Do today's forty- and fifty-year-olds have a chance to receive a decent pension from the state? Under the current solidarity pension system, these chances are slim. The main reason for such disappointing forecasts is the "aging" of the population, which is happening all over the world, but in Ukraine at a much faster rate. The solution to the situation is the pension reform, within the framework of which the accumulative system of pension insurance will work. In this article, we will consider what mechanism of pension provision is proposed to be implemented and how every Ukrainian can increase his chances of a secure old age.
How the demographic situation affects pensions in Ukraine
The population of the Earth is aging, and the population of Ukraine is aging twice as fast. Yes, there are 10% of people over 65 years of age in the world, and in Ukraine this share is an impressive 20%. These processes are associated with a low birth rate, an increase in life expectancy, and the migration of young people abroad.
According to the Pension Fund, in 2024 there will be approximately 10.2 million pensioners in Ukraine, among whom about 2.7 million are working. The number of people paying a single social contribution is slightly more than 10 million. As you can see, one worker supports one pensioner.
In the future, the demographic situation in Ukraine will only worsen: according to forecasts, in 25 years, the share of Ukrainians over the age of 60 may increase from 20% to 30% of the total population. The number of pensioners may amount to 13-16 million people, and the number of workers in the formal sector of the economy, on the contrary, may decrease to 8-10 million. So there will already be two pensioners for one working person.
Of course, it is not only about the aging of the population, but also about the significant shadowing of the economy, when several million Ukrainians work unofficially and do not pay any contributions. This situation emphasizes the need for reforms, in particular, the introduction of a cumulative pension system, without which the future of pension provision in Ukraine looks quite pessimistic.
How a pension is paid in Ukraine by age
In 2004, a pension system consisting of three levels was adopted in Ukraine:
- solidarity
- mandatory accumulative
- voluntary accumulative pension system.
This is a modern model, common in many developed countries of the world. Unfortunately, no government has been able to fully implement it for 20 years.
Today, the country operates a joint pension system, which is a type of pension system in which pensions are paid out of the contributions of current employees. Such a mechanism is based on the principle of generational solidarity: the working population pays contributions to the Pension Fund, which finances pension payments to current retirees, and they earn for themselves only work experience.
The third level also operates in parallel - voluntary non-state pension provision or private accumulated pension, but its volume is very small. Thus, according to the data of the National Pension Fund of Ukraine, the total number of participants of non-state pension funds as of March 31, 2024 was 886,400 people - slightly more than 8% of the current number of pensioners.
Given the complex demographic and economic situation, it is obvious that the current system is not capable of providing adequate pension benefits for today's workers in the future. A mandatory accumulative system of pension insurance will help to solve the problem, which is why, after 20 years, the authorities have finally taken up its implementation.
The accumulative pension system in Ukraine
Accumulated pension in Ukraine is mandatory monthly contributions not to the general fund, but to personal accounts of citizens, where these funds will be accumulated during life and then paid out.
All officially employed and, therefore, insured Ukrainians will have their own savings accounts. Each month, a certain percentage of their income will be transferred to these accounts. It is assumed that funds for the accounts will come from employers, the state and in the form of additional voluntary contributions from the citizens themselves.
Solidarity and accumulative pension systems will operate in parallel, complementing each other, to ensure the effective functioning of all levels of pension provision. Payments from the accumulation system will not replace old-age, survivor's or disability pensions, but will only supplement them, which will contribute to increasing the level of monthly payments.
An important advantage of personal accounts is that after the death of the account holder, the pension savings are not lost, but are inherited. Funds can also be received earlier in case of illness, disability or moving abroad permanently.
Unfortunately, in April 2024, the draft Law "On Accumulated Pension Security" No. 9212 of April 17, 2023 was returned for revision. And the adoption of this law will require a number of legislative changes and mechanisms to be worked out, so the mandatory accumulative pension in 2024 is unlikely to be implemented.
While waiting for the reform, Ukrainians should think about not relying only on the state, but saving for old age independently. Even if the system will work effectively and high old-age pensions will become a reality in Ukraine, additional savings will not be superfluous, but on the contrary will allow to live a more dignified and fulfilled life in old age. In addition, it will give an opportunity to retire earlier - at the age of 50-55, instead of waiting for retirement age and sufficient insurance experience.
How to save for retirement on your own
No matter how old you are or what level of income you have, you should start saving for retirement today. For this, there are several basic mechanisms, among which you can choose the most convenient for you. At the same time, taking into account the long-term nature of savings, it is worth combining several tools - this will help reduce risks and increase savings.
Among the main instruments of long-term savings can be distinguished:
- Non-state pension funds
- Accumulated life insurance
- Investments in shares or real estate
- Long-term deposits in banks
Non-state pension funds (NPF)
There are 63 non-state pension funds in Ukraine, but according to the Ministry of Social Policy, only 15-20 of them are actively operating. The work of these funds is controlled by the National Bank of Ukraine and the National Securities and Stock Market Commission.
You can open a savings account in any of these funds and top it up regularly with your contributions. Here you independently determine the start date of pension payments and their periodicity: monthly, quarterly or annually. However, according to the law, you can only receive your pension savings after you turn 50.
The fund multiplies your funds by investing them in the most profitable and usually diverse assets - bank deposits, government bonds, shares in the corporate sector, etc. Due to the diversification of investments, the probability of capital growth is quite high.
Advantages
- the opportunity to accumulate more for a longer period;
- distribution of all profits among fund participants;
- absence of fines for late payment of contributions;
- the opportunity to use a tax discount;
- the ability to withdraw all funds on a certain date or receive payments in installments.
Disadvantages
- early termination of participation is impossible (with the exception of certain situations);
- there is no guarantee of income;
- contributions can be made only in hryvnias.
Investments in shares or real estate
There are plenty of investment opportunities: stocks, bonds, funds, real estate, land, business, etc. However, the investment process is more complicated and requires more knowledge and time from you and usually the involvement of other specialists. In investing, there are chances to get really high profits, but the risks of losing money are also higher. In addition, the minimum investment amount is not available for many citizens.
One of the most common ways of investing for Ukrainians is the purchase of real estate for further rental. Read more about this tool in our article What is more profitable: real estate investment or bank deposit?, where we compared real estate investment with deposits in terms of yield, risk, associated costs and complexity of the process.
Accumulated life insurance
This tool allows you to insure your life and health and accumulate capital at the same time. You enter into an accumulation life insurance contract with an insurance company, under which you regularly pay small insurance premiums over a long period of time. A portion of these premiums accumulate in your account and are invested by the insurance company for additional income. At the same time, during the entire period of validity of the contract, the insured person has insurance protection in case of death or loss of working capacity.
Advantages
- the opportunity to accumulate more for a longer period;
- insurance protection;
- indexation of the insurance amount and insurance premiums may be provided;
- an opportunity to use a tax discount.
Disadvantages
- early termination of participation is impossible (with the exception of certain situations);
- mandatory regular contributions;
- loss of funds in case of early termination of the contract.
Long-term deposits in banks
The most common and simple way of savings are bank deposits. Thanks to a transparent and understandable process, a low entry threshold, the ability to choose the currency, term and terms of the deposit, this tool can be used by every Ukrainian. In addition, banks constantly offer quite favorable conditions for deposits, and the amount of additional income is guaranteed and clearly defined in advance.
Advantages
Accessibility and simplicity. The deposit can be opened in any branch of the bank or online in the mobile application. Also, after the end of the deposit period, you can easily withdraw your money at any ATM, regardless of which region or country you are in.
Deadlines. Banking institutions offer their clients short-term financial instruments that allow them to place funds for a period of up to 3 years. After this period, you can withdraw, extend or open a deposit in another bank. For many customers, this is much more attractive than giving away money for 10 or more years.
Projected income. When investing funds in the bank, the depositor immediately receives information about the interest rate and can clearly determine his income level. In the case of non-state pension funds or insurance companies, the client is often at risk, as the return depends on where and how effectively his funds are invested.
Payment guarantee. During the period of martial law and three months after, the full amount of the deposit and accrued interest is reimbursed, after that the state guarantees all bank deposits up to UAH 600,000. Therefore, even in case of bankruptcy of the financial institution, the funds will not be lost, because they will be returned by the Deposit Guarantee Fund, and the procedure for obtaining compensation is simple and fast.
Disadvantages
Independent decision-making. You have to decide for yourself in which bank to place your savings and look for the most favorable conditions and offers. In the case of NPF or insurance companies, these aspects are taken over by professional specialists.
Short term. Since, unlike the NPF, the deposit is placed for a relatively short period, the depositor always has a risk and a temptation after the end of the deposit period not to place the funds again, but to withdraw and spend them.
Interest capitalization
A profitable choice for long-term investments is a deposit with interest capitalization. Interest capitalization consists in the fact that accrued interest is regularly reinvested, that is, it is added to the principal amount of your deposit. This creates the effect of compound interest, where the interest is compounded on a larger amount each time. The longer this process takes, the bigger your savings will be. In this way, even a small down payment can grow significantly over many years thanks to compound interest.
For more information on the features of capitalization of interest and in which cases it is beneficial, read our article What is interest capitalization on a deposit.
