Romania should stay the course - funded private pensions the key to sustainable future, PensionsEurope warns
After the Romanian government has decided to cut the contributions to pillar II to 3.75% (instead of raising to 6% from the actual 5.1% as mentioned in the initial draft bill), people in Romania are now facing a significant risk of suffering a decrease in their future retirement income, PensionsEurope warns.
"Funded pension are vital for future pensions as public pension come increasingly under pressure. Romania has been able to build excellent private pensions and should not start to dismantle them by lowering the level of contributions", Janwillem BOUMA, the Chair of PensionsEurope, said.
"Good pension reforms are based on in-depth analysis and long-term goals on adequacy and sustainability. The private pensions of Romania fulfill these goals and it is of utmost importance to continue with the long-term policy. Instead of decreasing the contributions, the government should increase them in accordance with the long-term plans. This would increase the citizens trust in the whole pension system, which is vital for any long-term policy", Matti LEPPALA, the Secretary General of PensionsEurope, added.
An ageing population, the trend in Europe and Romania
All of Europe is facing an ageing population due to a combination of increased life expectancy and declining fertility rates, PensionsEurope points out. As dependency ratios shift with growing elderly populations, governments will be faced with falling consumption and growing pressure on social services. Overall, the demographic old age ratio (people over 65 per 100 people aged 15-64) in the EU is expected to increase from 27.8 to 50.1 by 2050, meaning that there will only be two working age people for every person over the age of 65.
This is also in Romania the outlook, where life expectancy is projected to grow rapidly from 71.2 years in 2013 to 80 in 2050. That year, the elderly population (65 and over) will represent almost 30% of the total Romanian population. This will pose major challenges to intergenerational fairness, unless appropriate policy measures are taken to counterbalance some of these effects.
Europe cannot only rely on public pensions and more funded private pension savings are needed so that people may receive adequate and sustainable pensions. This is a clear long-term policy of the EU and it requires that the member states do not deviate from it for any short-term political reasons. Experience from the best European pension countries shows how important funded private pensions that cover most people with adequate savings levels are as part of a good pension policy. Evidence from Romania already now proves how vital these pensions are and will be in the future for good pensions outcomes and the need to develop and improve funded private pensions even further. The real investment returns of the Romanian pension funds have been among the best in Europe.
Pension funds play an important part in economic growth and financial markets and it is important to support the pension funds as one of the important bases for developing capital markets in Romania, PensionsEurope underlines. Pension funds as institutional investors are natural long-term investors, patient capital that is necessary for the growth of Romanian economy and thus improving employment. A well-functioning vibrant economic development is also vital for the social security pensions and all other social security benefits.
Contributions payed in Romania for the 2nd Pension Pillar, decreased in November
On 8 November 2017, the Romanian Government approved the decrease of contributions payed for the 2nd Pension Pillar, from 5.1% to 3.75%, starting in 2018, despite the former plans. In 2008, when the mandatory private pensions system (the Second Pillar) was launched in Romania, the graphic indicated a 0.5% increase of the contribution annually, from 2% of the gross income of employees in 2008 up to 6% in 2016. However, due to increasingly high budgetary pressures, authorities decided a few times to postpone the annual increase.
Multiple national authorities issued warnings regarding this action. For example, APAPR - The Romanian Association for Privately Administered Pensions expressed its concern about the Government decision, estimating that it will affect the future pensions of millions of Romanians. At the same time, AURSF - The Association of Romanian Financial Services Users warned about the consequences of reducing the contributions for the second pension pillar, the action leading to a significant decrease of the pension's value for an extremely high number of participants.
Author: Adina TUDOR
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