Inflation, devaluation, growth of the minimum wage and the cost of living – all this cannot but affect pension provision. The government says that indexation will protect Ukrainian pensioners from the negative impact of inflation. Will the recalculation of pensions really help the pensioners themselves and what impact will the increase have on the overall situation in the country’s economy? Focus.
Indexation of pensions in Ukraine in 2024 will take place on March 1. The approximate size of indexation will be 13%, but the exact figures are still unknown. They will be calculated in February, based on the necessary statistical indicators.
Interestingly, there is no consensus among economists regarding the need for indexation. While some say that from an economic point of view, an increase in social benefits is necessary to revive consumer demand, others call for the answer to the popular question “at whose expense is this banquet?”
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Indexation of pensions in Ukraine is provided for in Article 42 of the Law “On Compulsory State Pension Insurance”.
“To ensure the indexation of pensions, annually from March 1, a recalculation of previously assigned pensions is carried out by increasing the average salary (income) in Ukraine, from which insurance premiums are paid, and which is taken into account for calculating the pension,” the law says. “The average salary indicator ( income) in Ukraine, which is used to calculate pensions, increases annually by a coefficient corresponding to 50 percent of the growth rate of consumer prices for the previous year and 50 percent of the growth rate of average wages (income) in Ukraine, from which insurance premiums are paid, for three calendar yearsthat precede the year in which the increase is carried out.”
If there is no shortage of funds from the Pension Fund to finance the payment of pensions in the solidarity system, the size of the annual increase in the average salary may be increased, but in 2024 this is not worth even dreaming about.
Now the necessary statistics are not yet available, but at the end of last year, Minister of Social Policy Oksana Zholnovich said that as a result of indexation, pensions would increase by about 13%.
If there is no shortage of funds in the Pension Fund, the size of the annual increase in the average salary may be increased, but in 2024 this is impossible to even dream of
Pension question: where will the billions for payments in 2024 come from?
Given the huge state budget deficit, the government plans to take funds for pension payments from revenues from foreign partners. In particular, the Ukraine Facility program from the EU will help pay pensions on time for 50 billion euros, 18 billion of which Ukraine will receive during 2024 in several tranches.
The government plans to allocate part of the funds from the European Union to the social sphere to ensure payments. According to the Minister of Social Policy Oksana Zholnovich, financial assistance from the European Union will allow Ukraine to plan and timely pay social assistance to citizens from vulnerable categories. That is, the state will have funds for pensions and benefits for large families, people with disabilities, low-income people, etc. However, providing Ukraine with funds from the European Union does not mean that all issues with a lack of funds in the state budget will be resolved, because the Ministry of Finance at the end of 2023 planned to receive $37.5 billion from foreign partners – this is exactly how much the country needs to get through 2024 without significant complications with the payment of pensions, salaries and other payments. Now the main problem is the slowdown in making a decision on financial assistance to Ukraine in the United States.
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The main goal of pension indexation is to protect Ukrainian pensioners from the negative impact of inflation. Director of the Economic Discussion Club Oleg Pendzin says that the indexation formula has been working for several years, and it is really quite good: the growth of both wages and prices is taken into account. The question is: where to get the money for this indexation?
Funds for social spending today compete with funds allocated for defense, the expert says
“It is planned that this will be money from the macro-financial assistance of our partners, but the receipt of this assistance is still in question,” Pendzin noted in a commentary Focus– Eat optimistic expectations, but the final decision has not yet been made. And there are two bad points here. Firstly, our social spending is entirely covered by macro-borrowing funds. Secondly, now we actually live one day at a time, not knowing or understanding what will happen tomorrow, and this is unacceptable for social policy.”.
According to Oleg Pendzin, today the funds used for social spending compete with the funds allocated for defense. And which of these articles is more important is obvious. “The first sign of the economy being put on a war footing is the freezing of social standards,” says the expert. But the Ukrainian authorities, even during the war, do not plan to play the role of political kamikazes and distract the electorate from themselves. That’s why we see such populist decisions.”
And, the economist continues, we are talking not only about pensions, but also about the full social package. But instead of freezing, we have an increase in the minimum wage, the cost of living, and other payments tied to them.
Oleg Pendzin: now we actually live one day at a time, not knowing or understanding what will happen tomorrow, and this is unacceptable for social policy
“Inflation and wages have increased, therefore, based on the formula, there should be indexation,” he noted in the commentary Focus Analyst at the Center for Exchange Technologies company Maxim Oryshchak. “In order not to carry it out, it would probably be necessary to change the legislation.” However, given the difficult situation at the front and acute internal political contradictions, it would be quite difficult for the country’s leadership to explain such a legislative initiative and at the same time maintain the current level of support from citizens“.
All social payments and indexation are provided through foreign financial assistance, the expert continues. In his opinion, if they had been financed from internal sources by increasing taxes, reducing other government spending or emissions, loud statements on indexation, as well as indexation itself, most likely would not have happened.
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To help the economy: is it necessary to stimulate domestic demand?
At the same time, Oleksiy Kushch, an analyst at the United Ukraine Analytical Center, believes that freezing social payments would be the wrong decision during the war.“The modern Ukrainian economy develops through consumption. By reducing payments, we are reducing effective demand, with which we already have big problems due to the fact that 6 million Ukrainians have left the country. I said this during the pandemic, and I will say it now: the state should stimulate domestic demand through social payments. In particular, for example, pensioners with a pension below the average (at the beginning of the year – UAH 5,385) need to pay additional money at least once a quarter in the amount of the minimum pension,” the analyst suggests.
According to the expert, money for social services must be found even at the cost of emission (printing money through government bonds – Focus). Moreover, if a person receives a minimum pension of 3 thousand UAH, indexation will not solve the problem – more substantial payments are needed. In addition, the current indexation is projected to be only about 13% due to a sharp slowdown in inflation (at the end of 2023, annual inflation was 5.1%).
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Alexey Kushch is confident that increasing social benefits during the war is not populism, but a completely correct decision.“It is a big and harmful mistake to believe that saving on social payments can lead to a large economic effect,” the analyst noted in a comment Focus“Now we have two spirals of reduction: a reduction in consumer spending, because the population is trying to put aside savings during the crisis, and a reduction in the expenses of businesses, which do not want to invest money in investment projects.”
If the state also starts cutting budget expenditures, this will become a third spiral and a path “to nowhere,” the expert believes. And then, instead of saving, there will be a decline in the economy and a forced further reduction in budget expenditures.