Basic pension and service points: What reform is being prepared for Ukrainians and who will see an increase in payments?

The Ministry of Social Policy is planning to fundamentally change the solidarity pension system. If the reform is successful, 80% of Ukrainians will receive increased pension payments. At the same time, the state will be able to significantly save on judges and prosecutors. More details – in the review by RBC-Ukraine journalist Ruslan Kislyak.

In Ukraine, there is a desire to revise the current pension system, radically reforming the solidarity level of pension provision. And the full-scale war – is by no means a reason to abandon efforts to improve the living standards of Ukrainian pensioners. The Ministry of Social Policy has unveiled another draft pension reform.

The goal of the changes – is to enhance the fairness and adequacy of pension amounts assigned and paid within the solidarity pension system. The implementation of the reform is intended to gradually eliminate the disparities between pension amounts assigned in different years; significantly simplify the pension calculation mechanism; ensure a direct correlation between the amount of insurance contributions that a citizen pays into the pension system and the amount of pension that they will receive in the future. One of the expected outcomes of the reform should be an increase in pension amounts for over 80% of pensioners.

What should change in the solidarity system

First, the approach to calculating pension amounts must change. Currently, there is an imbalance in the amounts of previously assigned and newly assigned pensions due to the application of various salary indicators. As a result of utilizing different salary bases for pension calculations, the pension amount for two individuals with the same work experience and salary can differ by more than one and a half times. An additional factor contributing to such imbalances is the establishment of various supplements and allowances, leading to significant disparities in the payment amounts for pensioners who, from the perspective of insurance principles, have identical pension rights.

Secondly, the formula for pension indexation should change. Today, indexation is based on the average salary amount. The pension is indexed by a coefficient equal to 50% of the growth rate of the average salary over three years, for which insurance contributions were paid, and 50% of the increase in consumer prices from the previous year. This indexation formula significantly devalues the pension amount over time, necessitating periodic "modernization" of pensions. This is because, in the long term, wage growth rates in Ukraine generally exceed inflation rates. If the mechanism is not changed, the replacement coefficient (the ratio of pension to salary) will continue to decline.

Moreover, this formula works "against" economic development. When the economy grows, wages increase, and consequently, revenues from the Unified Social Contribution (USC) rise, – while pension growth slows down due to a deceleration in inflation. Conversely, when the economy declines, wage growth slows, revenue from USC decreases, – pensions increase due to rising inflation rates. In such conditions, there are no financial resources in the budget to raise pensions, and the incomes of the working population do not grow.

A separate problem is that during annual pension indexation, not the entire aggregate payment is recalculated, but only one of its components – the basic pension amount. Under these conditions, situations often arise where during indexation, the payment does not increase or increases by only a few hryvnias. This leads to a sense of injustice and diminishes trust in the state and the pension system among pension recipients.

Thirdly, the opacity of the pension system and the negation of insurance principles must come to an end. To support pensioners who have had a long insurance record but low earnings, various additional allowances and increases to the minimum pension amounts have been established by legislative and governmental acts. As a result, the total pension payment for some pensioners may consist of a basic pension amount (insurance pension) that is less than 10%, while more than 90% of the amount comes from allowances and supplements established at different times. This complicates the understanding of the established pension amount and does not encourage working individuals to work legally.

How the solidarity system should change

To ensure that Ukrainian pensioners receive the pension they deserve within the solidarity system, it is proposed to use information about the amounts of paid insurance contributions instead of salary information (income) from which the insurance contribution was paid.

There will be no limit imposed on the maximum amount of the solidarity pension.

It is proposed to introduce a so-called basic pension, which will replace the current cumbersome and opaque system of numerous supplements and "top-ups." Essentially, this means merging such supplements into a single amount – the basic part of the pension. Additionally, the basic part of the pension will provide a minimum level of pension provision for individuals who have reached retirement age.

It is also planned to exclude all allowances, payments with a status nature, and other privileges that are financed from the state budget from the concept of "pension."

Every Ukrainian should be guaranteed a basic pension in old age (photo: Getty Images)

Importantly! It is proposed to expand pension coverage to individuals aged 65 and over who do not have sufficient insurance experience, even if they have paid significant amounts in insurance contributions. Specifically, the right to an old-age pension should be granted regardless of the existing insurance experience (currently the minimum requirement is 15 years) for individuals who have reached 65 years, provided that prior to that, they paid contributions equivalent to the total amount for 30 years of service at the minimum wage.

It is anticipated that the amount of the old-age pension will equal the sum of the basic old-age pension and the insurance part of the pension, and there is also a proposal to increase payments for deferring retirement. The amount of the basic old-age pension cannot be less than 30% of the minimum wage, reduced by the amount of tax deductions.

The amount of the insurance part of the pension is calculated as a derivative of the total contributions made by the individual throughout their employment period.

The reform provides for a change in the approach to recalculating pensions in connection with indexation. Considering that the key criterion for the level of pension provision is the replacement coefficient, that is, the percentage of salary, and also that wage growth rates generally exceed inflation rates, it is proposed to modernize pensions based on the growth level of the average salary. This approach ensures that pension amounts do not decline. Pension growth will correspond to processes occurring in the economy: if wages increase (the amounts of contributions increase) – pensions will also increase; if wage growth slows – pension growth will slow.

Approaches to recalculating pensions for individuals who continue to work while receiving a pension will also change. For working pensioners, pension recalculation will occur automatically, annually. The pension amount will increase considering the amount of additional experience acquired.

All existing supplements, increases, additional pensions, allowances, and other top-ups that have a conditionally status nature, or were established for certain merits or work features, will be retained. The amount of additional pension payments will be established as a percentage of the basic amount, which at the start of the reform will be equivalent to the subsistence minimum for individuals who have lost their ability to work. This, the reform initiators assure, will not narrow the existing rights of pensioners. In the future, the amount of the basic amount will be approved by the Verkhovna Rada in the law on the State Budget for the corresponding year, taking into account economic dynamics.

How solidarity pension will be calculated

The reform stipulates that the solidarity pension will consist of two parts: a basic pension and an insurance pension. The amount of the basic pension will be 30% of the minimum wage after the payment of taxes and fees from it. All pensioners, without exception, will receive the basic pension. Currently (with a minimum wage of 8,000 hryvnias), the basic pension amount would be 1,848 hryvnias.

For the correct calculation of insurance experience to ensure fair pension payments it is proposed to introduce so-called points for each participant in the solidarity system. The point system for accumulating experience, according to the reform initiators, should eliminate disparities between pension amounts assigned in different years for people with the same experience and salary.

Points will be awarded based on the amount of the Unified Social Contribution (USC) that the worker pays during their employment period. For paying USC based on the average salary in the