Pension Reform in a Highly Informalized Post-Soviet Economy

Dobronogov, A.V. & Mayhew, L.D. (2000). Pension Reform in a Highly Informalized Post-Soviet Economy. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-00-041

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Abstract

Pension reform is now on the national agenda in most post-Soviet countries. These countries have highly informalized economies, which means that large areas of economic activity go unreported to the authorities. This paper deals with the problem of pension reform in a highly informalized post-Soviet economy, Ukraine. It includes an analysis of causes and consequences of informalization, a general description and analysis of trends in the Ukrainian pension system, and a discussion of different approaches to reform. The paper describes an approach to modeling labor and capital flows between the formal and informal sectors using a gravity model. It also reports and discusses results of simulations of different scenarios of pension reform in Ukraine. Policy-relevant findings of the study are as follows:

-- Public trust in reform is crucial. Therefore, in designing and and implementing reforms exceptional attention should be paid to trust-building measures;

-- Debt-financed transition to a fully-funded pension system in an informalized post-Soviet economy can lead to higher efficiency gains than a tax-financed transition. This is due to an alleviation of the tax burden, which encourages a decline in unreported economic activity.

-- Provided that public trust in the reform is sufficient, the larger the fully-funded system, the greater will be the decline in informalization.

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