Bulgarian Universal Pension Funds – Are They a Real Source for Financing the State Budget Deficit

Abstract

Bulgarian pension funds have been operating for more than 15 years since the fundamental reform in the pension system in our country was implemented in 2002. For the whole period Bulgarian lev has been fixed to the euro due to the currency board system. In such an environment Bulgarian central bank cannot finance the budget deficits of the state. Bulgarian government is trying to balance the budget or to form small deficits because in a currency board monetary system eventual shortages of cash inflows should be compensated by the private sector – mainly by the institutional investors – banks, pension funds, insurance companies etc. In this situation Bulgarian pension funds are one of the cash sources that could be used. But are they a real source in the long term? In the next lines a research is done on the structure of the government bond portfolio held by Bulgarian pension funds and how these financial institutions actually support the financing of the deficits formed by the Bulgarian government for the last 10 years. The research is trying to find answers to the following questions: Is the share of government bonds in Bulgarian universal pension fund portfolio constant or is it variable for the last 10 years. What is the share of the Bulgarian government bonds in government bond portfolio managed by the pension funds? Could we expect that these financial institutions will continue to finance the budget deficits of the Bulgarian government in the long term and to what extent? The last question is quite important having in mind that the introduction of the funded component of the pension system was accompanied by a transfer of the contribution due for the first pillar of the system (pay-as-you-go) towards the second one (fully funded with defined contributions). So part of the deficit formed into the pay-as-you-go pension system is due to this reduction of the contribution rate paid by those individuals insured into the universal pension funds.