The Croatian Old Age Security System in 2020

By Ivana Vukorepa, Faculty of Law, University of Zagreb

The origins of the Croatian pension system date back to the end of the 19th century when various disability and old age insurance schemes were adopted within the Austro-Hungarian monarchy. These were followed by the adoption of the Act on Mandatory Insurance for Workers in 1922. Throughout its existence, the pension system has undergone many significant changes. Before 2002, it embodied a public pay-as-you-go (PAYG), defined benefit system characterised by a very low retirement age and adherence to Bismarckian tradition. The transitional economy and wartime sufferings caused social instability and put financial pressure on the pension system, thereby bringing the need for reforms to the fore. The World Bank and the International Monetary Fund also advocated the necessity for system restructuring. In 1998, the first significant parametric reform focused on rationalisation and the control of pension costs. In 2002, a structural reform followed and turned the Croatian pension system into a multi-scheme system (also referred to in the national and international literature as a three-pillar system). Currently, ‘standard protection’ in the country is primarily provided by a public-private pension mix guaranteed by mandatory insurance in the public PAYG-financed pension scheme (also referred to as the first pillar) and in the private, fully funded pension scheme with individual accounts (also referred to as the second pillar). These pension benefits can be ‘topped up’ through voluntary participation in private or occupational pension schemes based on individual retirement accounts financed by contributions and investment returns (also referred to as the third pillar). Within the mandatory pension insurance, ‘minimum’ levels of pension protection are provided for individuals with insufficient contribution-based pension benefits. Outside the pension system, minimum subsistence levels are guaranteed through means-tested social assistance measures within the general social assistance scheme and a special social assistance benefit for the elderly enacted in 2020 and effective as of 2021.

Standard Protection in Old Age

The mandatory pension insurance based on generational solidarity  (obvezno mirovinsko osiguranje na temelju generacijske solidarnosti) is a public earnings-related defined benefit scheme financed primarily by contributions on a PAYG basis. It compulsory insures all economically active persons in Croatia, in addition to also covering some specific groups of economically active or inactive individuals. The public insurance scheme is primarily contribution-financed, while deficits are financed from the state budget. Apart from the standard old age pension regulations, many specific regulations determine the more favourable pension conditions with regard to numerous categories of the so-called ‘privileged pensioners’, such as military staff, police officers, war veterans, members of parliament, and workers in arduous and hazardous jobs.

The majority of persons covered by the mandatory pension insurance based on generational solidarity are also insured within the private pension scheme, the mandatory pension insurance based on individual capitalised savings  (obvezno mirovinsko osiguranje na temelju individualne kapitalizirane štednje). It is in fact a private-public law mixed scheme that is based on public law, administered by private pension providers managing the mandatory pension funds, and supervised by public institutions. It is a fully funded pension scheme based on individual retirement accounts providing defined contribution pensions. All persons under the age of 40 (either at the time of the reform in 2002 or at the time of acquiring insuree status) are mandatorily enrolled in this scheme. Specific transition rules apply for persons aged between 40 and 50 years in 2002.¹ Since 2019, all participants have the right to choose before retirement (payout phase) whether they want to transfer their savings and withdraw pension benefits only from the mandatory pension insurance based on generational solidarity, if this transfer would lead to more favourable pension benefits for them.

Top-Ups

Pension benefits can be topped up with benefits from voluntary private (so-called ‘open funds’) and occupational pension schemes (so-called ‘closed funds’) that fall into the category of voluntary pension insurance based on individual capitalised savings (dobrovoljno mirovinsko osiguranje na temelju individualne kapitalizirane štednje). The private pension scheme, the voluntary pension insurance based on individual capitalised savings within open funds (dobrovoljno mirovinsko osiguranje na temelju individualne kapitalizirane štednje u otvorenim fondovima), can be accessed by all citizens regardless of their age and employment status. The occupational pension scheme, the voluntary pension insurance based on individual capitalised savings within closed funds (dobrovoljno mirovinsko osiguranje na temelju individualne kapitalizirane štednje u zatvorenim fondovima), consists of occupational retirement funds established by (collective) agreement and fund sponsors, i.e. employers, trade unions or other professional associations. Participation in the occupational scheme is limited to active or former employees, association members or self-employed persons respectively. Both schemes consist of defined contribution individual retirement accounts that are fully funded through contribution payments and investment returns. Enrolment in both schemes is incentivised by state subsidies and tax exemption of pension payments. Employers’ contributions to both the ‘open’ and ‘closed’ funds benefit from additional tax relief measures. The Croatian law explicitly does not provide for the existence of occupational defined benefit schemes.

Minimum

The mandatory  pension insurance based on generational solidarity also  offers a ‘minimum pension’ (najniža mirovina) for individuals with insufficient contribution-based pension benefits. The ‘minimum pension’ is not a separate pension scheme but the result of a protective calculation method within the public scheme providing minimum statutory pension levels based on the individual’s number of qualifying years multiplied by the ‘actual pension value’.² Outside the pension system, general social assistance (socijalna skrb) provides minimum subsistence levels through various income-tested or means-tested measures for persons in need, including the elderly. Persons who qualify for the ‘minimum pension’ provided by the statutory pension scheme are usually not eligible for social assistance benefits, since pension benefits are mostly above the income thresholds for means-testing. During 2020, a special social assistance scheme, the income-tested national benefit for the elderly (nacionalna naknada za starije osobe)  was enacted, entering into force from January 2021. It is intended to guarantee minimum protection for persons older than age 65 who do not qualify for statutory pension benefits from the public or private scheme. Taking into account the conditions and amount of this national benefit, it is likely that persons without old age pension benefits or other incomes will either qualify for the guaranteed minimum income within the general social assistance scheme or for this new special national social assistance benefit for the elderly. Recipients of the national benefit for the elderly may still be eligible for some other social assistance benefits, such as targeted benefits for housing and heating costs and social services for the elderly.

¹ Those persons could choose between staying only within the mandatory, PAYG-financed public pension scheme (also referred to as ‘single-tier insurees/pensioners’) or joining the new two-tier mandatory system with the second DC-funded part (also referred to as ‘two-tier insurees/pensioners’). Persons who were over 50 years of age in 2002 could not join the private scheme.

² The actual pension value (aktualna vrijednost mirovine) serves as a basis for pension valorisation and indexation. It is the value of one ‘personal point’ and is updated twice a year with the changes in the consumer price index and wages. Prior to 2019, a different ‘minimum actual pension value’ was used for the calculation of the minimum pension. Nowadays, however, the actual pension value is also used for the minimum pension calculation, thereby leading to an increase in the amount of minimum pension.