The current pension model in Bulgaria encourages the concealment of income

The current model of the Bulgarian pension system encourages income concealment and the non-payment of required social security contributions. This is noted in an analysis by Prof. Bogomil Manov, Ph.D., of the Fiscal Council, in which he examines the main problems of our pension system. In it, he notes that the system faces “serious challenges stemming from the weakened link between social security contributions and the size of pensions, the existence of minimum pensions that undermine the contributory principle, and the unfavorable demographic structure.”

This weakens the incentives to declare actual income, encourages the evasion of social security contributions, and increases the system’s dependence on the state budget,” Manov notes.

According to him, a major structural problem is the insufficient link between individual social security contributions and the amount of the pension received.

Until this link is substantially strengthened, the incentives for full participation in the system will remain weak, and its financial sustainability will continue to deteriorate,” the professor warns.

“Additional Distortion”

In his analysis, Manov writes that the current formula determines the pension based on the national average insured income, the individual coefficient, and the length of service. The average insured income has an important advantage – it brings labor contributions in line with current income levels. According to Manov, however, it is precisely this factor that becomes dominant, while individual contributions have a negligible impact on the final pension amount, and this weakens the incentives to declare actual income.

“An additional distortion” is created by the guaranteed minimum pension amount, which, according to Manov, introduces an element of social assistance within the social security system.

As a result of all this, social security contributions based on minimum income, the concealment of social security income, and informal employment are encouraged,” says Manov.

“The problem is exacerbated by the unfavorable demographic structure—the ratio of workers to pensioners is significantly lower than the EU average – there are approximately 1.38 insured persons per pensioner, while the EU average is about 2.7 workers per pensioner. This limits revenue from social security contributions and increases the system’s dependence on the state budget,” he summarizes.

Proposed Model for Bulgaria

In summary, the professor proposes the development of a hybrid model, which, in his view, would reduce the need for frequent political intervention, improve the system’s predictability, and create a more stable foundation for the long-term adequacy of pension incomes.

The model includes:

• a transparent point-based or NDC-based formula in the first pillar;
• a clear separation of the social component from the contributory component;
• a gradual strengthening of the second, capital-based pillar;
• automatic demographic adjustments;
• expansion of e-services and access to information on individual pension entitlements.

The proposed model does not aim to replace the existing system, but rather to institutionally improve it by adapting proven European practices to Bulgarian conditions.

The main goal is to achieve a better balance between solidarity and benefit equivalence, while simultaneously increasing transparency, financial sustainability, and public trust in the pension system,” Manov said.

Translated with DeepL.