Wednesday, January 25, 2006

Slovakia leads the way

This week's The Business carries an interesting article by Cato's Marian Tupy on how Slovakia is leading the way on privatizing pensions:
Politicians in Europe and America who remain in denial about the huge black holes at the heart of their state pension systems should take a look at the remarkable reforms pushed through by Slovakia. That tiny Eastern European country, already famed for its flat tax, launched its pension reform on 1 January last year.
Under Prime Minister Mikulas Dzurinda’s new ­system, Slovakia’s 2.2m workers were given a choice: they could either remain fully reliant on the pay-as-you-go pension system or take a part of their social security contributions and invest it in personal retirement accounts managed by a number of different investment funds.
Social security contributions in Slovakia amount to 28.75% of gross wages. Workers can now put 9% into their personal retirement accounts and 9% goes to the old system. The balance covers other types of insurance or administrative costs.
So far, roughly 1.1m people, or 50% of the eligible workers, opted for the personal retirement account, and it is expected that an additional 300,000 to 400,000 people will switch before the 30 June deadline.
Read the whole thing. The transition seems to have been managed quite effectively - convincing the public with clear arguments and giving workers choice in the amount of risk they want to take on - and hopefully it will be widely emulated.

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