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Assessing the sustainability of Romanian pension system.

JEL J10 * 050 * E62

Like all the European countries, Romania is confronted with an ageing population, driven by progress in life expectancy, low fertility and birth rates, and a ratio of the elderly-to-working age group that has already reached unprecedented levels and is projected to increase further.

According to the National Institute of Statistics, the life expectancy at birth in Romania has increased from 70 years in 1990 to 74 years (70.3 years for men and 77.1 years for women) at present. The fertility rates in Romania went down from 2.3 births per woman in 1989 to 1.32 in 2008 and 1.33 in 2010, stagnating at this level for 12 years. Unfortunately, this level does not contribute to generations' replacement, which requires 2.1 births per woman. The birth rate (which is usually the dominant factor in determining the rate of population growth) has declined in Romania from 13.7 % in 1990 to 9.58 % in 2010 and 9.55 % in 2011. The old age dependency ratio is also in a constant upward trend. Eurostat projections show that in 2060, with a value of 64.8, Romania is surpassed only by Latvia, which registers the maximum value of 68.0. Starting with 2050, this percentage is higher in Romania than in the EU 27.

In addition, the external migration of young Romanians (especially temporary migration for work) is high--with major implications for the pension budget deficit. At present, there are not official statistical data concerning the number of Romanians who work in EU27. The Department of Employment, Social Affairs and Inclusion of the European Commission has recently communicated that about 2.1 million Romanians work in other EU countries, most in Italy (890,000), Spain (825,000), and Germany (110,000). From the migration flow, about 65 % fall in the age interval of 20-40 years, the period during which people have children. The free circulation of the labor force has constituted one of the fundamental values of the European community from its very beginning, but a large dimension of the workers' mobility at the European level has become a phenomenon with major implications for the social protection system, health system, and pensions system.

Romania's demographic reality, as described by the above mentioned indicators, can be characterized by the term "latent demographic crisis." The worrying aspect is that all these transformations took place in only 20 years.

This paper evaluates the consequences of an ageing population on the Romanian public pension system. Using the demographic model based on AWG (Working Group of Ageing--attached to the European Economic Policy Committee) assumptions, we try to simulate some scenarios (realistic, optimistic, and pessimistic) of the sustainability of public pensions. The pension projections of the European Commission for the period 2008-2060 are brought up to date with the results of the recent Romanian Population and Housing Census realized by the end of 2011 and take into account the challenges posed by the global economic and financial crisis. The sensitivity analysis is also used in order to identify the economic and demographic variables that influence the prospects of the Romanian pension system. The sensivity tests help also to quantity the responsiveness of the projection results in the underlying demographic and macroeconomic assumptions.

The analytical results are translated into policy recommendations deemed indispensable for the fiscal sustainability of the Romanian public pension system, such as the introduction of a new pension formula based on notional accounts derived from the Scandinavian model, but extended to the whole length of life and including all social services, as well as taking into consideration the national traditions, problems, and priorities. The notional or non-financial defined contribution (NDC) scheme proposed for Romania is a new model of structural pension reform which had emerged by the middle of the 1990s and was first introduced in Sweden and then in Latvia, Italy and Poland. This model combines the pay-as-you-go (PAYG) financing that is characteristic of traditional defined benefit (DB) schemes with the defined contribution structure (DC) of individual accounts. The NDC scheme ties benefits tightly to individual contribution history over an entire life, but credits these contributions with a notional interest rate linked to wage growth rather than a return in financial markets. At the time of retirement, the government will convert the notional account balance into an annuity on the basis of cohort life expectancy and will finance this benefit on a pay-as-you-go system.

Of course, besides reforming the public pension system, the need appears for developing the private pension system in order to supplement incomes of the elderly and soften the increasing uncertainty of the PAYG pillar eroded by the effects of ageing.

Int Adv Econ Res (2012) 18:465-466

Published online: 23 October 2012

[c] International Atlantic Economic Society 2012

I. Tache

Faculty of Economic Sciences and Business Administration, "Transilvania" University of Brasov, Brasov, Romania

e-mail: ileanatache@unitbv.ro

N. Barsan-Pipu

Faculty of Finance and Banking, "Dimitrie Cantemir" Christian University, Brasov, Romania

e-mail: nbarsan@gmail.com

N. Barsan-Pipu ([??])

e-mail: barsan@universitatea-cantemir.ro

DOI 10.1007/s11294-012-9379-7
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Title Annotation:Research Note
Author:Tache, Ileana; Barsan-Pipu, Nicolae
Publication:International Advances in Economic Research
Article Type:Report
Geographic Code:4EXRO
Date:Nov 1, 2012
Words:840
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