Romania's pensioners at the crossroads
Nine years on from its historic revolution and Romania’s pension scheme is still controlled by the government. The pension system is funded through a proportional earnings-based social insurance tax. The entire old age pensioner population is supported by a 23% contribution from each employee’s gross monthly salary. Simply put, the workers of today pay for the pensioners of today.
However, of the country’s 5m pensioners, some 1m spent their working years in the agricultural sector. These pensioners are not covered by the 23% contribution made by companies to the state budget.
Instead they are financed directly from the state budget and through a 2% tax collected from companies operating in the food and agriculture sectors.
The main pensioners’ organisation is the 800,000-strong Romanian General Union of Pensioners. Its president, Miron Niculescu, told IPE: the situation of pensioners in Romania is extremely serious. Industrial production has fallen by 25% in 1998. It is not our place to comment on the causes of economic decline, but we are totally entitled to protest about the negative effects the decline is having on our pensioners. Of all social categories, pensioners have had the most difficult time in this transition. Indeed, very few of them are likely to survive the process.”
Official statistics shows that average life expectancy has fallen to 69 years and that already, in the first nine months of 1998, some 100,000 pensioners have died. In many cases malnutrition has been recorded as the cause of death. Another frequent cause of death is the inability of pensioners to pay for basic medicines and health care. The average pension is currently pegged at 36% of the average salary. So, while the average monthly salary is Rol1.2m (E140), an average pensioner can expect to take home Rol418,000 a month. The percentage has been in continuous decline for many years now. In 1993 pensions stood at 45% of the average salary. Since 1990 prices have gone up by 542% whilst the pension has only increased by 260%. Many pensioners have fallen below the poverty line and are living on the edge of misery.
“We are perfectly capable of seeing that our country passes through difficult times, but we feel our claims are modest,” says Niculescu. “It is absolutely essential to calculate a minimum allocation for each pensioner which must be maintained at that rate. If that does not happen then some pensioners will have nothing but misery to look forward to. In our regular meetings with the ministry of labour and social protection we have identified some potential solutions to our problems. We have suggested that pensions should be recalculated every two or three months taking into account inflation.
“Also there are disparities between those who reached pensionable age before 1990 and those who follow.
Pensioners who served in the same position and for the same length of time but who became pensionable on different sides of 1990 take home substantially different sums. After lengthy discussions with the government we were told that the average pension of 1990 would be compared to that of 1998 and amended accordingly. To cover all this we estimate that the social insurance budget should be increased by around Rol24bn in 1999. This extra funding will only be available to the 1.2m pensioners who have clocked up the necessary number of years in employment. For men, this is at least 30 years and for women it is 25 years.” The 23% social insurance tax has proved an inadequate means of providing pensioners with a dignified standard of living. It is a closed system which makes no use of capital markets or any other methods of accumulating supplementary funding. As a re-sult the state budget needs to meet the shortfall in pensioners’ allowances. The tax is also undermined by the huge industrial plants, the so-called “black holes” that owe the state budget some Rol8,000bn in social insurance. As these companies are close to bankrupt they have exhibited no intention of paying their debts. “The government should fine these companies,” says Niculescu. “Pensioners are on the edge of a precipice. How come the government cannot use exceptional methods to collect unpaid social insurance taxes and show some imagination in finding means to supplement pensions.” One of the proposals presented by the General Pensioners Union as a means of augmenting the social insurance fund is having a proportion of the revenues generated for the state through privatisation set aside for pensioners. “This isn’t an absurd notion,” claims Niculescu. “As we were told during communism, people are co-owners of the state companies.”
It does appear that the calls of pensioners and the heavy financial obligations of the pension system have at least mobilised the government into action. Legislation on the administration of pension funds prepared by the ministry of labour and social protection is being debated in various government ministries and is expected to be brought for parliamentary ap-proval before the end of this year. The proposed legislation, currently before parliament, has already stirred the interest of some potential investors. It is hoped that the provisions of the legislation will come into operation at the beginning of the new millennium.
According to the proposed legislation, about 30% of social insurance contributions to the general pension fund would be entrusted to 10 private companies. Each of these companies would then be responsible for managing a universal pension fund (UPF). The law also establishes the legal framework for authorisation, operation and supervision of these UPFs. The law provides state guarantees for the social insurance paid by employees and for the establishment of a pension guarantee fund by the pension companies. A control commission will take responsibility for authorising and supervising the pension companies.
The permissible forms of investment the companies will be allowed to make are also outlined in the legislation.
If and when the law comes into force, each employee with at least 20 years to pensionable age will automatically become a contributor to a UPF. Crucially, they will be able to choose their UPF for themselves. It is hoped that competition between the companies that administer the UPFs will improve investment efficiency and returns to the social insurance budget. The result of this reorganisation of the pension system is that when a person comes of pensionable age, on top of their basic state pension, they will have a supplementary amount added each month by the UPF that they have subscribed to.
The legislation will certainly be the subject of sustained parliamentary debate, especially since UPFs could become important investors in a Romanian economy that is mired in crisis and starved of significant foreign investors.
It is expected that the proposed legislation will initially increase the social insurance budget deficit, but this short-term difficulty must be weighed against a current system which is steadily becoming more and more difficult to support. In any event, the success of the proposals still hangs in the balance, as there is general distrust in Romania of the private administration of national pension funds.