First Deputy Minister of Social Policy Daria Marchak (photo facebook.com/MLSP gov ua) Author: Danila Kramarenko, Dmytro Oleynik
From March 1, 2025, pensions will be indexed for most Ukrainian pensioners. It is set at 11.5%, but the increase is limited for the highest pensions. In a blitz interview for RBC-Ukraine, First Deputy Minister of Social Policy Daria Marchak spoke in more detail about the indexation, who will receive pension increases in April, and what will happen to the pension system next.
What makes indexing possible?
The state financial situation is complicated. The largest expenditure item is the needs of the security and defense sector and the financial support for our military personnel. But at the same time, pensions are very often, unfortunately, the only source of financial income for people who can no longer work.
Therefore, maintaining the real purchasing power of pensions is one of the government's priorities, which is why indexation is being carried out. Of course, this creates a burden on public finances. But this is the step that we must definitely take in order to prevent a deterioration in the ability of our pensioners to cover their basic needs.
How will pension indexation take place?
All these processes are automated. Moreover, the Pension Fund has already started making accruals, the procedure takes several days. At the beginning of March, all Ukrainian pensioners will feel the increase in pensions as a result of indexation.
How much will pensions increase after indexation?
If we look at the legislative framework, we have three instruments for increasing pensions. And they usually work in such a way that the pension size can increase unevenly. For example, for pensioners with the lowest so-called formula pension size (linked to the subsistence minimum), if we look simply at the norm of the law, then their pension size should be revised when the subsistence minimum increases. However, due to the difficult financial situation, the subsistence minimum is not increasing this year. And thus, if we do indexation simply according to the law, a significant part will not feel the increase.
Therefore, we continue the innovation that we introduced in 2023 – despite the fact that the law does not require it, we also index all the lowest pensions. The general logic of indexation is not to lose a single category of pensioners and to index absolutely everyone in the amount stipulated in the resolution – 11.5% with several exceptions.
First, in order to find financial resources to increase the smallest pensions, we have been setting a maximum limit on the indexation amount for the third year in a row. That is, the increase as a result of indexation cannot exceed 1,500 hryvnia . Because if we apply 11.5% for a pension of 3,000-4,000 hryvnia and for a pension of 20,000 hryvnia, then the growth in absolute terms will be uneven.
Why is indexation exactly 11.5%?
The size of the indexation is determined by law and depends on two indicators – the average salary growth rate and the inflation growth rate. Moreover, we take the inflation rate for 2024, and it is 12%. And we take the average salary growth rate for 2022-2024, and it is 11.5%. In fact, we take the average between these two indicators and come to 11.5%.
Does this cover the real costs of pensioners?
The indexation formula works in such a way that during an economic downturn, pensions sometimes grow even faster than average wages. The main indicator in the pension system is the replacement rate, the ratio between the pension and wages. And it turns out that the average growth of pensions occurs faster than the growth of wages. Since the task of a pension is to partially replace wages, this ratio is growing.
Doesn't the 12% inflation rate “eat up” indexation?
We have a clear formula defined by law, there are comments on it. And we believe that the mechanics of pension indexation can be improved. For this purpose, the ministry has developed a large systemic comprehensive bill on the reform of the solidarity pension system. Its goal is to make the system more convenient, fair and transparent. So that every person who works today can understand what their future pension will be and how they can influence it. This bill, among other things, should correct the shortcomings of the current indexation mechanism. But today we can only act within the formula defined by law.
Will there be another pension increase during the year?
We have working pensioners, and their pensions will be recalculated starting in April. This will also be done automatically. We will recalculate pensions for the additional pension rights they have accumulated over the last year of work. Therefore, this will also affect their pension amounts.
How significant? It depends on how many months you work and what amount of contributions you pay. Accordingly, if you pay contributions, for example, from the minimum wage, then obviously the increase will not be very significant. If these are contributions from a large salary, then the increase will be correspondingly noticeable.
When will the mandatory funded pension system be launched?
The bill has been developed, we have already submitted it to the government for consideration. We hope that the government will consider it soon and we will submit it to the Verkhovna Rada. We cannot guarantee the timing of its passage in parliament, but we are convinced that this bill should be supported. We have deeply analyzed the experience of previous initiatives and in the version that we submitted to the Cabinet of Ministers, we took into account all the comments that slowed down previous initiatives.
In addition, we have had intensive discussions with trade unions, employers' organizations, international partners, experts in order to understand whether this bill will have support. And we see that there is a consensus that the design that we have developed is supported and does not raise any comments.
We hope that we will be able to convince the people's deputies to vote this year in both readings. So that the bill will come into force as early as 2026. But we must understand that after that, a certain period of time is still needed to prepare the entire infrastructure. This does not mean that we will start accumulating pensions from January 1, 2026. To do this, we need to build the entire architecture: where we accumulate, how and how it is regulated. In addition, the key prerequisite for accumulation to work is the creation of the State Accumulation Fund. If we adopt the bill this year, we will finally be able to begin to specifically prepare the infrastructure for launching accumulations.
How much will need to be contributed to the funded pension?
The deductions will be made without increasing the tax burden on taxpayers. To do this, the government takes away part of the unified social contribution and part of the personal income tax. Thus, the accumulation will be made by reducing the rates of these taxes – first by 1%, then by 2%, then by 3%. We hope that we will be able to ensure that the accumulations are sufficient to provide a significant increase in the pensions of our citizens when they retire. And, of course, we will encourage citizens to independently make savings in state or non-state pension funds in order to further increase the amount of the sum that will be available after retirement.
Will the reform abolish the solidarity pension system?
In no case. The best international practices say that the most effective pension system is the one that allows you to build your pension like a pyramid from different components. That is, a solidarity pension from the basic guarantee and the insurance part, plus a funded pension, which is divided into mandatory and additional savings at will.
Many countries have additional tools such as professional pension systems. For example, if employers want to further stimulate people to go to work in their industry, they can introduce professional pension systems. We will move towards giving citizens the widest possible set of tools.
The main thing about pension indexation in figures
From March 1, 2025, pensions in Ukraine will be indexed by 11.5%:
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average forecast level of pension growth – 556 hryvnia
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the average pension will increase from 5789 to 6345 hryvnia
The increase will affect more than 10 million citizens : pensioners with pensions assigned on a general basis; retired security forces; recipients of a disability pension and in the event of the loss of a breadwinner due to the Chernobyl disaster; recipients with disabilities as a result of war and UBD with minimum payments; retired civil servants and those who worked in local government bodies.
Also, from March 1, monthly insurance payments will be indexed for 158 thousand victims of industrial accidents and occupational diseases, as well as persons entitled to insurance payments in the event of the death of the victim.
The minimum pension increase will be no less than 100 hryvnia. The maximum is 1,500 hryvnia.
The indexation from March 1 does not apply to those who were first assigned a pension in 2025.
From April 1, 2025, there will be an automatic recalculation of pensions for 629 thousand working pensioners, taking into account their updated insurance record.