UBB economists warn of a new generation of sacrifice: “The pension system is fast becoming unsustainable”

Economists from UBB estimate that the pension fund deficit in Romania will reach, in 2024, over 25 billion lei, the system quickly becoming unsustainable. As the “decrees” retire, the situation becomes even more complicated. What are the solutions available to the state and pensioners.

The generation of decrees will put the pension system under extremely high pressure. PHOTO: The Truth Collage

“Decreții (Romanians born between 1966 and 1989 -NR) spend 5-10 years in a pension that no one has to pay anymore due to the decrease in the active population, the exodus of the workforce and the birth rate desert”, the CEO of the Terapia factory in Cluj raised an alarm the other day.

This concern also exists among economists. Researcher Radu Nechita, Professor of Economics at the Faculty of European Studies of Babeș-Bolyai University, claims, speaking about Romania's sacrificial generations, that “there is now a major sacrifice due to the public pension system, which makes some promises that will not be able to be honored”.

He argues that people need to understand that their pension will not be determined by their contributions, but by the amount of contributions of those who will be in the labor market when they leave the workforce.

“This will happen regardless of the promises made by a current minister or the current director of the Pension House. The law cannot change reality, and the reality is that there will be more retirees, they will live longer, and those who work are fewer and fewer and enter the labor market later“, explains the economist.

“The pension system is quickly becoming unsustainable”

Economist Rácz Béla-Gergely, researcher at the Romanian Economic Monitor, within the Faculty of Economic Studies and Business Management (UBB), explained to “Adevărul” that in Romania, the pension system operates on the basis of three pillars, the first of these and the more important being known as state pension.

“It is characterized by the absence of capital accumulation and operating on a pay-as-you-go model”he explains.

There is a big problem with this pillar: the significant deficit, with income from contributions being considerably below the level of pensions paid. “According to our estimates, the deficit of the state pension fund exceeded 20 billion lei in 2023 (1.3% of GDP), while the total expenditure of state pensions reached 7.1% of GDP”details Racz.

Researchers from the Romanian Economic Monitor predict that the deficit will increase in 2024 to more than 25 billion lei, and to more than 30 billion lei by 2025.

“This deficit is covered from the state budget, which is also facing a considerable deficit. At this rate, the first pillar quickly becomes unsustainable and can generate serious budget imbalances”concludes the economist.

How we reform the pension system

“The drastic increase in the deficit can be attributed to the fact that the dependency rate of the elderly population in Romania is higher than the EU average (61% versus 66%, according to Eurostat). This indicator reflects the fact that one employee supports 0.66 pensioners. In addition, pensions experienced a faster growth in Romania than in other European states, generating considerable pressure on the first pillar, given the unfavorable demographic context”, explains Racz.

In order for the pension system to be sustainable in the long term, two types of reforms are needed: parametric and paradigmatic.

“The paradigmatic reform consisted in the introduction of the pension system with three pillars (pillar I – state pension, pillar II – mandatory private pension, pillar III – voluntary private pension), it being essential to maintain the second pillar and a gradual increase of contributions to it”explains the economist.

On the other hand, parametric reforms aim at adjusting the parameters of the existing system, including raising the retirement age or even increasing pension contributions. “Both measures are unpopular, but inevitable from the perspective of ensuring the sustainability of the pension system”claims Racz.

Asked how the decrees' pensions will be paid, the economist concluded:

“Pillar I will not disappear (ie it will remain a pay-as-you-go system), but it may undergo many reforms that will lead to an increase in the retirement age and slower growth in state pensions compared to wage increases . In other words, the state pension from the incomes of the future elderly will be present with a smaller and smaller weight”.

Tips for future retirees

In some countries around the world, pillar IV of pensions plays an important role. “Pillar IV, i.e. the occupational pension system, is regulated by Law no. 1/2020 regarding occupational pensions. The participant in an occupational pension fund can be any person in a contractual employment relationship with an employer, natural or legal person, whose occupational activities give or will give him the right to a pension in accordance with the provisions on the pension system occupational”explains the economist.

Joining an occupational pension scheme is optional.

Racz states that pillar IV does not solve the problems of the majority of taxpayers, “as this is also a form of voluntary contribution, just like the third pillar“.

The economist believes that even the second pillar, which provides an alternative to the state pension, will not completely eliminate the major difference between the amount of the first pension and the last salary income.

“Thus, for those interested in securing a stable standard of living in old age, a voluntary private pension is certainly a advisable option”concludes Racz.

Not even the new pension law, which will enter into force in the fall of this year, will solve the crisis in the pension system.

“The new law was adopted to eliminate inequities in the system and to adjust small pensions, as well as to ensure medium and long-term stability of the pension system. However, in our opinion, this ultimate goal has not been achieved, we will most likely see more reforms (…) Although the law has managed to correct some inequities and bring improvements, it is far from fully solving the problems being.”