IMF Calls for Pension System Reform in Bulgaria

Bulgaria should tighten its belt in the upcoming budget and halt further increases in public sector wages, the International Monetary Fund (IMF) has recommended during its ongoing mission to the country, which runs until 23 September.

Today, IMF representatives met with Members of Parliament from the Budget and Finance Committee. The Fund encouraged the government and the National Assembly not to abandon pension reform and to increase social security contributions.

According to the IMF, Bulgaria’s spending in the next budget should be reduced by 1% in order to avoid the risk of the budget deficit exceeding 3% as early as this year.

“An ageing population, defence spending, infrastructure upgrades, the water sector, education – all these areas will require much higher investment in the future. Our position is that next year’s fiscal policy should not be expansionary but, on the contrary, should focus on tightening,” said Fabian Bornhorst, head of the IMF mission to Bulgaria.

The Fund recommended controlling the rise in public sector wages, raising social security contributions by 1% as early as next year, and scrapping the maximum social security threshold.

“Strengthening the link between contributions to the pension system and benefits will encourage people to declare their real income,” Bornhorst added.

The chair of the Budget and Finance Committee expressed support for most of the proposed measures.

“You have identified very well that what must be brought under control is the increase in public sector wages, as well as the social spending automatically linked to the minimum wage,” commented Delyan Dobrev, Chair of the Parliamentary Budget and Finance Committee.

The IMF also recommended raising taxes and replacing the flat tax system with a progressive one, under which higher earnings are subject to higher tax rates. The governing coalition rejected this suggestion.

“The first recommendation we do not accept is the introduction of progressive taxation. The second, which we also cannot support, is the removal of the maximum social security threshold,” Dobrev said.

Bornhorst noted that there is also scope to strengthen budget revenues through higher property taxes and by accelerating excise duty collection.

The draft of Bulgaria’s new state budget is to be submitted to the National Assembly by 30 October.