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savings of about 30 percent by 2003 (assuming the average pension remains the same). (Cavalcanti, 1993). In Poland, cutting back early retirement by 50 percent could save roughly 3 percent of GDP annually by 2010 (Rashid, 1993). In Romania, equalizing normal retirement ages for men and women to 65 and for most early retirees to 60 by the year 2000 reduces the projected system dependency ratio by 25 percent at the millenrium (Romaiuan government projections).

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Lowering average benefits also generates expenditure savings, but not as dramatic in the m uJnM. In Poland, simulations lowering regular benefits by 20 percent generated only half the savings of the eligibility-delaying reforms by the year 2003 (Rashid, 1993). This is because the system is maturing. Without reform, the postwar baby boom generation will begin to reach retirement age during the next ten years.

Thus, of all the reforms of the public system mentioned above, the highest priority should be given to raising retirement ages. This is clearly a questioa of political feasibility as in Bulgaria, a 1986 survey found that over 50 percent of all pensioners rated themselves as able to work (Petkov and Minev, 1989).

The recommended reforms in the public sector are less feasible without the development of additional pillars. This is one of the most important reasons for moving ahead in this area. The second pillar will have other benefits as well which are not fiscal, but political or psychological. As Johnson, (1993) points out, creation of this pillar would be the strongest possible signal the government could send that individuals are now responsible for their own well-being. It would also create a constituency in favor of macroeconomic stability and financial sector reform. To the extent that in the absence of a second pillar the profits from privatization and enterprise restructuring are more likely to go to wealthier inivestors -- who are better able to diversify their portfolio, handle risk, and take a long term perspective -- creating institutional investors with broad participation among the active generation may increase the political acceptability of the privatization and restructuring process. Pension fund assets could also help to stimulate foreign direct investment (FDI), as they could complement FDI in new ventures. The presence of domestic pension fund assets in an 1DI deal would help to reassure foreign investors with respect to the political climate.

# Sequencing and Obstacles to Reform

Most EECA countries recognize that their public pension systems are in need of a major reform. Indeed, reform of long-term benefit entitlements has been a condition of Bank adjustment loans in most countries. Since 1989, some reform has taken place. (See Box 5). For example, Hungary has attempted to improve transparency by separating benefits into separate funds (e.g. long term benefits, short-term benefits, health care expenditures). The FSU created an independent pension and farnily allowance fund, fully financed by earmarked contributions, just prior to the break-up. Since the break-up, Estonia has introduced flat pensions. Bulgaria has reduced the scope of early retirement for future pensioners, and both