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Romania aims for pension reforms by December

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  • Romania aims for pension reforms by December

ROMANIA - Draft pension reform laws, including increases in retirement age and elimination of 'special' pensions of certain public sector workers, has been published by the Romanian government with the aim of implementing it by the end of December to comply with agreements with the International Monetary Fund (IMF).

In a country report published by the IMF, and a letter of intent issued by the Romanian authorities - outlining the reforms necessary to receive the second disbursement of €1.854bn - the government has committed to "approving pension reforms by law by end-December 2009. The reforms will be properly costed before approval to assure adequate long term savings".

That said, the political situation in Romania does not appear favourable as the government announced this week that it would pass the new reforms in Parliament under an emergency procedure - which does not take into account MPs' amendments - in an effort to meet the IMF's requirements.

This raised concerns that members of parliament and the government will now face a vote of no confidence on 13 October 2009. In addition, it is suggested the government has very little political support after the 70% coalition of the left-wing PSD and centre PDL government fell apart last week. This leaves the PDL with just 35% of the parliament ahead of presidential elections in November and early December.

In the meantime, the main elements of the draft reforms put forward by the government this week include:

Raising retirement ages from 58 years and 8 months to 60 for women, and from 63 years and 8 months to 65 for men, by 2014. There would be further increases for women to reach 65 by 2030; Increasing the minimum contribution period, in accordance with the increase in retirement age; Raising retirement age for "special condition" workers - such as defence and security - from 55 to 60 by 2025; Eliminating the non-contributory element of "special pensions"  - attributed to almost 300,000 public sector workers such as judges, policemen, military personnel, air traffic staff, MPs and diplomats - with contributions starting to be paid at 31.3% of gross wages Recalculation of "special pensions" to reduce them to the fair value that would have resulted were they contributing to the public PAYG system; (See earlier IPE article: Public sector reform to boost Romanian pensions) Public pensions will be indexed by the annual inflation rate plus 50% of the real increase in wages, instead of earnings increases only; All working, non-contributory self-employed professions will enter the public PAYG contributory pension system, and Penalties will be introduced for early retirement and disability retirement.

The Romanian Pension Funds' Association (APAPR) said Romania's agreement with international financial institutions, such as the IMF, also included a requirement to put the private mandatory second pillar "back on track".

Mihai Bobocea, secretary general of APAPR, pointed out that official estimates suggest the pension reform measures would save 0.5% of GDP from the budget in 2010 and 2.1% in 2020. This is equivalent to savings of around RON 2.63bn (€612m), which is only 40% of the deficit projected for the public PAYG system.

Despite this, Bobocea noted: "It leaves plenty of space for the government to resume the increase in contributions directed to the second pillar."

Mandatory contributions to private sector pensions were frozen at 2% in the wake of the financial crisis. (See earlier IPE article: Romanian second pillar back on schedule)

Data from the APAPR also showed that in 1990 the dependence ratio in the public PAYG system was one pensioner to 3.3 working inhabitants. This currently stands at 0.96:1 and it is estimated that by 2050 this will have dropped to 0.4:1.

It suggested this is partly attributable to the fact that while the legal retirement age is 58 for women and 63 for men, the real retirement age is on average 54, which means the public pension system is running at an unsustainable 15% deficit.

Bobocea said: "APAPR believes this entire reform is beneficial and necessary for the Romanian pension system, to give it a breath of fresh air, reduce chronic unsustainable deficits and increase the scope for contribution increases to the mandatory private system."

He argued that: "Private pensions are now the only hope Romanians have to consistently save for their retirement, and the Romanian authorities must keep their word and continue implementing contribution increases to the 2nd pillar, along with other reform measures. This will ensure sustainable, adequate pensions for current and future generations."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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