Ukraine has a rapidly ageing and declining population. By the beginning of 2010 the total population has decreased by 12% since 1993, when it reached its peak of 52 million. According to population projections , the share of the pension age population will increase from 24% in 2005 to 38% in 2050. At the same time, the share of the working age population will decrease from 54% to 44%.
Such a significant and rapid change in population age structure will likely have a number of macroeconomic effects. It will certainly change the demand composition, as consumption preferences vary by age. It will also affect national savings, as at different stages in their life cycles people have different savings propensities. There will be significant impacts on the size, composition and productivity of the labour force. Population ageing may even potentially affect the speed of technological progress.
This paper concentrates on the effect of the interaction of the declining labour force and the growing number of pensioners on the macroeconomy. The topic is especially timely because of the revived discussion about pension reform in Ukraine. It has long been recognized that the current design of the pension system is subject to high demographic risk and its Pay-As-You-Go (PAYG) component is not sustainable in the long run. Nevertheless, all previous attempts at reforming the system were only half hearted and did not address its major problems. Major reason for that was political instability in the country and the reluctance of the political elite to disturb pensioners – a large, growing and very politically active part of the population. However, recently a combination of economic crises and pressure from the IMF has resulted in more serious and bold discussion of pension reform than ever. Currently a new piece of legislation, changing the rules determining pension system participation and eligibility, is being discussed in Parliament. The biggest change proposed is an increase of pension eligibility age for females by 5 years over the next 10 years from current level of 55 years to 60 years. The pension eligibility age for males is supposed to remain unchanged at 60 years.
