Unfavourable demographics in Romania during the 1990’s saw an increase in the over-60’s population of 14% between 1990-98. At the same time the 15-60 age category remained at a relatively stable figure of 14m.
These demographic trends and a system of certain privileges and exemptions, such as early retirement, granted to special interest groups, led to an increase in the number of beneficiaries. From 1990, the number of retirees increased from 2.3m to over 4m by the end of the decade. And the ratio of beneficiaries from the basic Romanian pension system to the working population increased by more than 11% over the same period.
The employed population has also fallen and the ratio of contributors to working population has shown a steady, yet marked decline. Actual wage earners to the number of pensioners also decreased by two thirds during the 1990s. Consequently, the replacement ratio (average pension to average net wage) could not be maintained.
Furthermore, the social security contribution almost doubled; raising social security taxes caused the contribution base to shrink. The surplus of Romanian basic state social security system amounted to 9,004m Lei (E281m) in 1991, yet had reached a deficit by 1995 which totalled –3.5m Lei by 1998.
First-pillar retirement provision is a pay-as-you-go (PAYG) system in Romania. In April 2000 a new law regarding the public pension pillar was adopted and was implemented a year later. This law aims at a progressive increase of the retirement age – from 57 to 60 for women and from 62 to 65 for men. It also aims at sharing the contribution burden between employers and employees (a third by the employee and two-thirds by the employer); limiting the income on which social security contributions are paid (a maximum of three gross average monthly wages) and introduces a method which makes the pension amount reflect the entire period of contribution payment.
The new public pillar – without the recalculation of some pensions – is expected to have a small surplus between 2004 and 2016 followed by deficits after 2017. The implementation of the new law is reported to have encountered some problems such as putting pressure on the unions to ease the legal provisions regarding the retirement age, the groups of workers and pension calculation.
It has also been pointed out that the administrative problems are related to the establishment of the new Office of Pensions and Social Rights. Contribution payment and collection difficulties have also been encountered in the implementation of this new law.
The delay of the first-pillar reform, the first-pillar deficit and the recalculation of some low pensions when coupled with previous financial scandals have been viewed as impeding the introduction of a mandatory second pillar.
However, Smaranda Dobrescu, president of the Committee of Labour and Social Protection, addressing the Insurance in Balkans and SEE conference in Bucharest last year, considered the establishment of a second mandatory pillar pension in Romania. Romania needs a second mandatory pillar because the latest simulations show that in the long run the balance of the public pillar is attained with a replacement rate of 20% and a contribution rate of 37%. The public pillar budget deficit was 4,000bn Revi in 2000. Second pillar retirement provision has not been implemented in Romania yet, but it is expected that the funded pensions will be introduced next year. The second pillar will be mandatory, based on individual accounts, invested and capitalised, administered by pension societies. The implementation of the second pillar should have a minimum impact on the financial stability of the first pillar.
The Romanian pension reform action plan was published in May 2001. This action plan revealed the government’s proposed time schedule for pension reform. The plan introduces a three-pillar scheme as follows:
o October 2002: Establishment of mandatory privately managed DC funded pension schemes.
o Fourth quarter 2002 – second quarter 2003: Establishment of a supervision and regulatory institution for the companies which will administer the pension funds; initiation of prudential rules for those companies and regulation for asset managers and equity providers.
o 2003-2004: Identification of necessary resources for covering the public system deficit created by introducing the second pillar.
o First quarter – fourth quarter 2002: Increasing the population’s trust in economic agents in the pension reform system through an information campaign in order to help the members choose a fund.
Some of the solutions proposed include:
o A contribution diverted to the second pillar providing for a gradual increase: 2% of the gross wage from the beginning till 2007; 5% of the gross wage form 2008 till 2010 and 8% of the gross wage from 2011 till 2013;
o Mandatory participation for all active persons who have at least 20 years before retirement;
o A powerful and autonomous supervisory authority;
o Restricted investments of the pension funds - during the first five years after second-pillar implementation, contributions can be invested only in assets provided by the regulations of the National Committee for Funded Pensions;
o Second-pillar contributions are collected by the National Office of Pensions. After a year of mandatory collection each pension society will contribute to the National Guarantee Fund 0.01% of the pension fund assets.
As far as the third pillar of retirement provision is concerned, it is worth mentioning that a draft law was proposed to the Minister of Labour in 1999, but at that time it was not considered a priority of the government. The draft law was not discussed with stakeholders. The third-pillar steps include:
o Fourth quarter 2002-2003: Enacting the law on voluntary pension schemes.
o Fourth quarter 2002: Establishing the supervisory and regulatory institutions for both second and third pillars; strict regulations for asset managers, custodians and annuity providers.
o 2002-2003: Encouraging the participation to the supplementary pension schemes through substantial fiscal incentives.
o The third pillar is optional and tax deductible.
Nickolai Slavchev is chief retirement scheme analyst at Allianz Bulgaria Pension Company in Sophia