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How Ukrainians Can Survive In the Pensioners Country

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Ukraine experiences a threat to become a hopeless village from which young people go because they want to live their lives better than their parents, CASE Ukraine`s Senior Economist Volodymyr Dubrovsky in an article for the ‘Ekonomichna Pravda’ (‘The Economic Truth’) writes.
First of all, we should be aware of a question: who pays pensions? If it does a state, so, there is a taxpayer. If it does a Pension Fund (PF) which is contributed by those who desire to get pensions after reaching the relevant age, this is another case.
In the first case, it is unclear why we need a separate PF with its non-transparent budget, its ‘own incomes’, for some reason collected by the State Fiscal Service, and a huge staff. In the second case, it is clear that the PF should be separated from the state, but then the state should not force citizens to make contributions. They themselves should be interested in a secured old age.
A pay-as-you-go pension system began with purely voluntary contributions to pension funds, to which the state had nothing to do. Consequently, there was no one to coerce.
People carried their money there, because they reasonably expected to receive in the form of a pension more money than they invested during their period of service.
This was possible as long as the network of pension funds grew and expanded and each next generation was several times larger and richer than the previous one. In other words, it was a classic ‘financial pyramid’.

The solidarity pension system went bankrupt, and the state had no choice but to fulfill its obligations as guarantor and to take it for maintenance.
If it is possible to balance expenses with incomes, then the PF should become an ordinary budget institution. In addition, the tax policy should be formed without regard to ‘fees’ and ‘duties’.
The state can try to guarantee some types of savings and even to create a state voluntary fund, but it should not force anyone to choose this or that form or save a certain percentage.
It is only necessary to provide a resource for savings. This can be done by abolishing unified social tax and further reducing personal income tax to 10%. By the way, it will immediately solve all problems with ‘shadow’ salaries.

How to do it? Where can we get money? In 2017 as a total, the budget and the PF are going to redistribute about 44.3% of Ukraine’s GDP. This is prohibitive: even more than in the more prosperous Germany and Great Britain.

Ukraine will not become S. Korea: there are problems with payment of a debt, military expenses and irreducible social expenditures. However, it is quite possible to reach 37%, that is, to leave within the economy for its development another 7% of GDP. In addition, there are some reserves in the collection of VAT, excises and property taxes (mainly on land). In our country, they are collected less than 1% of GDP, while in the OECD countries it is 2.5%. In Ukraine, it would be desirable to collect 4% from those objects that cannot be hidden. That is, after reducing especially harmful taxes, you can ‘scrape together’ a total of more than 10% of GDP.

Read the full article [in russian]

March 2, 2017