Romania launches pension overhaul

16/10/2007

With more pensioners than employees, Romania is having trouble supporting its state-run pension system. The country is now joining 31 others that are shifting to private funds.

By Gelu Trandafir for Southeast European Times in Bucharest -- 16/10/07

A lack of younger workers is making it more difficult to support pensions for the elderly. [Gabriel Petrescu]

Under a new system launched last month, more than 3 million Romanian workers under 35-years-old must opt for one of 14 competing private pension funds before January 17th, 2008. Those ages 35 to 45 can also decide to join one of the private funds.

Starting in 2008, 2% of every worker's general income will be redirected from the state budget to the chosen private fund. This contribution will gradually increase to 6% by 2015, and the current 9.5% social security contribution to the state system will diminish accordingly.

"Several million Romanians will become investors, and the private pension system will educate them in the spirit of a free market economy," says Romanian President Traian Basescu.

"The launch of the private pension system marks the end of the process of transition from a socialist economy to a capitalist one, creating the premises for a long-term economic stability," says Finance Minister Varujan Vosganian. "The privatisation of the public pension system will thus ensure the transition from populism to guaranteeing the freedom and dignity of retired people."

The current, state-run pension system has been plagued by inadequate monitoring methods and poor management. It also faces intense pressure because of demographic changes. A scarcity of younger workers is leaving the elderly without enough financial support for their pensions.

"Romania is already the only country within the EU having more pensioners than employees -- in 2050 Romania would have 145 pensioners for every 100 employees," Basescu said. Authorities also hope the switch to private funds will trim the black market in labour, since it will now be in the workers' interest to have their real salaries recorded.

A Commission for the Surveillance of Private Pensions System has been set up, and 17 companies have been licensed to administer the private funds. "The system is safe," insists Commission President Mircea Oancea. "A company not able to reach the minimum efficiency needed for a pension fund would be placed under a special supervision. If it continues to fail, the Commission would designate another company to take over the fund."

According to Oancea, the new private system "increases individual responsibility". It develops "consciousness that only through saving during a long period of his active life, an individual could enjoy similar living standards once retired," he argues.

The minister acknowledges that the initial 2% contribution is small. However, he says, a decision was made to gain employees' confidence progressively.

Romania cautiously now joins a club formed by 31 countries -- Bulgaria, Macedonia and Croatia among them – that have decided to address the demographic pressure on state budgets through privatisation.

The political context for the reform is not friendly, however. Romania faces European, local and general elections within a year. In June, the Romanian parliament unanimously voted to increase the state pension system, a hike that will cause a projected budget deficit of 2 billion euros a year.