Reforming the Slovenian Pension System – Some Guidelines and Intergenerational Distribution Issues

In this note, we examine two possibly complementary ways of adjusting the Slovenian pension system, currently widely assessed as unsustainable. We separately evaluate the adjustments of the retirement age and the private saving rate that would be necessary to maintain the current pension-to-net-wage ratio. We implement a variant of the framework that the European Commission proposes to use to assess the long-term sustainability of public finances. We find that if only the effective retirement age is used as the variable ensuring the long term sustainability of public finances, it should almost linearly increase up to more than 68 year by 2050. If only the saving rate is to be adjusted, the saving rate of young cohorts needs to be adjusted by 5 pp to 15 pp of the net wage, depending on the real rate of return and the remaining saving horizon. However, for the cohorts who are retiring in the short to medium run the saving rate adjustment is unrealistically high, ruling out capitalized pensions as a viable adjustment for them. These results support the idea that over the next decade or two the increase in the effective retirement age to around 65 years would be an adequate or even inevitable pension system adjustment, if its current generosity is to be preserved. After two or three decades, however, capitalized pensions may effectively supplement PAYG pensions, though only if they are fully implemented straight away