What is the future of Ukraine

Ukraine analyzes

Oleksandra Betliy

To person

Oleksandra Betliy has been a Leading research fellow at the Institute for Economic Research and Policy Consulting in Kiev since 2002. She was involved in international research projects (including the following institutions: European Training Foundation (ETF), United Nations Development Program (UNDP) and World Bank). Her research interests are financial policy and tax forecasting, as well as social issues, including health and labor market policy. Betliy is also a country expert at the CRC 1342 "Global Development Dynamics of Social Policy" at the University of Bremen, where she mainly cooperates with the sub-project B06 "External reform models and internal debates in the redesign of social policy in the post-Soviet region".

Attempts have been made in recent years to expand the Ukrainian social welfare system by increasing the minimum wage, subsidies for ancillary costs and changes in pension policy. Looking to the future, promoting economic growth also appears to contribute to the social security of the population.

An elderly man with Nordic walking sticks in a park in Kiev. The social security of the population remains an important item on the agenda of Ukrainian politics. (& copy picture alliance / NurPhoto)

Summary

Due to the war in eastern Ukraine, the occupation of part of the industrial areas in the Donbas by separatists supported by Russia and the annexation of Crimea by Russia, there was an economic downturn in Ukraine in 2014 and 2015. The resulting depreciation of the hryvnia and the need to raise public utility fees were accompanied by high inflation. The purchasing power of households fell sharply, while the government had to take the path of budget consolidation. The lack of financial leeway initially did not allow the government to significantly improve the social safety net, apart from subsidies for ancillary costs. The structural reforms carried out in recent years and the prudent financial policy ensured economic growth in Ukraine, which created the financial scope for a stronger focus on social policy. The further development of human capital also became one of the government's priorities, given the mismatch between existing and required qualifications, low labor productivity and the comparatively high outflow of migrant workers. For example, it has started to carry out a health and education reform, implemented a pension reform and improved the social security of families with children.

Social policy on the political agenda

Ukraine has faced many challenges in recent years: the war and the loss of part of its territory in eastern Ukraine, the annexation of Crimea by Russia, the resulting economic downturn in 2014 and 2015, and the need to address a number of Carry out structural reforms. The fighting in eastern Ukraine and the annexation of Crimea by Russia also led to a sharp increase in the number of internally displaced persons. The economic downturn, high inflation and the depreciation of the hryvnia went hand in hand with a decline in the purchasing power of Ukrainians. At the same time, political responses to these challenges were often limited by the limited financial leeway, as spending on defense and security had to be increased (up to 5 percent of gross domestic product).

Social security is identified as one of the priorities in Ukraine's strategy papers. In the "Ukraine 2020" strategy adopted by the President in 2015, the reform of the social security system was named as one of 62 necessary reforms, but not included in the top ten. However, the introduction to the strategy paper states that without adequate social protection for the population at risk of poverty, security cannot be achieved either.

In 2017 the government adopted a medium-term action plan up to 2020 and defined the social protection of the population in goal number 3 ("Development of human capital") as a priority (see https://zakon.rada.gov.ua/laws/show/ 275-2017-% D1% 80). In particular, an efficient and effective social assistance system should ensure social inclusion and a reduction in poverty. Pension reform was defined as an essential measure to increase the well-being of pensioners.

The area of ​​social policy also appears in the Association Agreement between Ukraine and the European Union, in particular in the chapter "Cooperation on employment, social policy and equal opportunities" (Title V, Chapter 21). Ukraine and the EU agreed to intensify dialogue and cooperation, particularly in the areas of social security and employment, in order to achieve social inclusion, decent work, safe and healthy working conditions and gender equality.

The social protection of the population has always been a hotly debated topic by politicians and political decision-makers. The measures in this area had to be coordinated with the international donor community, above all with the International Monetary Fund (IMF), which runs the government de facto called for budget consolidation to be pursued. In particular, the IMF program contained the requirement to reduce general subsidies for the energy sector, which were reflected in reduced prices for the population, or to increase energy prices for the population. The aim of this measure was to reduce the financial support for Naftohaz and to limit the opportunities for corruption. In return, the EU's microfinance aid programs between 2014 and 2016 contained the requirement to create a social safety net to protect families with low incomes from the higher energy prices.

Social standards and minimum wages

Budget consolidation measures and limited financial headroom did not allow the government to raise the minimum wage or subsistence level in 2014. It was not until September 2015 that the minimum wage and subsistence level were raised (editor's note: this cannot be seen in the graphics at the end of the text, as the hryvnia lost value against the euro at the same time). Then in 2017 the minimum wage was doubled to increase the purchasing power of low-income workers, who were particularly hard hit by the high inflation in 2014 and 2015 (the consumer price index rose by 12.1 percent in 2014 and by 48 in 2015, 7 percent).

The level of the subsistence level fell in real terms between 2014 and 2019 due to the limited financial leeway, even if a slow catching-up process has been recorded in recent years (see Figure 1 at the end of the text). Support for low-income families has also increased.

Improving social assistance is still on the political agenda and is expected to be implemented in the near future.

Social security through ancillary cost subsidies

In 2014 and 2015, the government massively expanded the program for ancillary cost subsidies (including for water and electricity). It became the largest social aid program aimed at compensating vulnerable households for the rise in utility costs, especially gas prices. The increase in energy prices since 2014 was decided in line with the IMF program in order to reduce budget expenditure on general energy subsidies - caused by the deficit of the state-owned company Naftohaz - and to reduce the possibility of corruption in the energy sector.

First, the government introduced a special compensation payment for households with an income below the subsistence level. The payment compensated for the difference in household utility bills after the increase in gas, electricity and heating prices; the price increase was fully compensated. This compensation payment supplemented the existing ancillary cost subsidies. It was planned for the 2014/2015 heating season, after which a number of other changes with regard to the ancillary cost subsidies were planned.

In October 2014, the government changed the concept by introducing new upper limits for social housing and utilities: the new upper limits were determined by the size of the households and the compensation payments were limited to a certain consumption value for gas, water and electricity.

In addition, the government changed the formula for calculating the proportion of utility costs for which households were entitled to subsidies. Previously, a household received ancillary costs subsidies if the ancillary costs exceeded 15 percent of the household's income (or more than 10 percent of the household's income in the case of households with only inactive members). The excess amount was taken over. Since 2014, the amount of a household's income in relation to the subsistence level has been taken into account when calculating the share of costs to be borne by the state. Households with a per capita income equal to the subsistence level who receive utility cost subsidies now spend no more than 7.5 percent of their income on utility costs. Households whose income is four times the subsistence level must spend more than 30 percent of their income on incidental expenses in order to receive a subsidy. With the new calculation formula, poor households were granted more subsidies, while payments to rich households were reduced.

As a result of the new criteria, the number of households that are entitled to ancillary cost subsidies rose dramatically: from 1.6 million households in 2014 to almost 7 million at the end of 2016. Overall, the high percentage of subsidized households - 43 in 2017 Percent - on efforts by the government to optimize the criteria for the grants in 2017 and 2018. This concerned the new upper limits for social housing and benefits, the setting of appropriate apartment and house sizes for receiving subsidies, the obligation to provide evidence of unemployment through registration, the increase in the conditional unemployment benefit and the minimum wage level.

Since October 2018, the social welfare authorities have taken into account a household's income in the first half of the year instead of income for the last four quarters. Since wages rose significantly in the first two quarters of the year due to the increase in the minimum wage and the tense situation on the labor market, while consumption prices were not increased significantly, the payment of ancillary cost subsidies decreased.

In 2019, the government switched from cashless payment of grants to cash payments, which should increase the energy efficiency of households.

Changes in Pension Policy - 2017 Pension Reform and Current Developments

In accordance with the government's medium-term action plan, parliament approved a pension reform in 2017, which aimed to introduce a uniform concept for pension calculation, ensure a higher pension level and increase the sustainability of pension insurance (see also the Ukraine analyzes no April 27, 2018, http://www.laender-analysen.de/ukraine/pdf/UkraineAnalysen200.pdf). The bill, passed in October 2017, was a compromise between the government bill and hundreds of amendments by MPs.

Accordingly, the pensions of the current pensioners have been adjusted from October 2017 by increasing the average wage used in the calculation of the pension amount. Retirees who retired a long time ago received a larger pension increase. At the same time, some pensioners were granted little or no increase in pensions. This affected those people who had recently retired and those who were retired for whom the recalculated pension was less than or roughly equal to the legally defined minimum value.

The minimum insurance period for entitlement to an old-age pension will be gradually increased from 25 years in 2018 to 35 years in 2028. The regular retirement age for people with a full insurance period remains at 60 years. At the same time, people with an incomplete insurance period that is longer than 15 years can retire at the age of 63. Anyone who has not been insured for 15 years can retire at the age of 65 and receive a social pension equal to the subsistence level, which is also paid to people who have lost their ability to work. Anyone who does not have the necessary pension insurance periods can pay a flat-rate insurance contribution in order to be eligible.

At the same time, when new pensioners retire, they will receive lower pensions - if you compare these pensions with the old regulations. Each insurance year now brings in a pension of 1 percent of the annual salary (indexed by the growing average salary) - in contrast to the previous 1.35 percent. The government introduced automatic indexing of pensions to the mean of consumer inflation and wage growth, protecting retirees from a sharp drop in purchasing power in times of macroeconomic instability.

Since 2019, the minimum old-age pension - for people who can provide evidence of the minimum insurance period - has been 40 percent of the minimum wage. In addition, a new indexation of pensions was introduced in March 2019. According to the pension fund, this indexation led to an increase in the average pension from the equivalent of around 81 euros at the beginning of 2019 to around 99 euros in March 2019.

At the same time, retirees for whom the new indexation did not result in a significant pension increase (as their wages were much lower than the average wage) received a one-off payment equivalent to around 79 euros, which was paid in two tranches (March and April 2019). This payment was possible because the government had transferred the proceeds of a special customs procedure for cars with international registration to the pension fund.

The introduction of a second (funded) pillar of the pension system - the "pillar of accumulation" - is still on the political agenda. However, there is still no political consensus on how the system should be organized.

Fair support for families with children

Data from the State Statistics Service of Ukraine "Ukrstat" show that families with children are at higher risk of poverty. At the same time, the birth rate remains low, which leads to a birth deficit. Therefore, the population is falling. The government recently introduced several measures to support families with children and probably also to increase the birth rate.

In September 2018, the government introduced a "Newborn Package," which contains the essential items for a newborn. That being said, since January 2019 families have had the option of receiving a compensation payment of around EUR 54 if they hire a babysitter.

As the number of births grew more slowly than expected in 2018 and early 2019, resulting in savings in the budget for birth grants (larger lump sum after childbirth and monthly payments thereafter until the age of three), the government made the decision to use the improve social support for families with children. Since April 1, 2019, every family with at least three children has received child benefit equivalent to around 57 euros for the third and for each additional child up to the age of six.

Conclusion

Economic growth has proven to be the best tool for increasing the well-being of the population. Therefore, government policies that promote economic growth are needed.

In order to catch up quickly with the Central and Eastern European countries, the Ukrainian government is implementing reforms aimed at increasing the productivity and competitiveness of human capital. These reforms address all areas that are important for strengthening human capital: education, health and social security. Reforms must lead to better public services, especially in education and health. This would reduce the incentive for labor migration abroad in Ukraine.

Translation from English: Katharina Hinz
The Ukraine analyzes are published jointly by the Research Center for Eastern Europe at the University of Bremen, the German Society for Eastern European Studies, the German Poland Institute, the Leibniz Institute for Agricultural Development in Transition Economies, the Leibniz Institute for East and Southeast European Research and the Center for Eastern European and International Studies (ZOiS) gGmbH. The bpb publishes them as a licensed edition.