The causes of problems in the public pension system and reasons why funded pension insurance should be preserved in croatia

Abstract

The pension system has different demanding tasks that may sometimes be mutually in conflict. Despite the apparent improvement in the financial position of older people, the intergenerational solidarity system also has some adverse effects. It could distort labour supply and forms of compensation, increase the loss of dead weight effect of social insurance contributions, exaggerate redistribution in the system and create long-term unsustainable pressure on public finances. Therefore, a pension reform was implemented in Croatia and a funded system with personal accounts was introduced. Possible freezing or cancellation of the funded system would have highly unfavourable economic effects and would lead to a breakdown of trust in this savings system. It would only briefly mitigate the budget deficit, while simultaneously it would create great long-lasting difficulties for the government in meeting the obligations towards persons who had acquired pension rights. The purpose of this text is to clarify the importance of preserving compulsory funded (capitalized) pension insurance (the second pillar) in Croatia. The paper explains the most significant features of the funded pension insurance and offers possibilities for improvements.