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Populism or front-loaded social policy reform? Ukraine

September 21, 2015

Today Prime Minister Arseniy Yatseniuk announced increased pensions for State employees from early October, and for other pensioners an additional payment before the month end and an increase in pensions thereafter.

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Clearly with local elections on the 25th October there is a distinct whiff of populist politics meant to buy off the voting constituency in order that they overlook what is a decidedly grotesque social system.

It is a system that is exceptionally centralised, at times unreliable, extremely politicised and thus corrupt.

Further, whilst the leadership should be rightly concerned with assisting the poorest half of Ukrainian society in the wake of rampant inflation, necessary energy price rises (necessary in order to tackle elite corruption in the energy sector and remove subsidies the State cannot afford), these pension rises do absolutely nothing to address the social expenditures that are obscenely high in Ukraine.

Despite the obscenely high social expenditures Ukrainian society is entirely dissatisfied with the quality of services these expenditures provide.  That a good deal of social expenditure reaches people that do not need it, whilst those that genuinely need State social expenditure to escape real and unnecessary suffering do not get enough of it, lies squarely within a social policy that has no mechanism to target assistance to the most needy nor eliminate of the most wasteful excesses.

Leaving aside education and health which continually rank very highly within Ukrainian societal opinion polls as priorities (but have not been treated as priorities historically regardless of their consistently high poll rankings) this entry will stick to pensions and the usual pension rise prior to any election in Ukraine.

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In Ukraine the politics of populism has always preferred to increase benefits rather than address systemic and fundamental social reforms within the State infrastructure.  In the absence of any social reforms since independence, to political class has managed to alienate themselves and the institutions of state from their constituents.  It is necessary to be entirely honest – social reforms normally manifest themselves very, very quickly.  The benefits in living standards, social justice and quality of social services normally increase societal trust in the State and its institutions.  Where the State fails, the opposite occurs – and that opposite is what has happened continuously in Ukraine.

For those that recall the Yanukovych-Tymoshenko attempts to out do each other on in the populist fight between 2005 and 2009, they will perhaps be aware that pension expenditures rocketed.  From a few percent when independence came, by 2004 that percentage had reached 10% of GDP.  After the populism contest between Yanukovych and Tymoshenko during the mid/end noughties, pension expenditure had reached 18% of GDP – where it has stayed until now.  The current pension mess is directly attributable to this populist nonsense instead of social expenditure reform.

Now with a shrinking GDP and another increase in pensions, we are likely to see another increase – despite 18% of GDP being by far the highest percent of GDP being spent on pensions across the entire European continent.

The reasons for this are numerous, and briefly outlined relate to the retirement age being far too low and the minimum working (and contributing) years to receive a full State pension being far too short.  The number of citizens that qualify for early “special pensions” are far too numerous (police, military, miners, state officials etc., account for 4% of GDP alone) and the system overly rewards the old Communist Party elites (Heroes of the Soviet Union etc) at the expense of the young and middle class (health and education), whilst the pitifully poor receive support that ridiculues the definition insufficient or even woeful.

With such a low retirement age, so few years to be worked before qualifying for a full State pension, and so many entitled to an early “special pension”, approximately 30 of Ukrainian citizens are pensioners of one type or another – whilst many continue to work because they are still comparatively young (and would be a decade (at least) away from a pension in almost all European countries).

The purpose of an old age pension is surely not to reward State officials that have spent a career stealing from their fellow citizens.  Likewise many of the police, and many responsible for societal repression within the old Soviet structures.  The purpose of a pension is surely at its most fundamental, sufficient funds to prevent the elderly dying in abject poverty – and so dysfunctional and unreliable is the current state of the Ukrainian social policy, it is entirely likely that the State fails in this regard on all counts.

Clearly, at some point the pension system has to be brought under control, the age limit lifted, the qualifying years for a full pension increased, and controls and caps on “special pensions” created.  There is surely room, notwithstanding an obvious economic need if the State is to survive, to at the very least halve the 18% of GDP pensions currently cost.

Naturally it would help matters if the State would radically cut employers payroll tax, bringing more hidden employees into the collectible and declarable tax arena, but mandatory contributions could perhaps be run in parallel to voluntary private pension saving schemes – as most other nations manage to do?

Presumably these new pension hikes will be funded in part by the debt haircuts recently agreed, and the small budget surplus accrued thus far this year, as well as other odds and ends left over in budget pots as the budgetary year ends – but it is not sustainable.

To make it sustainable, serious GDP savings must be made elsewhere, in energy as previously identified, by privatisation, and by the immediate stop to all subsidies – but even then, is it desirable to have the most costly (in terms of GDP) and yet least efficient and socially irresponsible pension system within the European continent?

Perhaps when making such pension announcements, Prime Minister Yatseniuk could/should explain how these pension rises, which in the current circumstances are needed by the poorest in the nation, are going to be financed not only in the immediate term, but also in the medium term?  Some linkage to other fiscal and economic policies may be a reasonable idea within the public domain so when pain is felt in some sectors, all will know where the benefits of that pain are being felt elsewhere?

Is this a benefit front-loaded signal of social expenditure reform (even if the announcement will not properly benefit those who need it the most due to the system) and hard policy choices will also be announced (after the elections), or is it the usual pension populism with no regard to national sustainability?

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