Pension reform is an important and sensitive issue in almost all countries, but especially so in CEE countries with their aging populations. Established in a different economic and demographic era, most public pension programs are now very expensive. In many countries, pension spending is the largest expenditure item in government budgets, absorbing 15 percent of GDP in Poland and Slovenia. Meanwhile the payroll taxes required to finance these expensive systems are among the highest in world, some reaching 40 - 50 percent of employees' gross wages. Even so, they're not high enough to cover expenditures in Poland and other countries, where the systems run large deficits every year.
Costs are high in large part because of the large number of pensioners.
Average retirement ages are relatively low - about 57 for men and about 53 for women, compared with 65 and 67 for most OECD countries. Costs are also high because of generous early retirement rules and high rates of disability - with the latter, for example, doubling during the transition in Hungary and Poland. Nor do these massive outlays assure adequate protection of the poorest old people in many countries where governments have been forced to cut pensions in real terms. Raising effective retirement ages, tightening disability criteria, and introducing affordable but automatic indexation mechanisms are three crucial reforms that must be considered - even by countries in western Europe, I might add. Hungary, Poland and Latvia are all likely to have second pillars in place by 2000.