VZCZCXRO8665
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0153/01 0581335
ZNR UUUUU ZZH
P 271335Z FEB 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 8619
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 ZAGREB 000153 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ELAB SOCI HR
SUBJECT: CROATIA'S UNBEARABLE PENSION BURDEN 
 
¶1. (SBU) SUMMARY: With a quarter of its population receiving 
pensions, Croatia's pension expenditures amount to 11% of GDP 
and a third of the proposed 2008 state budget. The ratio of 
pensioners to contributors, currently 1:1.4, is expected to 
improve slightly over the next decade as employment levels 
rise, but then fall to 1:1 by 2050. Many of the reforms begun 
in 1998 to reduce the system's fiscal burden have been 
stalled or reversed. As a result, the current system is 
fiscally unsustainable and will become more so if the 
government implements the measures of the Croatian Democratic 
Union's (HDZ's) coalition agreement. Returning to a path of 
reform will be difficult, politically and economically, but 
if the government does not stabilize the pension system, it 
risks hampering Croatia's economic growth and passing an even 
more difficult problem to the next government. End Summary. 
 
HIGH PROPORTION OF "YOUNG" PENSIONERS; LOW 
CONTRIBUTOR-PENSIONER RATIO 
 
¶2. (U) About 1.1 million people receive pensions in Croatia. 
Just over half (578,500) of these beneficiaries qualify by 
age. About 240,000 qualify based on disability and another 
235,000 qualify as survivors. The remaining 67,700 are 
Croatian army and Croatian Homeland War veteran 
beneficiaries, 53,000 of whom qualify by disability. The 1.1 
million pension beneficiaries represent a quarter of 
Croatia's population. According to Danijel Nestic, researcher 
at Zagreb's Institute for Economics, because the government 
has used early retirement plans to ease the effects of job 
losses due to privatization and restructuring, and because of 
the high proportion of disabled beneficiaries, Croatia has 
45% more pensioners than it has residents age 65 or older. 
Currently, the ratio of pensioners to contributors is 1:1.4. 
Nestic and other analysts expect this ratio to improve 
slightly over the next decade as employment levels rise, but 
longer term projections estimate a 1:1 ratio by 2050. 
 
LOW AVERAGE PENSIONS, HIGH COSTS 
 
¶3. (U) The average pension for non-military beneficiaries is 
2000 HRK ($400) per month, although about half of 
non-military beneficiaries receive 1,500-3,000 HRK 
($500-1000) per month. The average pensions for military 
beneficiaries are higher: 3160 HRK ($630) for Croatian army 
beneficiaries and 5610 HRK ($1120) for Homeland War 
beneficiaries. Pension payments equaled about 11% of 
Croatia's GDP in 2007. Payroll contributions cover about 60% 
of the payment costs, with the remainder financed from the 
budget. At more than 33 billion HRK ($6.6 billion), pension 
payments constitute about a third of the government's 
recently proposed 2008 budget. 
 
LIMITED SUCCESS AT REFORM 
 
¶4. (U) In 1998, due to the fiscal pressure of the pension 
system, the GoC began a set of reforms by adjusting the 
existing pay-as-you-go (PAYG) parameters and setting the 
structure for a multipillar system. Elements of the reform 
included a gradual increase in retirement age, an increased 
penalty for early retirement, less generous benefit 
calculations, and introduction of wage-price indexation for 
benefits. The government introduced the "second pillar," a 
fully funded, defined-contribution plan that is mandatory for 
workers age 40 and under, in 2002. When the reforms were 
launched, World Bank analysis indicated that the changes to 
the PAYG parameters would reduce first-pillar spending from 
above 13% to below 10% of GDP by 2020 and 6% by 2040. The 
deficit between contributions and benefits was expected to 
decrease from 3.6% of GDP to 1.1% by 2005, thereby creating 
the fiscal space to raise the proportion of contributions 
going to the second pillar. However, policy interventions 
(reform reversals, in several cases) introduced in the 
meantime resulted in a 2007 pension deficit of 3% of GDP. 
According to World Bank forecasts from January 2008, 
continuing the current policies would keep pension payments 
at or above 11% of GDP for 10 years and prevent the pension 
deficit from falling below 2% of GDP for 20 years. 
 
PROPOSED ADJUSTMENTS: ANOTHER BLOW TO FISCAL SUSTAINABILITY 
 
¶5. (U) The coalition agreement reached by the Croatian 
Democratic Union (HDZ) and its partners in January 2008 
includes three pension policy measures: 1) an increase in 
replacement rates for current PAYG pensioners from 41% to 50% 
by the end of the government's mandate (2011); 2) 
introduction of an "old-age subsidy" for elderly persons not 
participating in the pension insurance system; and 3) an 
increase in the minimum pension for 25 years of service. 
According to Zoran Anusic, senior economist at the World Bank 
Regional Office in Zagreb, the second and third measures 
could have a minor fiscal impact, depending on the 
yet-to-be-decided details. He estimates, however, that 
 
ZAGREB 00000153  002 OF 002 
 
 
raising the replacement rate to 50% would raise pension 
expenditures to 13.6% of GDP by 2011, while the pension 
deficit would rise to 5% of GDP. 
 
¶6. (U) Because of changes to the system in 2007, pension 
expenditures will grow by more than any other item in the 
proposed 2008 budget, and they are forecast to constitute 12% 
of GDP. Anusic believes even this current system is fiscally 
unsustainable, and the changes dictated by the coalition 
agreement would be another step in the wrong direction. The 
general worsening of macroeconomic conditions in Croatia 
reduces the chances the agreement provisions will be 
implemented, and the proposed budget does not include funds 
for implementation in 2008. However, Anusic sees little 
chance the government will get the reforms back on track. 
 
¶7. (U) While Anusic and other analysts caution against the 
recent and proposed adjustments, the Croatian Pensioners 
Party (HSU), some unions, and pensioner advocacy groups 
continue to push for further changes to improve the lot of 
current pensioners. Citing estimates that the average 
beneficiary spends half his or her pension on housing, 
leaving just 33 HRK ($6.60) per day for other expenses, 
representatives of these organizations have called for 
raising current pension amounts by the percentage that GDP 
has grown and changing from wage-price indexation to wage 
indexation. 
 
COMMENT 
 
¶8. (SBU) Although the financial situation of many current 
pensioners may be difficult, increasing their benefit amounts 
will likely create a fiscal burden Croatia cannot afford. 
Abandoning the earlier reforms also risks penalizing future 
pensioners, while reinforcing the expectations of younger 
generations that they can rely completely on the state to 
take care of them in retirement. Reneging on promises to 
increase current pensions and returning to reform measures 
will be difficult, politically and economically. But if the 
government does not find a way to stabilize the pension 
system, it risks hampering Croatia's economic growth and 
passing an even more difficult problem to the next government. 
Bradtke