeltheBelarusianpensionsystem

inanOLGframework,taking intoaccountgeneralequilibriumeffectsofpossible

reformsandmacroeconomicconsequencesofdecreasingworking-agepopulation.

Wefindthatunderthecurrentarrangementsofthepublicpensionschemewith

thecurrentreplacementrate(averagepensionsataround40percentofaverage

73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110

wage)thePensionFunddeficitsincreaseuptotheyear2050.Wealsoshowthatit

will be necessary to either decrease the replacement rate or increase

contributions tokeep thePensionFundafloat.Delaying retirement, inparticular

forwomen, is anotheroption,whichnotonly improves the sustainabilityof the

PensionFund,butalsobenefitsGDPgrowthbyincreasingthelaboursupply.

Therestofthepaperisstructuredasfollows.InSection2wegiveanoverviewof

the pension system in Belarus. In Section 3 we briefly describe the model. In

Section4wedescribethecalibrationofthemodeltoBelarusianmacroandmicro

data.SimulationresultsandpossiblereformprojectionsaredescribedinSection5.

Section6concludes.

2.ThePensionsysteminBelarustoday

Thecurrentpensionsystem inBelaruswas inherited fromtheSovietUnion.The

pensionsystemisredistributiveorpay-as-you-go(currentgenerationsofworkers

pay contributions, which are used in the same period to pay pensions to the

currentretirees).

Thepensionageis60yearsformenand55yearsforwomen.Thesearethelowest

pension ages in Europe (see Table 1 for details), comparable only to those in

Russia(Ukrainehasalreadystartedraisingthepensionageforwomen).Theonly

reformsof thepension systemduring the years of the independence in Belarus

were the restrictions of access towork pensions , which are now paid only for

thosewhocontributedtothePensionFundforatleast15years(stillverylow).If

the person does not meet this criteria, she/he is only entitled to the social

pension, paid after the age 65 formen and 60 forwomen. Asmost developed

countries have moved towards the same pension ages for both sexes, Belarus

remainsamongthegroupoftransitioncountrieswhichstillclingtotheoutdated

policyofearlierretirementagesforwomen.

Thesocial securitycontributionsarepaid to theFundof theSocialProtectionof

the Population (here the Pension Fund). Total pension contributions are 29 per

cent of grosswages, ofwhich only 1 per cent is paid directly by the employee,

whiletheemployerpaystherest.

In2013, the totalamountofpensionspaidoutby thePensionFundconstituted

9.4 per cent of GDP. This level of expenditure is similar tomany European and

transition countries. 2013was also the first year of the Pension Fund deficit in

Belarus–thedeficitwasquitesmall,amountingto0.08percentofGDP.

Table1.Statutoryretirementagesacrosscountries

Transition countries Developed countries

Armenia 63 Australia 67 Azerbaijan 58/63 Austria 65 Belarus 55/60 Belgium 65 Bulgaria 60/63 Canada 65 Croatia 60/65 Denmark 67 Czech Republic 55-61/62.5 Finland 65 Estonia 60.5/63 France 65 Georgia 60/65 Germany 67 Hungary 62 Greece 65 Kazakhstan 58/63 Iceland 67 Kyrgyz Republic 58/63 Ireland 65/66 Latvia 62 Israel 67 Lithuania 60/62.5 Italy 60/65 Moldova 57/62 Japan 65 Poland 60/65 Netherlands 65 Romania 59/64 New Zealand 65 Russian Federation 55/60 Norway 67 Serbia 60/65 Portugal 65 Slovak Republic 59.5/62 Spain 65 Slovenia 56.3/63 Sweden 65 Turkmenistan 57/62 Switzerland 64/65 Ukraine 55-60/60 United Kingdom 68 Uzbekistan 55/60 United States 67 Source:Pallares-Mirallesetal.,2012

The replacement rate (the ratio of the average pension to average wage) in

Belarus is not high compared toOECD countries. TheOECD average is 54.5 per

cent, while the Belarusian replacement rate was only 43 per cent in 2013. The

averagepensioninBelarusin2013was2.21mlnBelarusianroubles,or249USD.

Given the demographic challenges ahead, Belarus needs to reform its pension

system. These changes can be parametric – changing only the features of the

current pay-as-you-go system – or structural. In this paper we focus on the

sustainabilityofthecurrentsystemandthepossibleparametricreforms.

3.TheModel

The model used in this paper is designed to analyse the long-term economic

implications of demographic change. The exogenous demographic process is

superimposedon themodel andprovides the shockor driving forcebehind the

simulation results. The model is calibrated on the Belarusian data. Below we

describethedemographicstructureofthemodelandoutlinethemainfeaturesof

theproduction,householdandgovernmentsectors.

3.1DemographicStructure

Thepopulationisdividedinto21generationsoragegroups(i.e.,0-4,5-9,10-14,

15-19,…, 100-104).Demographic variables, fertility,mortality andnet-migration

ratesareassumedtobeexogenous.Everycohortisdescribedbytwoindices.The

firstist,whichdenotestime.Thesecondisg,whichdenotesaspecificgeneration

oragegroup.

Thesizeofthecohortbelongingtogenerationg+kinanyperiodtisgivenbythe

followingtwolawsofmotion:

( ) [ ]⎪⎩

⎪⎨

⎧

∈+

==

−+−−+−−+−

−++−

+

20,1

0

1,11,11,1

15,1,

kformrsrPop

kforfrPopPop

kgtkgtkgt

tkgtkgt (1)

Thefirstequationsimplyimpliesthatthenumberofchildrenbornattimet (age

groupg+k=g, i.e.agegroup0-4)isequaltothesizeofthefirstadultagegroup

(g+k+5=g+5,i.e.agegroup20-24)attimet-1multipliedbythe“fertilityrate”,fr,in

that period. If every couple has two children on average, the fertility rate is

approximately equal to 1 and the sizeof the youngest generationg at time t is

approximatelyequaltothesizeofthefirstadultgenerationg+5oneyearbefore.

Aperiodinthemodelcorrespondstofiveyearsandaunitincrementintheindex

k representsboth thenextperiod, t+k, and, for an individual, anda shift to the

nextagegroup,g+k.

Thesecondlawofmotiongivesthesizeattimetofanyagegroup,g+k,beyond

thefirstgeneration,asthesizeofthisgenerationayearagotimesthesumofthe

agespecificconditionalsurvivalrate,sr,andthenetmigrationrate,mr,attimet-

1. In this model the fertility rates vary across time, while the survival and net

migration rates vary across time and age. For the final generation (i.e., the age

group 100-104 (k=20)), the conditional survival rate is zero. This means that

everyonebelongingtotheoldestagegroupinanyperioddieswithcertaintyatthe

endoftheperiod.

Timevariablefertilityandtime/age-variablenetmigrationandconditionalsurvival

rates are calibrated based on exogenous population projections. This permits a

precisemodelling of the demographic scenarios of any configurationwithin the

model.

3.2Production

At any time t, a representative firm hires labour and rents physical capital to

produceasinglegoodusingaCobb-Douglastechnology.Theproductionfunction

thusreads:

αα −= 1ttt LAKY (2)

whereYdenotesoutput,Kisphysicalcapital,Ldenoteseffectiveunitsoflabour,A

is a scaling factor andα represents the share of physical capital in output. The

market in which the representative firm operates is assumed to be perfectly

competitive. Factor demands thus follow from the solution to the profit

maximizationproblem:

1−

⎟⎟⎠

⎞⎜⎜⎝

⎛=

α

αt

tt L

KAre (3)

α

α ⎟⎟⎠

⎞⎜⎜⎝

⎛−=

t

tt L

KAw )1( (4)

where re andw denote, respectively, the rental rate of capital and the wage

rate.

3.3Householdsector

Householdbehaviouriscapturedby21representativehouseholdsthatinteractin

an Allais-Samuelson overlapping generations structure representing each of the

agegroups.Individualsenterthelabourmarketattheageof20,retireattheage

of65,anddieatthe latestbytheageof104.Youngergenerations(i.e.0-4,5-9,

10-14and15-19)are fullydependentontheirparentsandplaynoactiverole in

the model. However, they do influence the public expenditure. An exogenous

age/time-variablesurvivalratedetermineslifeexpectancy.

Adult generations (i.e. age groups 20-24, 25-29, …, 100-104) optimise their

consumption-saving patterns over time. The household’s optimization problem

consistsofchoosingaprofileofconsumptionoverthelifecyclethatmaximizesa

CEStypeinter-temporalutilityfunction,subjecttothelifetimebudgetconstraint.

Theinter-temporalpreferencesofanindividualbornattimetaregivenby:

( )∑ =

−++++=

+=

⎪⎭

⎪⎬⎫

⎪⎩

⎪⎨⎧

Π⎥⎥⎦

⎤

⎢⎢⎣

⎡

+Π

−=

20

41

,,04 )(11

11

k kgktmgmtkm

lg

kl CsrU θ

ρθ (5)

whereCdenotesconsumptionand𝜃 representstheinverseoftheconstantinter-

temporal elasticity of substitution. Parameter 𝜌 is the pure rate of time

preference, and is age-variable. Future consumption is also discounted at the

unconditionalsurvivalrate, 𝑠𝑟!!!,!!!! ,whichistheprobabilityofsurvivalupto

theageg+kandperiodt+k.It istheproductoftheage/time-variableconditional

survivalrate,srt+k,g+k,betweenperiodst+kandt+k+1andagesg+kandg+k+1.

The household is not altruistic, i.e. it does not leave intentional bequests to

children. It insures its future via a perfect annuity market, as described

theoretically by Yaari (1965, case C) and implemented in an OLG context by

Borsch-Supanetal(2006).

Thehousehold’sdynamicbudgetconstrainttakesthefollowingform:

( ) [ ]( ) [ ][ ]gtCgt

Ktgtt

Lt

Lgt

gtgt

CHArPensCtrY

srHA

,,,,

.1,1

1111

1

τττ +−−+++−−

×=++ (6)

whereHAisthelevelofhouseholdassets,ristherateofreturnonphysicalassets,

τK is the effective tax rate on capital, τL the effective tax rate on labour, τC the

effective tax rate on consumption, Ctr is the contribution rate to the public

pensionsystem,YListhelabourincome,Pensisthelevelofpensionbenefits.

The intuition behind the term 1/sr is that the assets of those who die during

period t are distributed equally between their surviving peers. Therefore, if the

survivalrateattimetinagegroupgislessthanone,thenattimet+1everyonein

their grouphasmoreassets. This is themathematicaldescriptionof theperfect

annuitymarket.

Labourincomeisdefinedas:

ggtLgt LSEPwY =, (7)

where LS is the exogenously given supply of labour. It is assumed that labour

incomedependsontheindividual’sage-specificproductivity.Inturn,itisassumed

that these age-specific productivity differences are captured in age-earnings

profiles.Theseproductivityprofilesarequadraticfunctionsofage:

2)()( ggEP t ψλγ −+= , γ,λ,ψ≥0 (8)

withparametricvaluesestimatedfrommicro-data(asdiscussedinthecalibration

section). Differentiating the household utility function, subject to its lifetime

budget constraint, with respect to consumption yields the following first-order

conditionforconsumption,commonlyknownasEulerequation:

[ ][ ]gt

t

tK

gt Cr

C ,

1

11,1 )1(

11 θ

ρ

τ

⎥⎥⎦

⎤

⎢⎢⎣

⎡

+

−+= +

++ (9)

It is important to note that, since survival probabilities are present in both the

utilityfunctionandthebudgetconstraint,theycanceleachotheroutandarenot

presentintheEulerequation.

3.4InvestmentandAssetReturns

Thelawofmotionforthecapitalstock,Kstock,is:

ttt KstockInvKstock )1(1 δ−+=+ (10)

whereInvrepresentsinvestment,δisthedepreciationrateofcapital.

Capital markets are assumed to be fully integrated. This implies that financial

capital is undifferentiated from physical capital, so that the interest rate parity

holds:

)1(1 δ−+=+ tt rer (11)

where r and re denote the net and gross rates of return to physical capital,

respectively.

3.5GovernmentSector

TheGovernment’sbudgetconstraintreads:

( ){ }

∑

∑

+=

+++

ggtgtt

ggtt

Kgt

Cgtgttt

Ltgt

PensPopGov

HArCLSEPwCtrPop

,,

,,,,, τττ

(12)

whereGov is public consumption. The left-hand sideof the constraint contains

thegovernment revenues.Theright-handsiderepresentsdifferentcategoriesof

governmentexpenditure includingtransfers tohouseholdsandpensionbenefits.

Notethatthepensionprogramisapartoftheoverallgovernmentbudget.

Public expenditures per person, GEPC, are fixed per-person and hence total

expenditure,Gov,dependsonlyonthesizeofthetotalpopulation,TPop.

GEPCTPopGov tt = (13)

In the simulations presented in this paperweuse thewage tax rate, Ltτ , as the

onlyendogenouspolicyvariablethatadjustsineveryperiodtoachieveabalanced

governmentbudget.Wagetaxdoesnotgenerateefficiencydistortions,giventhe

absenceofanendogenouslabour-leisuredecision.

3.6MarketandAggregationEquilibriumConditions

Perfect competition is assumed in allmarkets. The equilibrium condition in the

goodsmarketrequiresthattheBelarus'outputbeequaltoaggregateabsorption,

which is the sum of aggregate consumption, investment and government

spending:

ttttg

gtgtt GovEGovHGovInvCPopY ++++=∑ ,, (14)

Labour market clearing requires that the demand for labour be equal to the

supply:

∑=g

gggtt EPLSPopL , (15)

Similarly,theunitsofcapitalaccumulateduptoperiodtmustequaltheunitsof

capitaldemandedbytherepresentativefirminthatperiod:

tt KKstock = (16)

Inthesamevein,equilibriuminthefinancialmarketrequirestotalstockofprivate

wealthaccumulatedat theendofperiod t tobeequal to thevalueof the total

stockofcapitalaccumulatedattheendofperiodt:

tg

gtg KstockHAPop∑ =, (17)

4.Calibration

Themodeliscalibratedusing2013dataforBelaruswhereavailable.Thedatafor

thedemographicbaselineshockistakenfromthe2010-basedmediumpopulation

projections produced by the United Nations Population Division (UNPD).

Population projections are used for the calibration of the fertility and survival

ratesusedinthemodel.

The data on public finances and GDP components are taken from the National

Accounts. The effective labour income, capital and consumption tax rates are

calculatedfromthecorrespondinggovernmentrevenuecategoriesandcalibrated

tax bases. Data on total amount of pensions are taken from the Pension Fund

budget.Basedonthisinformation,theeffectivepensioncontributionrateandthe

average size of pension benefits can be calculated. The average pension per

person isobtainedbydividing the totalamountofpensionbenefitsby the total

number of people of pension age. In a baseline scenario, males start receiving

pensionbenefitsattheageof60andfemalesattheageof55.

ThesourceofthelabourmarketdataistheBelarusianHouseholdBudgetSurvey

2013 (BHBS). Two labourmarket characteristics arederived from thedata: age-

specific employment rates and age-specific productivity profiles. The latter are

estimatedviatheuseofquadraticage-earningregressions.

Figure2.Employmentratesbyageandsex

Figure2showsemploymentratesbyageandsex.Employmentisveryhigh–inthe

region of 90 per cent – until the pension age, at which point it plummets. As

expectedfemaleemploymentratesbegintofall5yearsearlierthanmalebecause

oflowerstatepensionage.

Inthebaselinescenarioweassumethatthereistotalfactorproductivitygrowthof

1.5percentperyearforthenext100years.The(5-year)inter-temporalelasticity

of substitution is set to 1.25. The wage rate is a numerare. Other model

parametersarecalibrated.

Thecalibrationprocedureisasequenceofthreesteps.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-80

male female

In the first step using the information on GDP, capital and labour earnings we

calculatethescalingparameterintheproductionfunctionandthecapitalincome

share.

Thesecondstepisthemostchallengingonesinceitinvolvesequationsdescribing

the household’s optimisation problem, the equilibrium conditions in the assets

andgoodsmarketsandthegovernmentbudgetconstraint.Inparticular,therate

of time preference is solved endogenously during the calibration procedure in

order togenerateplausibleconsumptionandcapitalownershipprofiles foreach

agegroup.Capitalownershipprofilesmustalsosatisfy theequilibriumcondition

ontheassetmarket.

Thethirdandfinalstepusesthecalibrationresultsofthefirstthreestepstoverify

thatthemodel isabletoreplicatetheobserveddatacorrespondingtotheinitial

equilibrium. Only when the initial equilibrium is perfectly replicated by the

calibration solution can the model be used to evaluate the consequences of

exogenousshocks/policyexperiments.

5.Simulationsandresults

Inallscenariospresentedbelow,populationprojectionsprovidethemainshockto

themodel.Inadditionwemakeassumptionsaboutthepaceofeconomicgrowth

andtheconfigurationofthepensionsystem.

Pay-as-you-go pension systems can be described by three broadly defined

characteristics:levelofcontributions,levelofbenefitsandnumberofretired.Our

model inevitably has to simplify many complexities of the Belarusian pension

system. We use three parameters as proxies for the above mentioned

characteristicsofthepensionsystem:contributionrate,replacementrate(ratioof

averagepension toaveragewage)and statepensionage.Byadjusting themwe

can seewhat effect thiswill haveon the future stability of thepension system.

Sincethecurrentcontributionrateat29percentoflabourincomeisalreadyone

ofthehighestintheworld,wedonotconsideranyscenariosthatrequireafurther

increase.

5.1.Baselinescenario

For the baseline scenario, we use the UN medium population projections for

Belarus for 2010-2110. After 2110 population size and age-sex structure are

assumedtostayconstant.Weassumetotalfactorproductivity(TFP)growthof1.5

percentperyearoverthenext100yearsand0percentthereafter.Pensionage

for females/males stays at 55/60 years. This can be thought of as a status quo

scenario,aswedonotchangethecurrentparametersofthepensionsystem.

Due to assumed technological progress, in the baseline scenarioGDP in Belarus

increases almost 2 times over the next 50 years. To illustrate the effect of

populationageing,Figure3showsGDP,GDPperpersonandinputsofproduction

relativetothescenariowiththesameTFPgrowthbutwithoutageing.Duetothe

changesinagestructureby2060,GDP,labourandcapitalsupplydeclineby41,43

and37percentcorrespondingly.GDPperpersonduringthesameperioddeclines

by16percentandstabilisesafterthat.

Figure3.GDPandinputsofproduction,relativetoscenariowithoutageing

Projecting the level of pension benefits into the future requiresmaking certain

assumptions. Pension benefits are usually indexed to take into account

-16%

-43%-41%-37%

-50%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

2105

2110

GDPperperson Laboursupply

GDP Capitalsupply

improvements in standardsof living. Indexation rulescanbeveryelaborate,but

two that are often used are indexation towages orGDP growth. They produce

drasticallydifferentoutcomesintermsofsustainabilityofthepensionsystemand

livingstandardsoftheretired.Figure4illustratesthedifferencebetweenthetwo

typesofindexationbyshowingtheamountoftotalpensionbenefitsasashareof

GDP. In2013 totalpensionbenefitsamounted to9percentofGDP. Ifpensions

areindexedtowages,thenby2050thetotalpensionbillwouldreach18percent

ofGDP.But ifpensionsare indexed toGDP, theywould increase toonly12per

centofGDP.

Figure4.TotalpensionsasashareofGDP

If contributions are not increased in line with the pension bill, this leads to a

corresponding deficit in the Pension Fund (Figure 5). If pension benefits are

indexedtowages,by2050thedeficitreaches9percentofGDP.If,ontheother

hand,pensionsareindexedtoGDP,deficitpeaksat3percentofGDPin2050and

bytheendofthecenturyalmostdisappears.

16%

9%9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

2105

2110

Indexationtowages

IndexationtoGDP

Figure5.PensionFunddeficit

Figure6.Replacementrate

7%

0.3%0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

2105

2110

Indexationtowages

IndexationtoGDP

41%

24%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

2105

2110

Indexationtowages

IndexationtoGDP

Different indexation rules have consequences not only for the financing of the

pensionsystem,butalsofortherelativelivingstandardsfortheretired.Figure6

showschangesinreplacementrate–ratioofaveragepensiontoaveragewage–

under different indexation rules. If pensions are indexed towages it essentially

means that replacement rate stays constant. If they are indexed to the growth

rateofGDP,however,thismeansthatrelativelivingstandardsofpensionersare

deteriorating– replacement ratedecreases from43per cent in2013, to just28

percentin2050.

5.2.Increaseinthestatepensionage

The previous section demonstrated that the status quo will result in a large

PensionFunddeficit.Thiscanbemitigatedbyusingdifferentindexationrules,but

at a costof a significant reduction in the living standardsof the retirees. In this

sectionwewill explore the effect of another policy option – an increase in the

statepensionage.CurrentlyBelarushasoneof the loweststatepensionages in

theworld–55years for femalesand60 formales.We lookat twoscenariosof

statepensionage increase.The firstone is increaseof femalestatepensionage

from55to60by2025(byhalfayeareveryyear).Thesecondscenarioisincrease

inthestatepensionageforbothsexesto65by2035.

Figure7demonstrates theeffectof thesechangesonold-agedependencyratio.

Thedependencyratiochangesinthecaseofanincreaseinthestatepensionage

for two reasons: the number of working people increases, and the number of

pensionersdecreasesduetolaterretirement.

Withfallingdependencyratio,fundingthepensionsystembecomesmucheasier.

Figure8showsthesizeofthePensionFunddeficit.Ifpensionageisnotincreased,

by 2055 the deficit reaches 9 per cent of GDP. If pension age for women is

increased to60years, thedeficit in2055decreases to7per centofGDP. If the

statepensionageforbothsexesisincreasedto65years,thedeficitatitspeakin

2060isonly3percentofGDPandlaterconvergesto2percentofGDP.

Figure7.Old-agedependencyratio

Figure8.PensionFunddeficit,%ofGDP

0.7

0.6

0.4

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110

55/60

60/60

65/65

7%

6%

2%

-2%

0%

2%

4%

6%

8%

10%

12%

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

2105

2110

55/60

60/60

65/65

6.ConcludingRemarks

Theprocessofpopulationageingpresentsaseriouschallengefor theBelarusian

economy. Our estimates suggest that it will result in a 16 per cent drop from

potential per capitaGDPby 2050. But oneof themost urgent consequences of

populationageingisthepersistentdeficitinthepensionsystem.

The Pension Fund has ran into deficit in 2013 for the first time, but our results

suggestthatdeficitswillgrowinthefuture,andunderthecurrentpensionsystem

willreach9percentofGDPannuallyby2055.Weestimatethepossibleeffectsof

two parametric reforms: decreases in replacement rate and increases in

retirementage.

Wefindthatretirementageincreasewouldbeveryeffective,asitworksnotonly

through thedecrease inpensionpayments,butalso increases the labour supply

andGDP. If retirementage forbothmalesand females is increased to65years,

the Pension Fund deficitwill not exceed 3 per cent of GDP. Increasing only the

femaleretirementageto60willkeepthedeficitbelow7percentofGDP.

Wedidnotlookatthescenariosthatinvolveanincreaseinpensioncontribution

rate,because it isalreadyoneof thehighest intheworld.Withoutasubstantial

increaseinretirementagesoranincreaseincontributions,thereplacementrate

willhavetodecrease.Thiswillresultin34percentreductioninthelivingstands

ofretireesrelativetoworkersby2055.

References

Adsera,A.2004.“ChangingFertilityRates inDevelopedCountries.The Impactof

LaborMarketInstitutions.”JournalofPopulationEconomics,17(1),pp.17-43.

Auerbach, A. and Kotlikoff, L., 1987. "Evaluating Fiscal Policy with a Dynamic

SimulationModel,"AmericanEconomicReview,AmericanEconomicAssociation,

vol.77(2),pages49-55,May.

Börsch-Supan,A., Ludwig,A. andWinter, J., 2006. "Ageing, PensionReformand

Capital Flows: AMulti-Country SimulationModel ". In:Economica, 73 (292), pp.

625-658.

Brainerd E. and D. M. Cutler, 2005. "Autopsy on an Empire: Understanding

Mortality in Russia and the Former Soviet Union," Journal of Economic

Perspectives,AmericanEconomicAssociation,vol.19(1),pages107-130,Winter.

Cockerham,W.1997,“TheSocialDeterminantsoftheDeclineofLifeExpectancyin

RussiaandEasternEurope:ALifestyleExplanation”. JournalofHealthandSocial

Behavior,Vol.38,No.2(Jun.,1997),pp.117-130

De Nardi, M., Imrohoroglu S. and Thomas J. Sargent, 1999. "Projected U.S.

DemographicsandSocialSecurity,"ReviewofEconomicDynamics,Elsevierforthe

SocietyforEconomicDynamics,vol.2(3),pages575-615,July.

Diaz-Gimenez, J. and J. Diaz-Saavedra, 2009. "Delaying Retirement in Spain,"

Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics,

vol.12(1),pages147-167,January.

Ellman, M., 1994. "The Increase in Death and Disease under ‘Katastroika’"

CambridgeJournalofEconomics,OxfordUniversityPress,vol.18(4),pages329-55,

August.

Grigoriev P., V. Shkolnikov, E. Andreev, D. Jasilionis, D. Jdanov, F. Meslé and J.

Vallin, 2010. Mortality in Belarus, Lithuania, and Russia: divergence in recent

trendsandpossibleexplanations.EuropeanJournalofPopulation.26(3):245–274.

Haiduk,K.andA.Chubrik,2007.'Pro-poorGrowth?FactorsDeterminingStandards

ofLivinginBelarus',(inRussian)IPMResearchCenterWorkingPaperSeries,WP

07/02.

Pallares-MirallesM.,RomeroC.,WhitehouseE. Internationalpatternsofpension

provision II aWorldwideoverviewof factsand figures/M.Pallares‐Miralles,C.

Romero,andE.Whitehouse//.–WorldBank.-June2012.–214p.

Perelli-Harris,B.2008.“FamilyFormationinPost-SovietUkraine:ChangingEffects

of Education in a Period of Rapid Social Change.” Social Forces 87.2: 767-794.

ProjectMUSE.

Shakhotska, L. 2007. “Снижение рождаемости как главный из вызовов

демографической безопасности Республики Беларусь.” Вопросы статистики,

№10.Аvailableathttp://demoscope.ru/weekly/2008/0327/analit02.php

Shakhotska, L. 2006. Смертность как один из вызовов демографической

безопасности Республики Беларусь // Вопросы статистики,№ 8 Аvailable at

http://demoscope.ru/weekly/2008/0327/analit01.php

World Bank. 2015. World Development Indicators, available

athttp://data.worldbank.org/data-catalog/world-development-indicators

United Nations, 2010. World Population Prospects: The 2012 Revision, online

databasehttp://esa.un.org/wpp/Excel-Data/population.htm

Yaari,M. “Uncertain Lifetime, Life Insurance, and the Theoryof theConsumer.”

ReviewofEconomicStudies,1965,32(2),pp.137–50.

Zviniene,A.,andS.Biletsky,2011.FiscalprojectionsforpensionsystemofBelarus.

Washington,DC:WorldBank.

http://documents.worldbank.org/curated/en/2011/05/16281971/fiscal-

projections-pension-system-belarus

Социальное положение и уровень жизни населения Республики Беларусь

2009-2013 Статистический сборник, Национальный статистический комитет

РеспубликиБеларусь,2014.