Slovenia’s proposed pension reform “falls well short” of expected financing needs by 2060 and more comprehensive reform is needed to reduce the generosity of the pension system, according to a new OECD economic survey.

The report said the small Central European country has been deeply affected by the global crisis, but is now recovering gradually along with the rest of the OECD area. As Slovenia is a small open economy within the euro area, it is crucial for it to rapidly rebalance its economy and restore competitiveness, the report said.

In order to resolve the “unsustainable” state of its long term public finances, Slovenia’s government has prepared a draft of a new pension reform which passed Parliament in December 2010.

Major changes include increasing the statutory retirement age to 65 and the minimum pensionable age to 60 for both men and women, introducing steeper penalties for retiring early - and bonuses for continuing work after becoming eligible for full pension, extending the pension reference period to the 27 best consecutive years of contributions, and indexing pension benefits partially to inflation.

Some additional measures aim to improve work incentives for older people by allowing individuals to combine pension benefits and work more flexibly, and reducing employer social security contributions for older workers.

While the proposed reform is “a step in the right direction”, the OECD survey urged further reform.

“The proposed pension legislation brings many welcome changes, but its budgetary impact, while significant, falls well short of the projected long-term financing needs.”

Permanently fixing the replacement rate at around 60%, where it would have been progressively lowered to below that level without the reform, is cited as one of the main reasons the package is not considered to go far enough.

The OECD said the weight of wage growth compared to inflation in the proposed benefit indexation formula is high, and past earnings are still revalued solely on the basis of nominal wage growth.

“The government should lower the replacement rate while encouraging the private pension system. One possibility would be to reduce the rate at which benefits accrue or revalue past earnings in the calculation of the pension reference salary in line with past inflation or some combination of past inflation and wage growth …, instead of wage growth only,” the organisation said.

Additional reforms to ensure public finances are on a sustainable footing are also recommended.

“The minimum pensionable age should be further increased to better align it with the statutory retirement age. The penalty for early retirement should be raised to a level consistent with actuarial neutrality. Pension parameters, such as the minimum and full pensionable ages and contribution requirements, should be closely linked to gains in life expectancy.”

Further, the organisation said consideration should be given to eventually transforming the current defined benefit scheme into a notional defined contribution scheme. The Slovenian pension system continues to grant somewhat more favourable conditions to women than to men, and the report recommended eliminating variation in the treatment of the genders.

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