The creation of personal retirement

accounts in Slovakia
By Jan ORAVEC

QUICK FACTS ABOUT THE PROCESS OF THE SLOVAK PENSION REFORM

June 10, 2002: The F. A. Hayek Foundation organizes the first international conference on the
need for pension reform in Slovakia. José Piñera is invited and delivers an inspiring presentation
about the new pension paradigm of personal retirement accounts. Many politicians are present
because of the upcoming elections, including Ludovit Kanik, at that time a leader of the
Democratic Party, and later Labour Minister implementing personal accounts.
September 25-26, 2002: Parliamentary elections give reform oriented parties an opportunity to
form a new government again
November 4, 2002: The new government adopts a declaration committing itself to personal
retirement account
2003-2004: The necessary legislative framework is prepared, a parliamentary delegation visits
Chile, and the law is approved.
January 1, 2005: The first day of an 18-month period giving Slovak citizens the opportunity to
opt for personal retirement accounts.

QUICK FACTS ABOUT THE FIRST RESULTS

June 15, 2005: the first billion Slovak crowns of personal savings are accumulated at individual
accounts.
August 15, 2005: 1 million citizens opt for the personal savings accounts.
February 1, 2006: SKK 10 billion of pension savings accumulated at individual accounts.
May 18, 2006: accumulated private pension savings exceed 1 % of GDP.
June 30, 2006: 1.5 million, or 54 % of eligible citizens, join the new system in its first 18 months
and accumulate on their accounts 17.3 billion of crowns in pension savings.

I. INTRODUCTION
The story of the creation of personal retirement accounts in Slovakia cannot be told simply by
presenting plain facts, irrespective how impressive the quick facts above are. There are two
major reasons for that. Firstly, the pension reform itself, an otherwise unprecedented
achievement needs to be put within a more general framework of a country making from the
beginning of the 1990s a very difficult economic, social, and political transition from centrally
planned economy, ruled by a communist totalitarian state, towards a democratic society and a
market economy. Secondly, one cannot get a full picture without the personal stories of many
individuals whose personal views, thoughts, visions, attitudes, and decisions were of crucial
importance in terms of their impact on the overall result.
These two observations are fully projected into the following personal reflections upon the story
of the creation of the personal retirement accounts in Slovakia. Firstly, the text is divided into
three time periods, each identifying its own specific challenges and describing the strategies to
meet them 1990-1998 was a period of intense and far-reaching overall political, economic and
social changes. However, the waters of pension reform were flowing very slowly, almost
stagnating in the meanders of a state run system inherited from communist times. In 1998-2002
there were the first signs of increased public awareness of a pension time bomb ticking also in
Slovakia, with the first – far from ideal - reform proposals elaborated by the government towards
the end of this period. And in 2002-2006 a new “world record” was set as the Slovak pension
reform with individually owned retirement accounts was prepared and implemented in just 30
months.
Secondly, throughout the text covering various periods the role of individuals will be constantly
underlined. Only dedicated individuals can make the difference. Of course, they also need other
conditions working in their favour: a favourable political development, politicians willing and
ready to implement the reform, meeting the right people at the right time, interest and positive
attitudes of crucial media, etc. The story of the Slovak pension reform is almost a textbook
illustration of how all these conditions for success came together.
Finally, these reflections are written also as a tribute to José Piñera for his contribution to the
introduction of personal retirement accounts in Slovakia. José is a man who not only pioneered
the first comprehensive dissolution of a Bismarckian welfare state in the 20th century. In
addition, he is making enormous efforts to spread the important idea of individual liberty by ever
expanding the list of countries undergoing pension reform following the example he set up 25
years ago.

II. 1990-1998: The Stone Age of Cosmetic Changes in State Pension System

 The major Problem of the Period: The pension “time bomb” is overshadowed by other
urgent problems as Slovakia is busy making the transition from a centrally planned
economy to a market economy and becoming a newly sovereign country.
 My strategy: to conduct research and increase public awareness via lectures and
presentations.

The Very First Years of Transition

The collapse of communism in November 19891 and the Velvet Revolution opened a window of
opportunity for implementation of far-reaching reforms. To understand why a pension reform –
the mother of all reforms - was implemented only after 15 years of transition, we need to go back
to the beginning of the transition process itself.

1 At that time Slovakia was a part of Czechoslovakia, a compound state – federation of two nations, Slovaks and Czechs, living together since 1918.
In 1989 the Slovak economy had one of the highest shares of state ownership in the economy in
the world2, most of the Slovak exports were directed to non-competitive markets of former
communist countries, and the Slovak economy was dominated by several large companies
quickly losing their competitiveness, and employing tens of thousands of people. The whole
economy and society was in urgent need of fundamental structural adjustments.
As a result, in the beginning of 1990 there were many urgent challenges:
 The transition from a totalitarian Communist regime to a multiparty democracy,
 The transition from a centrally planned economy to a market economy,
 The transition from state paternalism to individual responsibility.
Facing just one of these challenges would be more than enough for one generation. That is why I
sometimes call this period “One Century Compressed Into One Decade”!3. Discussions about
privatisation and restructuring of state owned companies, market opening and liberalisation,
including deregulation of politically sensitive prices4 were at the top of the political agenda of
that time.
In the late 1980s I was working as a young research assistant at the Institute of Economics of the
Slovak Academy of Sciences. It was an exceptionally exciting time as everybody wanted to
contribute to the necessary changes. I was no exception. Since free-market thinking was an
extremely scarce good at the time, I was looking for the most efficient way to accelerate the
transformation towards a free market and a free society.
The first step was to facilitate association of like-minded individuals and that was why – together
with my colleague Ivan Svejna – we established The Libertarian Club in the early 1990s. After
several months we felt that we needed to take further steps in order to increase our impact. And
we invited other market-oriented people5 to establish an economic think tank called The F. A.
Hayek Foundation6 in 1992. Its main mission was to establish a tradition of free market thinking
and free market policies that were virtually absent in Slovakia before November 1989. Later on
Ivan Miklos and others went their own way and established their own economic think tank called
MESA 10.
In the meantime, history was taking giant steps almost every day. Due to differences in its
industrial structures7 Slovakia was disproportionally hit by the first reform measures 8. Growing
disagreements between Slovaks and Czechs over structural reforms, and the monetary and fiscal
policy mix led to the well-known “velvet divorce3” of the Czecho-Slovak federation and its split
into two internationally recognised states as of January 1, 1993. As a result, in addition to the
above-mentioned three parallel historical and unprecedented transitions, Slovakia was forced to
face a fourth difficult process: the transition from a federation to an independent state.
The pension system in the shadows

2 It was about 98 % of GDP.

3 Ján Oravec: ”THE TRANSITION OF SLOVAKIA: One Century Compressed Into One Decade“, Economic Freedom Network Annual Meeting, Bratislava, October 16, 2003.
4 Gas, electricity, heat, rents, etc.
5 Including Jozef Kucerak, the prime minister of the first reform oriented Slovak government after November 1989, Ivan Miklos, then the minister of privatization in the same government, and
many recognized economic journalists, or other well-known people.
6 At that time Hayek was perceived by us as one of the most persuasive symbols of free market thinking of 20th century.
7 dominated by heavy industry.
8 While unemployment rates in the beginning of 90-ies were steadily below 2 % in the Czech Republic, they exceeded 10 % in Slovakia.
Only by recognising all specific features of this period one can understand why pension reform
was not a top priority in those days. We were all aware of the importance of the ageing challenge
from the very beginning; at the same time we were simply completely consumed and busy
debating and solving all other urgent issues associated with privatisation, restructuring, price
deregulation, trade liberalisation, etc.
As the years went by and the transition experience accumulated I started to understand that of the
above mentioned four historical challenges the transition from state paternalism to individual
responsibility is by far the most difficult transition of all. After 40 years of communism people
still believed that it is up to the state to take care of them in their retirement, to finance,
administer, provide, and safeguard their pension benefits. The institutional framework and the
main features of the pension system at the time worked accordingly.
The Slovak welfare state in the first half of the 1990s was still a centralised system taking care of
the individual from cradle to grave. It was a compulsory pay-as-you-go system with universal
coverage and defined benefits financed from payroll taxes. It was complicated9, conditions of
eligibility were not transparent, benefits were automatic claims, the system was extensive,
expensive, and open to abuse. The first changes introduced into the pension system were just
reactions to urgent transition problems. For example, as of March 1, 1991 a pension indexation
was introduced to protect pensioners against the high inflation rates that resulted from price
liberalisation.
However, the original centralised state system did not manage to stay immune to certain reform
efforts to decentralise it. It was important that financing of welfare services was separated from
the state budget. In 1993 the National insurance company was established to take care of
sickness, pension and health insurance, and various benefits. In 1994 this institution was
transformed into a public tripartite institution10, and renamed to the Social insurance company11.
Later, in 1996, voluntary and non-universal occupational schemes were introduced as employer-
employee schemes managed by pension insurance companies12 and state were defining the rules
of the game and the supervision. There were also other partial changes implemented, for
example, preferential treatments of different working categories were abolished as of January 1,
1994
1994 was also an important year because The World Bank published its famous report13
presenting the first comprehensive and global examination of old age income security. This
report distinguished for the first time three systems which since have become well-known as the
“three pillar” architecture of the reformed pension system:
 a publicly managed system with mandatory participation and the limited goal of reducing
poverty among the old
 a privately managed, mandatory savings system
 a voluntary savings system
The report concluded that “a combination of different income security policies is more effective
than any single approach”.
9 With 80 different kind of benefits.
10 With representatives of the government, trade unions, and employers being present in its board.
11 Taking care of sickness and pension insurance + accident insurance, reduced number of benefits payments.
12 With 100 000 clients minimum requirement.
13 Averting the Old Age Crisis, The World Bank, Washington, 1994.
I read this report, and from the beginning had difficulties accepting its proposals. As for a
“freedom fighter” it was impossible for me to accept the idea that the transition from state
paternalism to individual responsibility would end up in a semi-paternalistic system where
individual freedoms and responsibilities would be limited by obligatory requirements of the
government, although I realized that the complete transition would still take a very long time.
Despite my disagreements with major conclusions and the proposed three pillar architecture, the
analytical aspects of the report even further increased my interest in these issues. At the time I
was giving even more lectures and public speeches focused on the urgency of the pension crisis,
the lack of public awareness of these problems, including politicians, policy-makers and major
media, and the necessity to take immediate actions to reverse the negative developments. In my
papers14 and presentations I focused on global trends in pension reform and the lack of attention
in Slovakia, based on the following foreign inspirations for pension scheme reform strategies: 1.
Singapore – a centralised system of mandatory personal savings administered by the state, 2.
Chile – a decentralised system of mandatory personal savings managed by private pension funds.
I thought that these inspirations could be applied to the Slovak pension scheme by choosing one
of the following reform strategies: 1. introducing mandatory personal savings accounts at the
existing Social Insurance Institution15, or 2. introducing mandatory personal savings accounts and
decentralising their administration to either a) existing life insurance companies, or b) newly
created specialised institutions (pension funds)16. My strong preference went from the very
beginning to the Chilean model. Again, I saw a mandatory aspect of these reform scenarios only
as an intermediary step towards the system based on voluntary pension savings of individual
citizens and with absence of any state paternalism.
In addition to campaigning in Slovakia I was making presentations on these issues abroad,
including the following two: on November 12, 1996 I made a presentation of the social security
system in Slovakia in Warsaw, Poland at an event organized by the Polish Chamber of
Commerce, on December 11, 1997 at a workshop “Pension Reforms in Eastern Europe” in
Ljubljana, Slovenia I presented a paper called “Pension Scheme in Slovakia and Relevance of
World-Wide Pension Scheme Reform Efforts to Slovakia”.
III. 1998-2002: Increased Public Awareness, the First Reform Efforts
 The major problem of the period: the pension crisis is finally identified as a major
problem, pension reform becoming a top priority of the government, however, the wrong
solutions elaborated as a result of a leftist politician becoming Labour Minister
 My strategy: to fight against approval of the wrong solutions proposed by the Labour
Ministry
1998 was a very important year for the acceleration of pension reform efforts as well as for
Slovakia overall. From 1993 to 1998 the Slovak governments were implementing mostly bad,
mistaken, and irresponsible policies. The originally intended concept of a voucher privatisation
was replaced by direct sales of state property to insider buyers17 with generally negative
consequences: non-transparency, corruption, growing collusion between political and business

14 J. Oravec: Analysis of Various Welfare State Systems, Bratislava, 1997, written for The Institute of Liberal Studies Bratislava.
15 “Singapore model”
16 “Chilean model”
17 Mostly by friends, families, loyal people.
elites. Certain sectors and companies were excluded from privatisation18, politically sensitive
prices were not deregulated and companies producing these commodities and services experience
serious financial troubles. A restrictive fiscal policy was replaced by an expansionary one19 with
growing budget deficits, and government debt, as government borrowing was crowding out
private investment20. Since foreign investment was discouraged the Slovak economy was
seriously under-capitalised. The legislative framework was increasingly distorted by vested
interests21 Slovakia was excluded from the integration efforts22 of other transition countries.
As a result of all these measures and their negative results there was almost universal consensus
among experts as well as the general public that the country was heading in the wrong direction.
The major slogan of the political opposition was embodied into one single word: CHANGE.
Even though the 1998 parliamentary elections were won by HZDS, the party chaired by Mr.
Meciar, a prime minister with authoritarian tendencies, its coalition potential was close to zero.
As a result of this the opposition parties, three right wing parties and one left wing party, were
able to form a new government set on reversing the previous bad policies.
Starting in 1998 the government accelerated privatisation and widely used a method of open
international tenders. Banking, telecommunications and the energy sector were restructured and
privatised by foreign investors. Politically sensitive prices were deregulated and regulatory
framework was reformed, more insulated from political influence through the establishment of
independent regulatory authorities. Large public infrastructure investments were slowed-down,
intentions to reform the public sector declared, and as a result of more responsible fiscal policies
government bond rates were significantly reduced. Foreign capital was attracted by (first) tax
holiday, and (more importantly) by efforts to improve the business environment. The legislation
was also liberalised in many areas and sectors in order to comply with international standards.
Finally, the integration efforts were accelerated and Slovakia became a member of the OECD
member in December 2000, and had realistic prospects for becoming EU and NATO member.23
In the beginning of this period it was clear to our team in the Hayek Foundation that the 1998-
2002 period did represent a window of opportunity for implementing many of our ideas,
including tax and pension reforms. Since the foundation was established we had consistently
been practising our “think tank-do tank” approach. We were not only promoting reform ideas
and encouraging public debate on various issues, we were always also lobbying for their
implementation trying to persuade politicians, policy-makers, law-makers, and opinion-makers
that by a contributing to their implementation they would encourage prosperity in our country.
In order to help to accelerate much delayed structural reforms in Slovakia we made a strategic
decision back in 1999 that I would accept a position of Chief of Strategy at the Ministry of
Economy. I was going there with a vision of the ministry to be changed fundamentally, to make
its transition from a ministry conducting old-fashioned industrial, energy, and trade policies
based on strong sectoral focus24, to a modern ministry with modern policies focused on
improving the business environment in Slovakia.

18 Including banking, telecom, energy sectors.

19 With public expenditures aimed at large public infrastructure investments.
20 At some point government bonds interest rates exceeded 30 % when there was one digit inflation.
21 Government policies were increasingly favoring some and discriminating against others.
22 EU, NATO, OECD.
23 Slovakia eventually became a member of NATO and the EU in 2004.
24 Picking winners, selecting sectors and companies to be promoted by the government.
Most of my activities were focused on corporate sector reforms that were badly needed to
increase the competitiveness of the Slovak economy. It was crystal clear to me that this could not
be done without significant improvements of the business environment, especially its legislative,
regulatory and administrative framework. In co-operation with FIAS experts25 my team prepared
a strategy paper on the elimination of legislative, regulatory, and administrative barriers for doing
business in Slovakia, including a list of detailed proposals and measures how to improve the
business environment in a defined period of time. This paper was highly welcomed and
appreciated by domestic experts and Slovak as well as foreign businesses as a foundation of pro-
business government policies in upcoming months and years.
The tax system is without any doubt one of the most crucial elements of the business
environment. The Hayek Foundation started its own campaign for reducing the total tax burden
in Slovakia and for implementing a flat tax idea in 1997. In 1997 we established The Slovak
Taxpayers Association which in the same year launched its very successful project of
a calculating and publishing the so-called Tax Freedom Day. It increased public awareness of
the close connection between high government expenditures and low net wages, including
worsened prospects for a prosperous economy. Being in an executive position I brought this
fight into the internal structures of the government. In one of the documents elaborated by my
team and submitted to government for approval there was an introduction of a flat tax of 19 per
cent (still back in 1999!) proposed as one of the potentially most powerful measures to make the
business environment more favourable to both domestic and foreign businesses. Since at that
time the minister of finance, Mrs. Schmognerova, was a representative of the left wing party, our
proposal failed. However, the first seeds were planted, and this venture brought its fruits several
years later when the comprehensive flat tax proposal was implemented as of January 1, 2004. In
my view this story proves that my life long strategy of deliberately „setting outside bars” or
„going beyond what is possible in a given time” works and sooner or later pays off.
However, I was busy not only by working on laying down the foundations for the corporate
sector reforms, a preparation of a restructuring of utilities and their privatisation, or
improvements of business environment by eliminating various barriers, and a proposing the flat
tax reform. Thanks to my decision to join executive power26 the Hayek Foundation was able to
influence directly also crucial decisions that were important for the pension reform as well: 1. to
accelerate and help to approve in the government and parliament the biggest privatization in
Slovakia ever27, 2. to persuade the government to allocate most of the privatisation revenues to
financing the fundamental pension reform in future28, 3. to help combat the wrong pension
reform proposals of the Labour Ministry by the government by the end of the 1998-2002 period.
Unlike in other policy areas there were no major changes proposed or debated in the area of the
pension reform. And it was not because the problems would not be visible. With a growing
number of analyses published it was increasingly clear that fundamental changes were necessary.
Contribution rates necessary to keep the 1996 gross average wage/average pension rate were
predicted to grow from 27.5 % in 1996 to 48.6 % in 2040. Despite a very low effective pension
age29 there were no efforts to increase it. Even a scenario with a modestly increased pension

25 Advisory agency being a member of the World Bank group.

26 Although my original expectations differed significantly from reality: I expected to complete my mission within a period of 3 months, and finally stayed there for more than 3.5 year.
27 The Slovak Gas Industry, the company transiting a Russian gas from Russia to Western Europe.
28 A significant part of revenues of SKK 130 bln. from selling of a 49 % stake in the company were deposited by the government at central bank with an aim to use it after the introduction of the
pension reform to finance an early stage of transition period. These revenues were expected to last for up to six years.
29 59 for men and 54 for women.
age30 the system would end up in significant deficit by 2040. Calculations showed that if
demographic trends were to remain unchanged, in 2040 the receivers of benefits would
outnumber the contributors. In other words, each worker would have to pay contributions to
cover old-age benefits of more than one pensioner.
Why was there – despite all this persuasive evidence – almost no reaction from the responsible
ministry? The answer is simple. Like in the case of the Finance Ministry, the Labour Minister
Magvasi represented the left wing party. And he thought that the best way to implement the
ideological principles of his party in his area of responsibility would be to pretend that there was
still no sense of urgency, no need to change the pension age, no need to change pay-as-you-go
financing. As a result, there was no incentive to look for alternative solutions. Even in a case
that some solutions were mentioned unofficially, funded - capitalisation - schemes played no or
only a minor role in them.
After two wasted years in the second half of 1998-2002, Mr. Magvasi finally prepared his reform
proposal. However, it could hardly be called a reform, because what he came up with, if
implemented, would be perhaps worse than the status quo. His proposal consisted of creating
personal retirement accounts that would not be privately owned, and would be administered
centrally by the public Social insurance company, and managed by investment committee
members, some of which would be nominated by the government. Simply a nightmare!
When this proposal was submitted for inter-ministerial comments, I put much effort, time, and
energy into voicing the strongest possible disagreement of the Ministry of Economy with this
particular solution. I remember I called it “the manifest of collectivism” during one of our
meetings aimed at settling the dispute between the two ministries.
Mr. Magvasi and his party were trying their best to get approval for this proposal from the
government. We needed to use a strategy of combination of generating of both internal and
external pressure on the minister and his ministry to force them to change their anti-reform
attitudes. Even though the minister was using his political backing to defend his positions, he
finally surrendered also due to a growing pressure from Ivan Miklos31 and his team. Fortunately,
it was not enough. It was only several months prior to 2002 election when the government
decided that this particular proposal would not be even submitted to the government and did
leave the decision on the pension reform for a future government.
We have learned our lessons from this dangerous situation of being quite close to an
implementation of a perverse pension reform. It was exactly this situation that forced us in the
Hayek Foundation to make our next important and strategic decision that brought us further
towards increased involvement in the pension reform “crusade”: to prepare our own ambitious
proposal of the pension reform, and to find potential allies abroad that would help us to fight with
ideas efficiently for the reform.
It was in this period of 2000-2001 when I contacted José Piñera for the first time. I did not know
him personally. I read about his achievements in Chile and I found his e-mail at his
"International Center for Pension Reform"32. My intention was to get in touch with him and
discuss the idea of a potential visit in Slovakia. I remember I expected to hear from him
something like this: I am busy, my diary is full, and anyway I charge a speaking honorarium of

30 +1 year for men and +3 years for women in period 2002 – 2014.
31 Miklos held in 1998-2002 a position of a Vice-Prime Minister for economic affairs, and enjoyed a strong position within the government being a close ally of the prime minister Dzurinda.
32 Its website is as follows: www.pensionreform.org
XY tens of thousand bucks. Instead he replied immediately: yes, I can come. My conditions: I do
not take any money, when you invite me, I expect you to cover a business class air ticket from
Santiago, a nice hotel and several cappuccinos in Bratislava. That is all. Oh no, still one more
thing: because there are 200 countries in the world, I would come to Slovakia only in case there
would be a realistic prospect that my presence there could help to make the LAST push for the
reform. It was decided. We started to do our homework.
IV. 2002-2006: The New World Record: The Pension Reform Prepared and Implemented
in 30 Months
 The major problem of the period: After previous periods of efforts aimed at increased
awareness, periods of fights against the wrong solutions, the major challenge of 2002-
2006 became: 1. a preparation of a sound reform proposal and 2. its implementation.
 My strategy: 1. to fill a gap and to come up with our own proposal, 2. to attract attention
of politicians by inviting José Piñera, 3. if the reform would receive “a green light”, the
NFAH team was ready to help with implementation of the reform
We started to work on our own pension reform proposal and on a preparation of José’s visit
almost immediately. There were regular parliamentary elections called for October 2002. We
adjusted all our preparatory works towards this date. We had chosen June 2002 as the most
appropriate timing for both the presentation of our own proposal and for the visit of José Piñera.
Our team started the necessary analytical works, with Martin Thomay33 working on the proposal
full-time. At the same time an intense communication with José started in order to maximise the
results of his presence in Slovakia.
Finally, we came to our mutual agreement that we would prepare a four-day visit of José in
Slovakia. The date was set up for June 8-12, 2002. The program of the visit included the Annual
lecture of the F. A. Hayek Foundation, the international conference on pension reform organised
by the Foundation, presentation of its reform proposal during this conference, presentation of
José, his TV appearances, meetings with politicians, etc.
After Jose´s arrival we started his visit with informal dinner in Bratislava Old Town with the
Hayek Foundation team. We agreed that before an official part of the program Ivan Svejna
would bring him to his hometown Banska Stiavnica, the UNESCO site, to see also other parts of
Slovakia than Bratislava.
The next day they together visited Banska Stiavnica, an old mining town and picturesque place
about two hours by car from Bratislava. Ivan prepared a small picnic there for the closest friends.
Among them there was Ludovit Kanik, a friend of Ivan’s, and at the same time a leader of small
right wing value based party, the Democratic Party, that was preparing its campaign for the
upcoming elections.
During informal discussions José strongly suggested to Ludovit Kanik to put a high priority in its
agenda on the pension reform, to campaign with it, and even becoming a Labour Minister after
elections with a vision of introduction of personal retirement pension accounts. Even if it seemed
to be more like utopia at that time, José’s words proved to be almost a self-fulfilling prophecy
because Kanik after elections in fact became the Labour Minister and did implement the pension
reform…But we still had several months to go.

33 At that time working with The Hayek Foundation, later leaving us with an ambition to establish his own venture.
The next immediate important event for us was the Annual Lecture of the F. A. Hayek
Foundation on June 10, 2002. In my opening speech I introduced José as the famous architect of
the successful and the best-known pension reform in the world. I underlined that as any
important and pioneering reform it has its own supporters and opponents. Most of these debates
were available to us. However, it is much better to hear directly once rather than to read ten
times the second-hand information. And I gave the floor to José. Since I never had the
opportunity to listen to Jose lecturing, his presentation was a big surprise for everybody in the
conference hall, including myself!
José in his lecture showed his best performance, making an enthusiastic, eye-opening speech,
presenting his famous small pension book, and warning politicians to avoid measures that would
hurt pensioners “do not touch grandmother’s money”. And he was repeating it again and again
the next day during the conference, in his interviews with press, in his TV and radio interviews,
and during a press conference.
After his return to Santiago I thanked him in my e-mail of June 26, 2002: I want to thank you for
everything what you did in Slovakia to support a pension reform here. From responses of direct
participants and from media coverage of your visit it is clear that people here were really deeply
impressed by your presentations, interviews, arguments and above all by SIMPLE language you
used to talk about these issues.
I must confess that personally you have surprised even me. Of course, I was looking forward to
meeting you as a personality who is well-known all over the world. However, I was expecting to
meet someone who is "a former :-) reformer", who is making his living from his past
performance. I found that in fact you are the perfect opposite of that. I found a man who is
seeing the world as a continuous opportunity to look for improvements of our lives, to identify
them, to prepare an action plan and to execute it successfully. And José replied by quoting what
Ronald Reagan used to say, "you ain’t seen nothing yet".
Our conference on pension reform was attended by the specialists and experts from insurance
companies, pension funds as well as general public. During this conference we introduced our
own proposal of pension reform in Slovakia. Of four types of pension reforms, the parametric
changes, notional accounts, multi-pillar models and full privatization of social security, we
presented our strong preference for the full privatization. In the long term our proposal would
mean an elimination of the current PAYGO system by a system of voluntary savings, without any
mandatory aspects. Minimum subsistence level would be guaranteed by arrangements outside
the pension system itself.
Again, with my deliberate strategy of “going beyond the possible”, we went for this radical
proposal as a point of departure, knowing that politicians that were present at the conference were
ready to “digest” only certain parts of it. The more radical the original proposal was, the more
likely the final compromise would be acceptable also for us.
The October 2002 elections were won by Mr. Meciar and his party again. The situation after the
1998 elections repeated itself also after 2002 elections. Because of a low coalition potential of
Mr. Meciar, three right wing parties of the then government coalition were able to form a new
government, which was even more reform-oriented than the previous one because it was joined
by a newly established right wing party.
A window of opportunity for the second wave of fundamental reforms putting Slovakia ahead of
other transition countries was opened after October 2002, including labour market reform, flat tax
reform, further reforms of business environment, school system reform, health care reform, fiscal
decentralisation reform, and, of course, the pension reform. Ivan Miklos, the deputy prime
minister and finance minister of the Slovak Republic in the second government of Mikulas
Dzurinda, could report in his article in the Wall Street Journal encouraging news also what
concerns the pension reform: “We are preparing the pension reform to transfer the current pay-
as-you-go system to a program of real savings in personal accounts.”34
When this unique window of opportunity for implementation of the ambitious pension reform
was opened, we had made another important strategic decision. After my 1999-2002 mission at
the Ministry of Economy, we deliberately opted for our think tank to become a do tank again.
We decided to send our expert team to help Ludovit Kanik as the responsible minister and his
ministry to implement the pension reform we had long been campaigning for. The F. A. Hayek
Foundation expert team, including Ivan Svejna, Martin Chren, and Martin Thomay became an
important part of the pension reform team at the Ministry of Social Affairs of Slovakia during
years 2002 – 2003, with Ivan Svejna becoming a Director General of the Ministry and a Head of
the team responsible for a preparation of a reform strategy. Later on, Ivan and Martin wrote a
book “Pension Reform: The Slovak Way” describing their experience from this period.35
Our previous close contacts with the world’s best reformers proved to be of crucial importance
for the whole reform. It was natural that Ivan Svejna in his new position invited – following a
suggestion from José Piñera – two experienced Chilean advisors, Augusto Iglesias, and Klaus
Schmidt-Hebel. They joined the team and without their important contribution it is difficult to
imagine that the final overall result would have been equally successful.
Overview of Major Reform Features
During 2003 two main legislative acts – the Social Insurance Act and the Old-Age Pension
Savings Act – were prepared by the reform team. These two bills have set up the framework for
the new pension system that was expected to operate in Slovakia from January 1, 2005. The
Social Insurance Act set down changes in the unfunded pension system, the Old-Age Pension
Saving Act created a new, fully-funded pillar of the pension system.
The main changes brought by the Social Insurance Act were: a) the new model of calculating of
old-age benefits paid by the unfunded pension system using the so-called “Personal Wage
Points”, b) gradually increasing the retirement age to 62 years, c) a new structure of both
mandatory pension contributions and benefits, and d) a complex re-definition of the disability
benefits. Based on the Old Age Pension Saving Act, new Pension Companies were able to start
their businesses in Slovakia, managing the personal retirement accounts of Slovak workers.
Prior to reform Slovaks were obliged to pay to the PAYGO system contributions of 28.75 % of
their gross wages36, and the system promised in exchange to pay an average old-age benefit
amounting to 50 % of gross wages. The reform allowed workers to redirect a significant part of
their contributions, 9 % of gross wage37, to their personal retirement accounts.
The system is mandatory for citizens who entered the labour market for the first time after
January 1st, 2005. Citizens who decided that they were not going to retire earlier than after ten
years, could opt to stay in the state-operated PAYGO system or switch to the new system within

34 Ivan Miklos: A Flat Tax and More, May 8, 2003 , Wall Street Journal.
35 The book was called “Dôchodková reforma po Slovensky” and was published in Slovak in 2004. It is also available on web pages of The F. A. Hayek Foundation, www.hayek.sk.
36 18 % for old-age benefits, 6 % for disability and survivorship insurance, 4.75 % for Reserve Fund.
37 The single largest share redirected to the system of private retirement accounts in Europe!
a period of 18 months38. All citizens who were already retired or wanted to retire earlier than in
the next ten years were asked to stay in the state-operated system.
The pension funds, accumulating workers’ pension savings, are managed by private Pension
Companies. The pension Companies are under strict supervision of the Financial Market
Authority. Each of the pension companies set up three different pension funds, each of them
having a different portfolio of securities. The Old-age Pension Savings Bill determines strict
investment limits for each of the funds, based on type of securities, their issuers and ratings, the
main goal being to diversify investment as much as possible to reduce risks.
The battle for private ownership of pension savings in 2003
From the description above one might wrongly assume that everything was almost perfect during
the preparatory stage of what finally became a successful pension reform. In reality, just the
opposite was true. Firstly, there were growing disagreements over the size and parameters of the
PAYGO. These disagreements forced Ivan Svejna and part of his team to depart from the
ministry during 2003. Unfortunately, it did not wake up the politicians in charge to the need for
adjustments in the PAYGO system and these changes will still need to be made in upcoming
years.
There was even more serious source of tension, however. It was a question of ownership of
pension savings. An overall situation with two crucial structural reforms, the flat tax and pension
reform, looked optimistic, even rosy in the autumn of 2003. In my e-mail to José from
November 1, 2003 I was able to report: Dear José, let me start with great news from Slovakia:
last Tuesday our parliament adopted a 19 % flat tax that should be effective from January 1,
2004. In all likelihood January 1, 2004 will also mark the beginning of the pension reform since
this parliamentary session is discussing the last piece of the reform proposal.
Anti-reform forces mobilised themselves in the very last moment and they used a debate on fiscal
consequences of private retirement accounts for their own purposes. The EU intervened into our
reform efforts when Brussels announced that increased transition costs will not be tolerated and
will be considered as a regular part of the deficit. This was a “cold shower” for some reformers
and also anti-reformers started to come up with the proposals how to meet a Maastricht criteria
by keeping all financial flows of the reformed pension system within the public finances. In
other words, how to have pension savings accumulated in personal accounts of citizens owned
publically instead of privately.
This was one of the most important issues, because without private ownership the whole reform
would be only mimicking the true reform. Fortunately, in the middle of the parliamentary debate
on this issue, a visit of our parliamentary delegation to Chile was scheduled for this period. The
members of our parliament visited Santiago where they held many meetings with people
associated with the reformed pension system in Chile, including a special 3-hour meeting with
José Piñera.
What happened during that meeting is summarised in the following e-mail received from José on
December 9, 2003: “Jan, Slovakia should approve a pension reform in which every worker
OWNS his/her retirement account. I cannot support a reform in which the government owns the
accounts, because there is a clear possibility that some government will in the future confiscate
all or part of the workers hard-earned money. It will be another big frustration for the Slovak

38 January 1, 2005 and June 30, 2006.

people. I was very surprised to discover this key departure from the Chilean system only once the
delegation was here. Nobody had told me about that. Since I am committed to principles, and not
political tactics, I oppose that distortion of the idea of private personal retirement accounts and I
said that with full force and independence to Minister Kanik and the full commission (and all the
deputies supported my position). Best, José”
The further acceleration of the next course of events can be clearly seen in my reply to José from
December 11, 2003: “Dear José, you have made a great impression on all members our
parliamentary delegation. After their return from Chile they were repeatedly making references
to views of yours - as views of an already well known “classic” in Slovakia. I wish we could
send there all our MPs, and all ministry staff, including the minister, well before they started to
work on the reform...”
In following days, after many exciting debates and negotiations in a parliament, there was a right
decision taken be our deputies. Minister Kanik could send his letter to José Piñera on December
19, 2003 starting in a following way: “Dear Mr. Piñera, I would like to share some good news
with you. On Tuesday the 16th December 2003, the Slovak parliament approved the law on the
old-age pension savings scheme. Thus, as of 1 January 2005, Slovak workers will start depositing
9 % into their personal savings accounts. These savings will be their private property, to which
succession rights will fully apply.” And he continued: “Your visit to Slovakia had started an
intense discussion about the pension reform, and enormously influenced the generation of a
favourable political climate. I am confident that the pension reform, borne by your inspiration
and with your significant assistance, will bring not only higher pension to our citizens, but also
freedom and self-assurance while seeking out the correct way. The time of our visit to Chile
coincided with the period of acute search for parliamentary support of the main law of the
reform. The discussion with you made great impression, and contributed to a major extent to the
determination and will of the members of our parliament to push through this historically new
project of the pension system in our society. Ludovit Kanik”
The same day, December 19, 2003, José Piñera replied to Kanik by e-mail: “You have given me
the best possible Christmas gift. Congratulations for a pension reform that, as you say,
gives private ownership of their pension accounts to Slovak workers. ...I have already begun to
tell my network around the world that Slovakia, with its twin structural reforms (pension and flat
tax), has become a leading reform country in Europe”.
All in all, when we consider June 2002 as a sort of a “kick off” event of the true reform, there
was a relatively very short period of 30 months within which the reform was successfully
debated, prepared, and finally implemented. In other words, a new world record in the discipline
of pension reform implementation had been set.
The second visit of José Piñera and the June 2006 parliamentary elections
On June 17, 2006 there were parliamentary elections in Slovakia again. Pre-election public
opinion polls were dominated by a leftist populist opposition party SMER with ratings close to
30 %. There were two major issues in their pre-election campaign: 1. heavy criticism of all
reforms39 adopted by the right-wing government, 2. promises of reversal of most of these reforms
under a slogan of a reinstallation of a welfare state that is typical for continental Western Europe.
Even the pension reform was demonised as a mere business for the private pension funds at the
expense of pensioners.

39 Described as irresponsible and even "brutal" social experiments on citizens.

At the Hayek Foundation we envisaged an escalation of these debates in our pre-election
campaign well in advance. That is why we made a preliminary agreement with José on his
second trip to Slovakia still back in 2005. We thought it was a good timing to invite José in May
2006 in order to defend the pension reform and its major results.
When it came to the program of the visit, we agreed that we would basically follow the pattern of
his first trip: 4 days, the conference on the pension reform, and many press, TV, and radio
interviews and press conferences, including the major press conference with the minister of
finance, Ivan Miklos. During this press conference Ivan Miklos announced that the pension
reform was one of the most fundamental reform measures of the outgoing government that was
already benefiting millions of workers, accumulating SKK billions of pension savings on their
private accounts. In his presentation José Piñera congratulated the outgoing government and the
minister for a well-done job while implementing the reform and underlined the importance of the
reform for the future prosperity of Slovak citizens and their economy.
In his keynote speech in the opening session of the conference, assessing the first results and
prospects of the pension reform, José summarised the major contributions of personal retirement
accounts in improving the performance of the Slovak economy, and above all, for increased
standards of living and individual freedoms of the Slovak citizens in the future. And he kept
sending the same major message while making many follow-up interviews with both printed and
electronic media.
In addition to media, politicians and political parties were among our target groups when
organising this conference. That is why there was also a panel discussion with representatives of
political parties to express their views on the pension reform, and to reveal their plans as far as a
future of the reformed pension system concerned. 6 of 7 relevant parties likely to make it into the
parliament stated clearly that they were satisfied with the pension reform as implemented and that
they had no plans for significant changes. Only the 7th party, SMER, remained a risk factor, as it
considered reducing payments to IRAs from 9 to 6 percent, or other significant adjustments 40 in
the reformed pension system.
Even though SMER finally won the elections on 17 June 2006 with a comfortable 29 percent,
three right wing parties of the outgoing government coalition got 38.5 percent, including the
leading party of a Prime Minister Dzurinda with surprising 18.4 percent. Total results - 29
percent for the left, 38.5 percent for the right, and 20 percent for the centre41 - were not bad at all.
All in all, the right wing parties were even in a position to stay in power if they made an
agreement with Mr. Meciar who changed his behaviour and strategy significantly during the last
four years42. However, it was still not enough for the Christian Democrats and they announced
they would never form a coalition with Meciar, so this option was not explored.
The trick was that there were two other parties mentioned above with their total 20 percent. The
new government was thus formed as a combination of the leftist opposition party SMER, led by
Mr. Robert Fico, and two other opposition parties with Mr. Fico as the new prime minister.
Despite these developments I remained confident that we would be able to keep the majority of
the reforms unchanged, namely the flat tax and the pension reform. To achieve this, we needed to
invest almost all our time and energy after the June 2006 elections into lobbying and defending

40 Even to abolish the whole reformed system.

41 For two parties - The Slovak National Party and HZDS, Mr. Meciar´s, the former Prime Minister (before1998) party – declining to define themselves as neither left-wing nor right-wing party..
42 In a positive way.
crucial reform achievements, including the pension reform. We used a strategy of a public
campaign called “Save the Pensions” that was combined with internal lobbying via employers´
organisations and other pressure groups.
There was no guarantee that our voice would be heard43, but mutual communication was still
better than no communication at all. SMER as the strongest party of the new government
coalition used its right to nominate ministers with heavy portfolios, including the ministry of
labour and finance. Their statements after elections were significantly less radical as compared to
their pre-election rethorics. The new lady minister never repeated the pre-election fantasies about
abolishing the reformed pension system. And with more and more days in the office she was
closer and closer to keeping the 9 percent of contributions than proposing a reduction. The only
firm commitment that remained in terms of the reformed pension system was to make it
voluntary in future.
On 1 August 2006 the new Prime Minister presented his government declaration in parliament.
When dealing with the pension system, much attention was paid to ways to improve the stability
of the PAYGO system. On the reformed pension system, the new government declared: "the
government will maintain the system of old-age pension savings system". No single word on its
abolishment, no single word on any potential plans to reduce the contribution rates. The only
fundamental adjustment the government finally declared was its plan to make the reformed
system voluntary. Although future consequences of this measure need to be analysed more in-
depth, after more details of these plans will be released, of all measures that were considered by
the government, this is the least dangerous. Its flaws can be eliminated by improving the pension
funds’ marketing strategies when competing for future clients within the PAYGO system. Of
course, a conditio sine qua non of this optimism is that the government does not make the
PAYGO an artificially attractive alternative for workers considering their personal options.
At the very end of each story we usually want to a Happy End. As we know "all is well that ends
well". Can this be considered as the Happy End of our Story? I do believe it can. Firstly, the
new leftist government decided to keep the reformed pension system. Secondly, the figures say
it all: a total number of people switching to IRAs is about 1.4 million, i.e. about 70 per cent of all
eligible people, with SKK 17.5 billion accumulated pension savings in their privately owned
savings accounts.

V. Concluding Remarks
I know from my practical experience that in order to succeed in implementing fundamental
changes, several factors need to be in place: 1. open crisis – and in Slovakia we had it after 1993-
1998 period of irresponsible macroeconomic policies, and the lack of microeconomic
adjustments, 2. appropriate inspiration and a reform model – and we had them in José Piñera ,
and his reform efforts in Chile, 3. a free market think tank and "do tank" – we had the F. A.
Hayek Foundation, 4. politicians ready and willing to implement the necessary reform steps – we
had Ivan Miklos, and Ludovit Kanik.
Even if all four factors would be in place at the same time, it still does not need to be sufficient.
There is still another factor that needs to work in favour of reform efforts. The framework
conditions need to be supportive as well. If minister Magvasi had been able to get approval for

43 There were also trade unions and other groups lobbying and having quite opposite priorities.
his bad reform proposal, there would be no true pension reform based on private savings. If the
two leaders of the Slovak National Party had not started quarrelling before 2002 election and
would not split the party, Mikulas Dzurinda would not have been able to form his second
government. If the parliamentary delegation´s trip to Chile had not coincided with the debate on
ownership of pension savings the most likely outcome would have been a very different pension
reform. Consequence: if also the framework conditions had not worked in favour of reform
forces, there would be have been no pension reform as it was finally adopted.
Once again, all of these factors – open crisis as a starting point, appropriate inspiration and
reform model, a small group of dedicated free marketers, and politicians able and capable to
implement necessary reform steps, and generally favourable framework conditions - needed to be
in place in order to make radical reforms in Slovakia possible, including the pension reform. I
am sure the same can be done in every single country in the world that is still on José’s list of
non-reforming countries. And hopefully, after a reading of this Story someone from one or more
of these countries will get inspired and will start to make the first small steps on the same reform
path as we did many years ago in Slovakia.

Bratislava, September 1, 2006