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PIE Discussion Paper Series March, 2005 ROMANIAN ACADEMY INSTITUTE OF NATIONAL ECONOMY ROMANIA’S PENSION SYSTEM BETWEEN PRESENT RESTRICTIONS AND FUTURE EXIGENCIES Authors: Valentina VASILE, PhD Gheorghe ZAMAN, PhD Bucharest Abstract In Romania of today the largest part of available incomes at old age is ensured by pensions, and the most important source is constituted by the public system. The reform of the multipillar type system – is delayed, already regulated but still partially nonop
  PIE Discussion Paper SeriesMarch, 2005 ROMANIAN ACADEMY INSTITUTE OF NATIONAL ECONOMY ROMANIA’S PENSION SYSTEMBETWEEN PRESENT RESTRICTIONS AND FUTURE EXIGENCIES  Authors: Valentina VASILE, PhDGheorghe ZAMAN, PhD Bucharest    2    Abstract In Romania of today the largest part of available incomes at old age is ensured by pensions, and the most important source is constituted by the public system. The reform of the multipillar type system – is delayed, already regulated but still partially non-operational - is aimed to the youth of today as future or junior contributors to the system.Only young persons under 35 might plan and think about the level and structure of theintended old age pension. Older generations do not have a viable perspective towardsfinancial independence in old age; quite on the contrary they are faced with far more limitedoptions, which include: -    participation to the public system , but the expected pensions shall becomparatively far more diminished (in accordance with estimates, the transfer rate in the public system shall be substantially diminished); -   the contribution to funded private systems , but on a pretty high background of uncertainty – distrust against market operators, diminished possibilities of contribution due to low incomes, low estimated rates of profitability (for shorter contribution’ periods); -   The recourse to specific social assistance services for the third age as addition ismore a desiderate than an alternative, Romania having a lot more to achieve inthis sense.The projected system is not adequate for persons with low incomes or for the medium termfuture pensioners    3 CONTENT1. Pensions Reform – Much too far from ensuring inter- and intrageneration equity2. Brief History of Old Age Insurance 2.1. Stages, Particularities2.2. 1990-2001(April) Reform or just Adjustments? 3. Reform of the pension system 3.1. Overall scheme. Constructive principles and particularities3.2. Inconsistency and subjectivism in implementation. Pensions´levelling3.2.1. Recorrelation   3.2.2. Differentiated indexation3.2.3. Minimum economic effects, major social implications3.3 Chronic system crisis. Perenity of inequities3.3.1 Fundamental “correction/adjustment” measures of the pillar I 3.3.2   Perenity of system’s inequities. A vicious circle 4. A credible beginning of the system’s operation, or just a new challenge? Expectationsversus practical possibilities   4. 1. Access to the state pension system of young generation4.2. Economic – social (demo) conditions – restrictions in applying the pensions' reform4.3. Third age welfare of present contributors to the system. Intergeneration solidarity versus personal responsibility4.3.1    Is the future system of social protection of elderly in Romania able to ensure “old age safety”?4.3.2  .  New adjustments are necessary 5. A coherent strategy of old age insurance 5.1. Towards a sustainable pension insurance system. Requirements for a durable strategy5.2. Partnership in building and sustaining an efficient insurance system for old age 6. Brief conclusive considerations AnnexesReferences    4  The reform of old age insurance system is a true challenge for Romania, at least for threereasons:- The current system , partially reformed and constructively truncated undergoes a crisis ;- due to the speeding up of demographic transition and in the absence of a real (economic andsocial) and coherent reform , the old people of tomorrow shall not only be significantly more innumbers, but also poorer and more dependent on the social assistance systems of the state;- EU accession and free movement of labour force requires the creation of an old age securitysystem compatible with the ones of the EU member states, which should stimulate insuranceand allow for the transfer of insured amounts.To a certain extent, a system adequate to Romania is required, that should also answer tostrategic exigencies of economic development and social stability within the Europeanroom 1 . More and more is discussed about the necessity of “national pension reform strategies”to ensure “future evolution of social protection from a long-term point of view, giving particular attention to the sustainability of pensions systems in different time frameworks up to 2020 and beyond” (Lisbon, 2000). In this context, Romania is still in the stage of building a multipillar  pension scheme. Reforms are still slow paced, a legal frame for a multiple system has beenoutlined and we find ourselves in the stage of preparing the implementation of private funds. 1.   Pensions Reform – much too farfrom ensuring inter- and intrageneration equity Transition in the field of pensions’ system has lasted now for about 15 years, and the resultsare far too modest . The profound and prolonged economic crisis and the inability to rapidlyadjust to the exigencies of a competitive environment, to be dynamic and flexible in achievingthe necessary changes triggered an unjustified postponement and lack of consistency insocial reforms .Right from the start it was wrongly assumed that pensions’ reform represents a secondaryfield of interest . The commitments made to generations in payment regarding old age security  are not supported yet by a protection system oriented on the future . Even after all this time,the fundamental laws of old age insurance have been drawn up in a hurry (!) and, for their  becoming operational they need to be modified. 11 years of preparation and 4 years of publicsystem reform have changed the pension into a “time-bomb” , the pension system beingunable to overcome/solve the two fundamental issues: a deficit within the affordability limit(now it varies between 1 and 2 % of GDP) and an inequity regarding comparable pensionlevels 2 .Pension reform depends not only on the economy evolution, but also on policies promoted inthe field of social assistance for persons in special circumstances, or deprived ones. Third-age 1 Even member states having past and present functional and performing insurance systems « are invited to set outclear strategies for ensuring the adequacy of their pension system without destabilising public finances or over- burdening the economy » (source : Communication from the Commission to the Council, to the EuropeanParliament and to the Economic and Social Committee – The Future Evolution of Social Protection from a Long-Term Point of View : Safe and Sustainable Pension, Brussels, COM(2000)622final) 2
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