Analysis and Proposals for the Improvement of the Long-Run Adequacy and Sustainability of the Croatian Pension System
FACTSHEET
1. What is the assignment that the World Bank received?
In October 2021, the Ministry of Labour, Pension System, Family and Social Policy (the Ministry) requested technical assistance from the World Bank in conducting an analysis of the long-term adequacy of the Croatian pension system in the context of fiscal and budgetary constraints. Through this task, the World Bank provided a background analysis of the pension system, presenting policy options for consideration by the Ministry during the implementation of a National Recovery and Resilience Program 2021-2026 reform entitled ¡°Increasing pension adequacy through continued pension reform¡±.
2. What did the World Bank¡¯s task related to pension system analysis consist of?
The Bank¡¯s task included two sets of interconnected activities. One was to prepare a pension simulation model of the Croatian pension system. The other comprised an analysis and policy proposals for the improvement of the long-run sustainability of the Croatian pension system, with an emphasis on pension adequacy. The World Bank team worked in close collaboration with the Ministry, the Croatian Pension Insurance Institute (HZMO), and the Central Registry of Affiliates (REGOS). The work was completed by summarizing the results of the analysis in a final report submitted in July 2024 for consideration by the Ministry.
The developed microsimulation model of the Croatian pension system (CROATIA PROMIS) is based on the World Bank PROMIS microsimulation model. It enables the simulation of adequacy levels for selected groups of insured individuals, and it incorporates various assumptions, both individual, group and macroeconomic.
The analysis and policy proposals for the improvement of the long-run sustainability of the Croatian pension system, focused on measures to increase the long-term adequacy of pensions in the context of budgetary and fiscal constraints and intergenerational equity. The work covered all three pillars of the Croatian pension system, namely, pay-as-you-go (PAYG) or the first pension pillar, the second mandatory funded pillar, and the voluntary or the third pension pillar.
3. What are some of the key findings of the analysis?
The analysis identified several main challenges of the current pension system which contribute to low adequacy of pensions and a high risk of poverty at old age, such as; a short service period, low average exit age, low support ratio (contributors/pensioners), abundant early retirement options, a choice option between a PAYG and a combined (1st and 2nd pillar) pension at the time of retirement, significant amount of non-earnings related transfers included in pension benefit calculation affecting the choice between a PAYG and a combined pension.
The analysis concluded that the Croatian pension system does not need significant changes. These changes include eliminating the second pension pillar or reinstating the mandatory second pillar pension (removal of the pension choice). With appropriate adjustments and upgrades, the three-pillar system can continue to provide better social protection at old age than either the first or second pillar alone. The analysis also indicates that the implementation of a set of policy measures, such as stronger indexation of pensions, raising the retirement age, reducing the early retirement period, offering more equitable pensions choices, and introducing automatic lifecycle portfolios in the second pillar, would help to reverse the trend of the eroding pension adequacy, support fiscal sustainability of the pension system and ensure intergenerational sustainability.
Resources
Report on the "" (July 16, 2024)