Modernization of the Bulgarian retirement policy: analytical review of the recent changes and prospects

Why and how has the pension system been modernised in Bulgaria? This paper considers how economic, social and political needs for modernising pension policy and for reforming the pension system in Bulgaria was pronounced at the beginning of the 1990s. After long public debates and painful, even sometimes contradictory changes in the years after 1989, the reform of the Bulgarian social-insurance system started at the beginning of 2000 after the enforcement of the Mandatory Social Insurance Code (MSIC).

The paper attempts to:

• present the main weaknesses of the Bulgarian pension policy and the reformed pension system at the end of the 1990s
• analyse the new Bulgarian pension model
• analyse initial effects and evaluations of the pension reform for two of the main stakeholders, the population and the pension insurance experts

Findings include the following:

• major disadvantages of the pay-as-you-go mandatory social insurance model, which comprised the major element of social insurance at the end of the 1990s, included financial instability, incomplete coverage, limited choice, and unequal distribution of financial burden and low pensions
• a three-pillar model was chosen as a replacement, based on combining pay-as-you-go and capital-funded principles and supplementary voluntary pension insurance
• one of the first outcomes since the reforms has been an increase of the nominal pension amount, however the increase cannot compensate for the extremely low pensions received.

The paper concludes that:

• there was practically little alternative to reform of social insurance in Bulgaria at the end of the 1990s, leading the government to evaluate the need for reform of both social insurance and of the entire social protection system
• a three pillar model was chosen as none other was proposed and international institutions and donors supported decisions directed to adoption of the three pillar model
• the pension reform did not initially enjoy broad public support, though it gained support from pension experts
• in terms of structure optimisation and pension increase, the financial situation of the pension system remains presently unstable, a financial deficit will continue and aggravate in the coming years though in the mid-term a gradual stabilisation is expected
• the new model aims to combine the advantages and neutralise the shortcomings of pay-as-go, capital-funded principles, state and private insurance and provide greater opportunities for choice of insurance behaviour