Mandatory Pension Insurance based on Generational Solidarity

Mandatory insurance

• All economically active persons, i.e. all groups of employees and self-employed persons.
• Specific groups such as farmers, apprentices and volunteers.
• Specific groups of temporarily economically inactive persons who receive social insurance benefits (e.g. for periods of maternity and child-rearing, sickness, or for recipients of unemployment benefits if they are 65 years or older and lack the required minimum pension insurance period).
• Specific groups of economically inactive persons who do not receive social insurance benefits (e.g. parents during child-raising periods, home caregivers).

 Voluntary insurance

• So-called ‘prolonged pension insurance’, only available within 12 months following the termination of the mandatory insurance; available for persons in the following circumstances: during unpaid leave; during suspension of employment until the child reaches the age of three; during vocational training or specialisation after the termination of the employment contract, service, or performance of activities; during unemployment; during temporary or seasonal cessation of occupational activities; during employment abroad in international and other organisations on the basis of international social insurance agreements (i.e. with a foreign employer, if during that period the person is not compulsorily insured in the Republic of Croatia, or if EU regulations on the coordination of social security systems or international social insurance agreements do not specify otherwise); during a stay abroad as a spouse of the insured person working abroad; during unemployment of a person insured as a member of a ship's crew after termination of a fixed-term employment contract.

General finances

• Mainly PAYG-financed out of insurance contributions of the currently insured population.
• Partly tax-financed out of the state budget, for non-contributory insurance periods (credited as pension-relevant periods) and for covering pension budget deficiencies due to specific higher regular benefits for ‘privileged’ groups of pensioners (e.g. military, police, war veterans.)

Contribution rates

• The contribution assessment bases are either wages or payment receipts (for the self-employed: amounts are set by law as a percentage of the average wage in Croatia); with the minimum monthly social contribution threshold being 38% of the average wage in Croatia (HRK 3,321.96 in 2020) and the monthly contribution assessment ceiling set at 600% of the average wage in Croatia (HRK 52,452 in 2020), both determined on a yearly basis.
• For persons only enrolled in this public mandatory scheme (i.e. ‘single-tier insurees’): fixed share of monthly gross earnings (20%) paid in total by the insured person.
• For persons also enrolled in the private mandatory pension scheme, the so-called mandatory funded pension insurance based on individual capitalised savings (i.e. ‘two-tier insurees’): fixed share of monthly gross earnings (15%) paid in total by the insured person.
• For persons whose work is based on a service contract or an author’s contract: contribution rates are halved (i.e. 10% instead of 20%, and 7.5% instead of 15%, respectively), paid in total by the insured person. 
• For self-employed persons working in agriculture and forestry: contribution rates are lower (i.e. 10% instead of 20%, and 5% instead of 15%, respectively), paid in total by the insured person.
• For workers in arduous and hazardous jobs: additional contributions are paid by the employer.

Taxation of contribution payments

• Contributions are tax-exempt.

• The ‘Ministry of Labour and Pension System’ is in charge of legislative proposals and the general supervision of the system.
• The ‘Pension Insurance Institute’ (PIII) manages the scheme.

Qualifying conditions

• Standard old age pension: statutory retirement age is 65 for men, and increases gradually to 65 until 2030 for women; minimum insurance period: 15 years.

Early retirement

• Statutory early retirement pension: available up to 5 years prior to reaching the retirement age of the standard old age pension with (negative) permanent adjustments of pension benefits (0.2% per month of early retirement; maximum pension decrement: 12%); statutory early retirement age is 60 for men, and increases to 60 until 2030 for women; minimum insurance period: 35 years for men, and increases gradually to 35 years until 2030 for women.
• Early retirement due to employer’s bankruptcy: persons fulfilling statutory early retirement conditions whose insurance status was terminated due to employer’s bankruptcy, provided they have been unemployed for at least 2 years continuously prior to retirement; no adjustment of pension benefits.
• Early retirement for long-term insured persons: early retirement age is 60; minimum insurance period: 41 years, without adjustments of pension benefits.
• Special early retirement regulations apply to certain groups of insured persons (e.g. military, police, workers in arduous and hazardous jobs, etc.).

Deferred retirement

• Retirement can be deferred without limit; positive pension adjustment (0.34% per month of later retirement, for a maximum of 5 years, and a maximum total increment of 20.4%).

Combining employment & retirement

• Termination of employment is not a precondition for claiming pension benefits (restriction: standard and early retirement is compatible with part-time work of up to 20 hours per week, with the right to full pension benefits).
• By working and paying social security contributions persons can increase pension benefits.

Pension benefits

• It is a defined personal points system, primarily based on contributory earnings throughout working career and related to the length of the insurance period.
• Maximum amount: often capped at 380% of the person’s average earnings for the whole contribution period compared to economy-wide average earnings over the same period. 
• Minimum amount: not set as absolute amount; it depends on the number of qualifying years multiplied by the ‘actual pension value'¹.

Factors for benefit calculation

• All elements relevant for benefit calculation are reflected in the pension formula, which is a product of personal points, pension factor, actual pension value and the average ratio of contributions paid into the scheme in relation to the total mandatory (public and private) pension contribution rate.
• Reference period: overall average earnings throughout the career (reflected in average value points that constitute personal points).
• Pension supplement: amount varies depending on the scope of participation in the mandatory pension system; it is 27% for ‘single-tier pensioners’, and 20.25% for ‘two-tier pensioners’.
• Adjustments: twice per calendar year (every 1 January and 1 July) pension benefits are adjusted according to a variable formula which depends on the trends of consumer prices and wages; adjustments are always to the pensioners’ advantage: indexation is based on whichever of the two ratios of wages/consumer price index (70/30 or 30/70) yields the highest increase; pension benefits cannot be indexed downwards.

Taxation and social security contributions

• Pension benefits are subject to income tax, but under preferential treatment: tax obligation based on pensions is reduced by 50%.
• Pension benefits are often exempt from health insurance contributions; pension benefits higher than the average wage are subject to health insurance contributions, but at a reduced rate (3% compared to regular rate of 16.5%).
• Earnings received by working pensioners are subject to compulsory social security contributions (i.e. pension and health insurance contributions).