The Mandatory Additional Pension Insurance in Bulgaria works Against Citizens and leads to lower Pensions

Bulgarian economist Lubomir Christoff has published a series of papers dedicated to the disadvantage of paying the mandatory additional pension insurance which leads to lower pensions.

Are you a worker in Bulgaria and if so, have you ever wondered what the mandatory additional pension insurance is for? What is the role of the Private Funds which collect part of your monthly salary and what does that mean for your future? Lubomir Christoff, the CEO of the Institute of Certified Financial Consultants, located in Delaware U.S.A., has published a series of papers dedicated to the disadvantages of paying the mandatory additional pension insurance in Bulgaria.
Christoff’s published works on the topic can be found here: Pension Inadequacy in Bulgaria

In the year of 2000, the Bulgarian pension system has been converted to the three pillar variety. This means that aside from paying pension insurance to Social Security, citizens divert part of their payments towards private owned funds, which take-on the responsibility to pay citizen a certain amount of money once they have reached the age of pension. On paper, it sounds great, a person receives a second pension together with his first one and the money never stops flowing. Since January 1, 2016, Bulgarians can opt-out of the mandatory additional payment insurance and Christoff’s papers reveal why this is not such a bad decision.

To cover the full extent of the topic, Lubomir Christoff has made three economic models based on 40 years of uninterrupted payments of pension insurance fees for both Social Security and Private Funds. The first model covers insurance on maximum insurance income, the second on average salary and the third one a rising payment, starting from insurance on average salary, continuously growing to two average salaries. The results show that the average return of private owned funds is between 60% for the maximum salary and 38% for the growing salary, compared to the pension citizen would receive if all the money Is invested in Social Security. At the moment, the two pensions combined – one from the government and one from the Private Funds – are lower than a pension would be with only the government insurance.

The reason behind is that the internal rate of return of Private Funds is quite low. The average rate of return for Social Security is about 3%, where the return rate for Private Funds is less than 1%. In order for Private Funds’ payments to become competitive for someone who has been working between the years of 2000 and 2040, their return rates should soar above 4.4% (starting from 2016), which is highly unlikely, due to the limitations imposed on Private Funds considering pension fund portfolio management. Until Private Funds have reached this unlikely success, the two pensions combined will remain lower than if all the funds were directly funnelled to Social Security, which directly hurt the customer by severely lowering their income.

Those who wish to return their funds from Private Funds back into Social Security may do it by downloading a the needed documents from the National Revenue Agency and presenting them NRA office responsible for the region on their address registration.

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Bozhidar Lazarov

Bozhidar Lazarov is a freelance writer, hobbyist programmer and an aspired novelist. Feel free to follow him on for his latest articles and personal projects.

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