




































112 

 

Finance, Accounting and Business Analysis 
Volume 2 Issue 2, 2020 

http://faba.bg 

 

Bulgarian Pension System – Is It A Sustainable Social Security 

Structure in The Long Term  

 
Jeko Nikolaev Milev 
  
University of National and World Economy, Sofia, Bulgaria 

Info Articles  
 

Abstract 

History Article: 

Submitted 23 January 2020 

Revised 4 March 2020 
Accepted 17 May 2020 

 Bulgarian pension system consists of three pillars. The first one functions on a pay-

as-you-go principle and is a mandatory one, the second and third pillars are fully 
funded. The insurance into the second column is compulsory and that into the third 
one is voluntary.  The unfavorable demographic trends in the country have an 
adverse effect on the pay-as-you-go part of the system. At the same time the minor 
accumulation of resources into the second and third pillar makes the sustainability 
of the pension system under question especially in the long term. The current 

research is trying to put some light on this issue by following the reforms made in 
the recent years and the tendencies concerning the government decisions on each of 
the pillars of the pension system. The paper is structured in two parts. The first one 
focuses on the pay-as-you-go part of the system and the factors that influence its 
financial health. The second one concentrates on the current problems of the funded 
component of the pension system and the way it must be strengthened in the long 

term to effectively support the dominant state pension system. Further reforms are 
needed to raise the sustainability of the pension system as a social security structure 

in the long term. 

Keywords:  
Bulgarian pension system, 
demographic structure, risks, 
pay-as-you-go 

 

  

   

Address Correspondence:   
E-mail: j.milev@unwe.bg 

 
 

 

  



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INTRODUCTION 

 
The PAYG part of the pension system in Bulgaria has been effectively supplemented by fully funded 

columns since the beginning of 2000’s.  Following the model promoted by the World Bank in the mid 

1990’s, the policymakers in Bulgaria introduced pension insurance similar to that in a number of countries 

in Central and Eastern Europe. The insured individuals in Bulgaria were given the opportunity to save and 
to accumulate resources for their future retirement. The long-term goal of the implemented reform is to 

achieve an income replacement rate at around 70%-75% of the final salary of the insured person. The 

second pillar of the system takes the form of two types of pension funds: universal and occupational. All 
persons born after 31.12.1959 must insure themselves in universal pension fund, while all individuals 

working under the first and second labor category (i.e. working in hard working conditions) must insure 

themselves in occupational pension fund. This rule was a little bit relaxed in 2015 when the insured 

individuals into the second pillar of the system were given the opportunity to opt out of the funded 
component of the pension system and to contribute only into the first pillar. The third pillar of the system 

is supplementary voluntary pension insurance, wherein all participants can choose to make additional 

contributions for supplementary benefits. The sustainability of the pension system in the country depends 
on further development of each of the pillars. The fully funded mandatory pillar of the pension system in 

Bulgaria has been existing for almost 20 years. The fully funded voluntary pension pillar is even older (the 

first voluntary pension funds in Bulgaria started their activity in the mid 1990’s). In the early 2000’s these 

two new pillars of the pension scheme were seen as supplementary elements of the pay-as-you go part of 
the system that would allow future generation retirees achieve replacement rates adequate to their pre-

retirement income. The world financial crises of 2008 changed the attitude toward the pension funds in 

Bulgaria. That could easily be seen by the promoted policy of the governments since then. The funded part 
of the pension system is not seen as a priority element anymore.  

 

REVIEW OF THE  LITERATURE 
 

According to Davis (1995) the funded component of the pension system if structured in a proper way, 

could support effectively the PAYG part of the system in a time of consistent population aging. Blake 
(2006) also considers funded pillars of the pension system as a must if government really wishes to 

effectively manage the risk of poverty among the elderly. Szczepanski (2015) notes that in a situation of 

demographic aging state PAYG pension systems “cannot guarantee the level of benefits and financial 

security in old age as was possible in the 1980’s and 1990’s”.  Daneva (2018) notes that this type of reform 
is needed in countries with high emigration rates, where the deficits of the PAYG part of the system tend 

to become constant. In a research of Manov (2003) for the private pension funds it is shown the positive 

relationship between contributions paid into a personal pension account and the wish for paying those 
contributions on the “real wage”. The fully funded pension insurance is seen as a method for managing the 

grey sector in economy. However, Orzag and Stigliz (2001) consider the funded component of the pension 

system as not suitable for all the countries. They disagree with many of the ideas in the main report of the 

World Bank (1994) which was the basis for promoting the private pension schemes in Central and East 
European countries. According to them the administrative costs are too high and many of the countries do 

not have capacity to manage this type of schemes. Szczepanski (2015) also notes that many of the 

supposed advantages of the private pension schemes did not materialize in practice and significant 
normative changes were needed in order to raise the effectiveness of the second and third pillar of the 

system. 

 

METHODS 

 
 For the purpose of the analyses statistical data is used for the development of the demographic 

tendencies in the country and their impact on the PAYG part of the pension system. The reforms 

regarding fully funded pension pillar are researched and analysed with the aim to put some light on the 

possibilities of this part of the pension system to contribute effectively to the sustainability of the pension 
system in the long term.   

 

Pay-As-You-Go (Payg) Pillar of  The Bulgarian Pension System In 2020 – Reforms, Problems and 

Challenges  

The main motives about the reform made in the late 1990’s were closely related to the unfavorable 

prognosis regarding the future demographic trends in the country influenced by both the high emigration 

rates of young individuals in the mid 1990’s and the expected low birth rates in the coming years. The old-
age dependency ratio (the ratio between the individuals aged 65 and more and individuals aged between 



Jeko Nikolaev Milev / Finance, Accounting and Business Analysis 2 (2) 2020 

114 
 

15 and 65) constantly rises.  
 

Table 1. Old Age Dependency ratio in Bulgaria (2007 – 2019) 

Year Dependency ratio in Bulgaria (2000-2019) 

2007 25,0 

2008 25,2 

2009 25,4 

2010 25,9 

2011 27,8 

2012 28,5 

2013 29,3 

2014 30,2 

2015 31,1 

2016 31,8 

2017 32,5 

2018 33,2 

2019 33.8 

Source: National Statistical Institute in Bulgaria (www.nsi.bg) 

 
The ratio between the number of pensioners and the number of those individuals who contribute to 

the system is also quite unfavourable. It is not a surprise that the share of pensioners constantly rises in 

relation to the whole population and to the insured individuals.  
 

Table 2. Number of pensioners, insured individuals and population in Bulgaria (2007-2017) 

Year Number of 

pensioners 
(in 

thousands) 

Number of 

insured 
individuals 

(in thousands) 

Number of 

population 
(in 

thousands) 

Relative share 

pensioners/insured 
individuals 

Relative share 

pensioners/population 

2007 2252 2863.5 7659.8 78.6% 29.4% 

2008 2214.9 2851.2 7623.4 77.7% 29.1% 

2009 2192.5 2829.8 7585.1 77.5% 28.9% 
2010 2191.9 2831.5 7534.3 77.4% 29.1% 

2011 2199.6 2765.7 7416.1 79.5% 29.7% 

2012 2217.6 2770 7305.9 80.1% 30.4% 
2013 2195.9 2729.8 7265.1 80.4% 30.2% 

2014 2181.9 2735.1 7223.9 79.8% 30.2% 

2015 2177.7 2755.9 7178.0 79.0% 30.3% 

2016 2180.9 2765.1 7127.8 78.9% 30.6% 
2017 2172.8 2779.8 7075.9 78.2% 30.7% 

2018 2162.9 2790.2 7025.0 77.5% 30.8% 

Source: National Social Security Institute (www.nssi.bg) 

 

The numbers of the above table indicate that financing of the pay-as-you-go column of the pension 
system is not an easy process. The ratio between the contributing workers and pensioners is almost 1:1 

which means that the sustainability of the future deficits of the state pension insurance system is out of 

question. This could easily be turned into a significant crisis of the pay-as-you-go part of the system. This 

gloomy perspective is a fundamental factor that presumably must force the government to introduce 
additional reforms into the funded part of the pension system in order to further strengthen it financially. 

The basic idea behind the reform made in the late 1990’s is still actual in 2020. However, after the financial 

crisis of 2008 the government stopped all of the reforms needed to support the funded part of the pension 
system (the envisaged gradual increase of the contribution rate, the multifund system, the detailed 

regulation of the pay-out phase). It even adopted a regulation change that allowed insured individuals to 

transfer their resources into the first pillar of the pension system.  The basic factor that made possible 

behavior like this was the economic growth realized in the years after 2008. The unprecedented growth of 
the insurable income and the tax revenues lets government finance the pay-as-you-go part of the system 

and even increase the pension benefits of the current pensioners. The return to the pay-as-you-go part of 



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115 
 

the system depends on two factors - the growth rate of the average earnings (which determines the growth 
in total contributions) and the ratio between contributing workers and pensioners (dependency ratio). The 

return to the funded part of the system depends on the rate of return on accumulated assets and the 

“passivity” ratio (number of years in retirement relative to the working age) (Aaron’s rule). Many 

empirical studies (Davis, 1995) show that under certain normal circumstances the return on financial 
assets exceeds the growth rate of average earnings which means that if equality is assumed between the 

dependency ratio and the passivity ratio, the return to the funded pension system must exceed that to the 

pay-as-you-go one. However, in Bulgaria, the opposite is true for the period (2002-2019). 
 

Table 3. Insurable income and contributory rate for pension for the period 2002-2019 

Year Average monthly contributory 

income (euro) 

Rate of increase of average monthly 

contributory income 

Yield realized by 

pension funds 

2002 132.81  10.58% 
2003 143.55 8.09% 10.99% 

2004 157.89 9.99% 11.92% 

2005 169.55 7.39% 7.86% 

2006 181.25 6.90% 8.31% 

2007 203.58 12.32% 15.67% 

2008 255.93 25.72% -20.76% 

2009 283.65 10.83% 7.22% 

2010 291.61 2 .80% 5.18% 
2011 303.78 4.18% -0.96% 

2012 316.01 4.02% 7.49% 

2013 331.69 4.96% 4.50% 
2014 349.39 5.34% 5.70% 

2015 371.40 6.3% 1.37% 

2016 393.73 6.01% 4.01% 

2017 416.70 6.68% 6.09% 
2018 455.00 8.32% -4.15% 

2019 504.40 10.86% 6.45% 

Source: National Social Security Institute, www.nssi.bg Financial Supervisory Commission, www.fsc.bg – 

statistics, insurance market (value of 1 pension unit UNIDEX for the last working day of each calendar 

year for the period 2005-2019) 
 

The basic reason behind the cited high growth rate of the average income is the existence of extremely 

low basis in the late 1990’s. In 1997, the average wage in the country equals $63.92. The growth rate of the 

average income is a result from the growth rate of the economy. 
 

Table 4. GDP, Growth of GDP and Inflation rate in Bulgaria (2000-2019) 

Year GDP, mln. euro % growth Inflation rate Real growth 

2000 14 380       

2001 15 843 10,18% 4,82% 5,11% 

2002 17 419 9,95% 3,81% 5,91% 

2003 18 733 7,54% 5,64% 1,80% 

2004 21 066 12,46% 3,98% 8,15% 

2005 24 040 14,12% 6,45% 7,20% 

2006 27 410 14,02% 6,49% 7,07% 

2007 32 444 18,37% 12,48% 5,23% 

2008 37 217 14,71% 7,76% 6,46% 

2009 37 400 0,49% 0,56% -0,07% 

2010 38 044 1,72% 4,53% -2,69% 

2011 41 252 8,43% 2,75% 5,53% 

2012 42 033 1,89% 4,25% -2,26% 

2013 41 885 -0,35% -1,59% 1,26% 

2014 42 875 2,37% -0,88% 3,27% 



Jeko Nikolaev Milev / Finance, Accounting and Business Analysis 2 (2) 2020 

116 
 

2015 45 675 6,53% -0,38% 6,93% 

2016 48 620 6,45% 0,09% 6,35% 

2017 52 309 7,59% 2,77% 4,69% 

2018 56 086 7,22% 2,67% 4,43% 

2019* 60 674 8,18% 3.82% 4,20% 

Source: National Statistical Institute in Bulgaria (www.nsi.bg). *2019 GDP data is a prognosis) 

 

If the size of the economy is measured by using data for the realized GDP for the period 2000 – 2019, 
the conclusion is that Bulgarian economy almost tripled for that period. This is the basic reason why the 

government can finance the promised pension benefits and at the same time postpone reforms needed for 

strengthening the funded components of the pension system. However, the crises of the pay-as-you-go part 

of the system could be seen quite well if the budget of the state pension system is taken into consideration. 
 

Table 5. Budget of the State PAYG Pension Fund (thousands euro) 

Year Revenue Expenses Deficit Year Revenue Expenses Deficit 

2002 1 053 438 1 507 915 -30,14% 2011 1 576 099 3 440 775 -54,19% 

2003 1 236 585 1 600 872 -22,76% 2012 1 500 770 3 564 282 -57,89% 

2004 1 285 491 1 763 583 -27,11% 2013 1 692 897 3 850 580 -56,04% 

2005 1 236 399 1 946 351 -36,48% 2014 1 723 721 3 974 404 -56,63% 

2006 1 187 306 2 129 118 -44,23% 2015 1 780 841 4 095 209 -56,51% 

2007 1 317 640 2 293 997 -42,56% 2016 1 941 680 4 271 086 -54,54% 

2008 1 560 631 2 597 717 -39,92% 2017 2 230 717 4 382 906 -49,10% 

2009 1 716 268 3 216 613 -46,64% 2018 2 610 417 4 657 449 -43,95% 

2010 1 333 735 3 448 400 -61,32% 2019 2 967 203 4 934 954 -39.87% 

Source: National Social Security Institute, www.nssi.bg 

 

The above numbers show that the deficit of the pension fund of the State social security system is 
enormous. There is a slight decrease in the last years mostly due to the growth of the average earnings and 

the new retirement conditions (higher pension age and length of service). In these circumstances the 

government is forced to use part of the revenues collected via general taxation to finance the pension 
benefits of the current retirees. In this sense one may assert that pensioners in Bulgaria finance almost 50% 

of their pension benefit by paying their taxes. Having in mind the extremely low pension benefits, the 

worsening demographic structure and the huge deficit of the state pension system, the implication is 

obvious - pay-as-you-go part of the pension system in the country is not a sustainable social security 
structure in the long term. Of course, its existence is out of question, but the amount of the pension benefit 

is not to be adequate to the preretirement income of the pensioner and the risk of poverty among 

individuals within this group of society is significant.   From this point of view the government must 
continue making reforms that could strengthen financially the pension system. Any delayed efforts now 

could cost more in the future. 

 

The Fully Funded Pillar – Could It Efectively Support The Payg Part of The Pension System in 

Bulgaria 

Two basic arguments are stated by some officials as problems of the second pillar of the pension 
system: first, the accumulation of resources into individual accounts is small for a number of insured 

individuals and second, the stock exchange in Bulgaria is still characterized by lack of instruments, low 

turnover and many possibilities for manipulation. So, could private pension funds in Bulgaria raise the 
sustainability of the pension system in the country in the long term?  

Why the accumulation of funds into individual accounts is considered as low? There is a special rule 

in Bulgarian social security legislation, which specifies the reduction of the so called individual coefficient1 

for those individuals who have right to pay contributions into the second pillar of the system (all persons 
born after 31.12.1959). The idea here is straightforward – those who make contributions into private 

pension fund receive part of their pension benefit by the second pillar, that’s why the pension amount 

obtained by the first pillar should be reduced. This approach seems fair since the contribution rate for the 
first pillar was lowered for those born after 31.12.1959 and the deduction was forward to the private 

                                                     
1 Individual coefficient is a special ratio between the contributory income of the insured and the average national 

contributory income. The higher the coefficient is, the bigger the pension amount will be.  

http://www.nsi.bg/


Jeko Nikolaev Milev / Finance, Accounting and Business Analysis 2 (2) 2020 

117 
 

pension fund. In this way the second pillar of the system was supposed to support financially the pay-as-
you-go column in the long term. The problem comes from the methodology applied for reducing the 

individual coefficient elaborated still at the beginning of the reform. It prescribes that the individual 

coefficient must be corrected with a ratio that roughly equals the contribution rate for the first pillar for 

those born before 01.01.1960 and the contribution rate for the second one for those born after 31.12.1959. 
This methodology could be valid only if the pay-as-you-go part of the system were able to finance the 

whole amount of pension benefits using money collected via pension contributions. The reality is 

somehow different - almost 50% of the amount of the pension benefits is covered by subsidy from the state 
budget. The accumulated funds into individual accounts are not enough if they must compensate for a 

reduction that is not proportionate to the real contributions paid for both of the pillars. If one considers the 

strong subsidy that comes from the state budget, then the amount of the real contribution for the first pillar 

must be almost twice as much as its current figure. In other words, there is no clear implication just from 
the fact that universal pension funds could not compensate the insured individuals for the reduction of the 

first pillar pension benefit, that they haven’t been managed effectively.  In theory it is even possible the 

government to equalize the contributions paid for the first and for the second pillar making them 5% (the 
percentage applied for the second pillar) and then to ask pension funds to bear 50% of the financial burden 

for the payment of the pension benefits. In addition, those individuals who first are going to receive 

pension benefits from the second pillar of the pension system were in their mid 40’s when they started 

effectively to accumulate money into their personal accounts. At that time almost half of their length of 
service had been passed. In reality, these individuals are not going to have enough money to finance 

pension benefit proportionate to the envisaged reduction but this have nothing in common with the 

management of the pension funds and their rule for the future of the Bulgarian pension system.  
The second argument against the funded component of the pension system regards the illiquid and 

underdeveloped stock exchange in the country.  The opponents of the private pension funds state that it is 

not possible to have financially strong funded pension system without well-developed and transparent 

capital market. As a matter of fact, this argument is a robust one.  It is true that still pension funds cannot 
rely on the capital market in the country to trade actively financial instruments. The lack of deep and 

liquid market means that pension funds in the country do not have adequate market valuation for many of 

the instruments in their portfolios. The pay-out phase is coming closer and if the sale of a significant part of 
the portfolios is put under pressure, this could mean severe problems both for the pension companies and 

the insured individuals. Due to a number of factors2 pension funds in Bulgaria  have not been able to 

contribute effectively for a significant development of the stock exchange – something that was observed, 

for example, in Chile, after the initial start of the funded pension system in 1980’s. However, the 
significance of this argument should not be exaggerated. Bulgaria is part of the EU and currently Bulgarian 

pension funds have access to all European stock exchanges and to all instruments traded on them. The 

investment regulations do not differentiate between Bulgarian corporate instruments and European Union 
ones. The current portfolio structure of the Bulgarian pension funds could be considered as a balanced one 

with many instruments traded abroad and evaluated correctly at the market. At the same time, the fact that 

Bulgarian corporate instruments are not traded actively does not mean that they do not bear yield for their 

owners. Currently many of the bonds issued by private companies are just held until maturity bringing an 
extra yield for the low liquidity they have. Regarding the equities, possessed by the funds – the risk here is 

much higher but also their potential for growth and expected return. Many shares, traded at the Bulgarian 

stock exchange could be viewed as undervalued having price/book ratio at around one. Pension funds can 
really benefit from their equity holdings, but they must well know the core business of the chosen 

companies and exert continuous control on them. 

Both stated arguments against the funded component of the pension system are not of such scale to 

undermine the idea that funded elements could contribute to the sustainability of the pension system in the 
country.  At the same time there are some additional reforms that must be done as soon as possible if 

funded component is seen as a long-term solution of the current systemic problems of the pension system. 

First, Bulgarian pension insurance companies keep on managing just one portfolio of assets without 
considering the investment horizon of the insured individuals. The so called multi-fund system has been 

discussed for a decade and it is still not introduced in practice. Second, the pay-out phase of the universal 

pension funds must be elaborated in detail in the next few months. The first insured individuals that have 

right to receive pension benefits by the second pillar pension funds are going to retire in 2021. There is still 
legislative vacuum on this very important and specific issue. Third, if pension funds are to be used as an 

element of the long-term future of the Bulgarian pension system, there is a clear need to reduce the 

political risk on which they are currently exposed. After almost two decades of operation it became 

                                                     
2 Tough regulation rules, 2008 financial crises, the policy of zero interest rates promoted by the Central banks in 

the last years. 



Jeko Nikolaev Milev / Finance, Accounting and Business Analysis 2 (2) 2020 

118 
 

obvious that private pension companies are exposed to a significant political risk as well. The ruling 
political party can change the rules of the game in such a way that it can motivate insured individuals to 

replace their insurance from one pillar into the other and vice versa. The pension system in the country is 

exposed to a few risks but the political one seems to be the most important one. The wish for attracting 

voters in the short term makes politicians avoid important but sometimes painful reforms. If the above 
mentioned issues are effectively addressed, then funded component of the pension insurance could be seen 

more obviously as supplementary part of the PAYG system in the long term. And only if each of the 

pillars of the pension system in Bulgaria continue to exist, the sustainability of the system is to be raised for 
the next generation retirees.  

 

CONCLUSION 

Bulgarian pension insurance system has a modern structure but at the same time its sustainability in 

the long term is problematic. The worsening demographic structure deteriorates the pay-as-you-go part of 
the system. At the same time, many delayed reforms regarding the pension funds in the country make 

them vulnerable on current market conditions and populist political decisions. If adequate pension 

amounts are set to be an important goal for the future generation retirees, then all pillars of the pension 
system are needed. Current workers’ savings are going to be an important part of their future income. 

Pension funds could be viewed as only one of the possible vehicles for saving, but currently they are 

among the most transparent financial institutions in the country and if policymakers manage to raise their 

efficiency by implementing some additional reforms, they could really turn into a crucial element of the 
future pension system in Bulgaria.  

 

REFERENCES 

 
Blake, D. (2006). Pension Finance. UK: John Willey & Sons ltd, . 

Daneva, I. (2018). Insurance and Insurance Market, New Bulgarian University 

Davis, E.P. (1995). Pension Funds Retirement Income Security and Capital Markets. An International 

Perspective. UK: Oxford University Press. 
European Commission (2018). Pension Adequacy Report 2018, Current and Future Income Adequacy in Old Age 

in EU, volume 2 – Country Profiles, Publications Office of EU. 

Gochev, G., Manov, B. (2003). Social security – theory and practice, Trakia M, Bulgaria 

Orszag, P., Stigliz, J. (2001) Rethinking Pension Reform: Ten Myths About Social Security Systems, The World 

Bank 
Szczepanski M (2015) Barriers And Drivers Of Development of Occupational Pension Schemes in Poland, Poland, 

Publishing House of PUT  
Social security code, Promulgated State Gazette, No. 110/17.12.1999, effective 1.01.2000. 

World Bank (1994) Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth. New York, 

N.Y.: Oxford University Press 

 


