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Pension system in Romania affected by structural inequalities, special pensions , unjustified early pension
The pension system in Romania is affected by structural inequalities, the existence of special pensions, early, unjustified retirement, according to an analysis made by the European Institute for Economic Studies.
“The latest amendment provides a 40% pension increase as of 2024. This model points out the way in which Pillar 1 of the pension system is frequently used by politicians to ensure immediate votes with the price of increasing future fiscal obligations and public debt,”said Christian Nasulea.
Over the last two decades, the public pension system has fucntioned constantly with deficit, contributing to government deficit and increasing explicit public debt, the authors of the study say.
“For 2022, the deficit of the pension system was 15% from the contributions collected. It includes accounting deficit (892 million lei) and subsidies of the general state budget (11,938.2 million lei)”, the study shows.
At the same time, the detailed analysis shows that the present pension system in Romania is mostly redistributive, which means that it depends mostly on the current contribution of the present employees to pay present pensions. This model has significant risks, expecially in the context of a changing demographic climate and of an old population.
“From the financial perspective, contributions to pension systems through distribution are rather a form of applying taxes than a saving means for pension. Since these contributions are not accumulated in personal pension accounts and are not invested to generate profit, they do not contribute directly to the tax payers' future financial security. In exchange, they function as a wealth transfer from the active to the retired population, with the implicit promise that future tax payers will continue to finance pensions of future pensioners,” said economist Radu Nechita.
In context, the report suggests several recommendations to reform the pension system. A major suggestion is the more rapid and ample transition to a system based on capitalization, which would allow the accumulation of financial reserves for future pensioners.
The study also encourages gthe adoption of measures to stimulayeprivate investments in pensions, which would offe higher financial flexibility and safety for future pensioners.
“In a private pension system, peoplecan have higher control on their retirement age. Since their pension depends on personal savings and investments, they can choose earlier or later retirement, according to their financial preparation, instead of relying on a retirement age determined by the state,”the authors say.
Another critical asptect approached in the study is the need to improve transparency and responsibility within the system. The report suggests that all financial obligations, either explicit or implicit, should be correctly reflected in public finance, to ensure a realistic image of the system financial health.
In context, the authors of the study present “5 things which should be urgently carried out,” the first one being the elimination of exemptions from contributions for Pillar 2.
“About one million workers from different domains (construction, agriculture, IT) are exempted from contributions to Pillar 2 (but not to Pillar 1)”, the authors say.
Specialists also recommend that no more “attacks or threats be made on Pillar 2”.
“Do not buy votes with pensions of people who are not informed,” they say.
The list also includes recommendations such as: the application of the law on private pensions according to the initial provisions of law 411/2014 through which the contribution to Pillar 2 should have grown progressively to 6% of gross salaries in 2016; stability, pridictibility and isonomy.
“Abolish privileges, do not create new rights, but a rule for all! Constant legislative changes, privileges of the special pension type should disappear,” the authors of the study say.
At the same time they recommend the elimination of restrictions and improving communications of the Private Pension Funds so that people could understand what pensions they would receive ar retirement age according to contributions. Also they recommend the publication of official annual estimates of the public pension system debt in order to ensure transparency and information about the financial state of the system.
The study was made over October- December 2023 by the European Institute for Economic Studies, with EPICENTER support.
The Institute complited an ample study about the pension system in Romania, in an attempt to shed light on complexities and challenges facing it.
The report, created by specialists Christian Nasulea, Radu Nechita and Diana Florentina Nasulea, offers a thorough prspect on the structure and functioning of the system, as well as on its impact on Romanian economy and society.