Will the economic downturn affect retirement incomes?

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As most countries affected by the coronavirus pandemic are looking for ways to boost spending and maintain as much of the living standards of the citizens as possible, under SDSM Macedonia is apparently opting for a different route. SDSM party leader Zoran Zaev announced that he will call for a major cut in public sector salaries, reducing the administration down to the minimum wage-cutting the salaries of many employees in half or even more.

Zaev worriedly announced that the shortfall in the budget may be as high as 60 percent – between 1.3 and 2.2 billion EUR.

The budget is just a piece of paper, there is no money, we all must grit our teeth now, Zaev said in a number of public appearances and the Government is expected to discuss this, initially two months-long pay cut, tomorrow.

But there is another much greater outlay that is being obscured in the debate over the unsustainable budget. There are over 120.000 public sector employees – an estimate that is notoriously difficult to make given the large number of temporary employment agencies that are used to move public sector employees around, and the opaque status of many semi-independent institutions.

But there are 320.000 retirees. Their incomes are much lower, the average old-age pension set around the minimum wage of 230 EUR, while some receive as high as 800 EUR. And while public sector salaries set the budget back by about 400 million EUR a year, retirement redistribution amounts to whopping 900 million EUR.

Pensions are funded by a separate tax on salaries, to the tune of 18.8 percent of the gross salary. This is nowhere near enough – as Macedonia is aging and the ratio of retirees to employees is growing, the deficit in the PIOM publicly run retirement fund has gotten to 470 million EUR in 2019 – all covered from the central budget.

The budget is funded by two main sources – the 5 or 18 percent value-added sales tax, and the 10 percent income tax paid by all companies on their revenue and by all citizens on their salary (on top of the 18.8 percent retirement tax and the 7.5 percent public healthcare tax). Both revenue sources are hard-pressed. Locked in their homes, Macedonian citizens are hardly able to spend, and a number of service industries have completely dried out, hitting the VAT tax receipts badly. The lack of spending, in turn, is expected to lead to a spate of job losses, which is going to hit income tax revenue projections. A rare bright spot in Macedonia’s economy – the large newly built manufacturing plants like Draexlmaier near Kavadarci and Marquardt in Veles were forced to send thousands of employees on a paid vacation due to the coronavirus epidemic and it’s unclear when they can resume operations.

If the Government is going down the cost-cutting route, taking the hatchet to a smaller piece of the retirement incomes could easily create the same or even more savings than cutting public administration salaries in half. But both options are political poison, and in an election year, Zaev is apparently choosing to drink the smaller dose.