PUBLIC PENSIONS SYSTEM

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PUBLIC PENSIONS SYSTEM
ROMANIA
MIHAI SEITAN

• JUNE 2008

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SHORT HISTORY

• The Romanian pension system - an atypical
  system.
  
• Did not refer to pensions only, but covered other
  short term elements such as maternity leaves,
  medical leaves, child care leaves, and death,
  etc.
• No separation of insurance contributions existed
  in terms of services, social insurance budgets
  and their execution being developed and
  supervised globally.
• Until 1991, the social insurance budget
  represented a chapter of the state budget.
  

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Reform measures after 1990

• POSITIVE MEASURES
• The segregation of the social insurance budget
  from the state budget in 1991
  
• The introduction of differentiated contributions
  depending on the labour group(3 labour groups
  existed in Romania. The first 2 groups gave the
  possibility for a retirement up to 10 years
  earlier (1st groupd) and up to 5 years earlier
  (2nd group)). Previously, the social insurance
  contribution was the same, regardless of the
  labour group, even though the employee benefited
  from a substantial reduction of the
  contributions period, from a longer benefiting
  period, compared to persons working in conditions
  considered normal.

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• NEGATIVE MEASURES
• The early retirement of persons who meet the due
  work experience conditions, with up to 5 years
  before reaching the standard retirement age (55
  years for women and 60 years for men).
• In 1990, in 4 months only 400,000 persons
  retired, thus achieving the first important
  misbalance of the dependence rate.
  
• - Under a strong pressure of the trade unions the
  labour groups legislation has been revised,
  becoming more permissive. In 1996 the number of
  active persons within the 2nd and 3rd labour
  groups has increased to approx. 3 million people,
  compared to approx. 300,000 before 1990. The
  consequence was that annually, on top of the
  normal demographic number of persons newly
  retired, another 150,000-200,000 persons retired.
  
• The introduction in 1991 of a new legislation
  regarding unemployment and the fear of many
  people from such a possibility, having a largely
  permissive background (as a result of under the
  counter payments), has lead to a spectacular
  increase of invalidity pensioners, especially but
  not exclusively, of the 3rd degree.

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• Between 1990 and 2000 a massive increase of the
  pensioners number has been registered (aged 55
  years on the average), based on a strong
  reduction of the tax payers number.
• The only solution within the governments reach
  (in the absence of a quick and coherent reform)
  was the substantial raise of the social insurance
  contribution (from 14 in 1990 to 35 in 2002).
• Even in such conditions the social insurance
  budget has started to register deficits,
  beginning with 1995. The deficits became
  chronic, rising annually. (Example the deficit
  in 2002 over 0.8 of the GDP).
• This process was favored by the increase in the
  tax evasion, as well as by the facilities and the
  re-phasing allowed by the administration,
  particularly towards the large state owned
  enterprises, artificially maintained alive.

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STATISTICS ON PUBLIC PENSIONS
Tax payers and beneficiaries, 1990-2007 (in
thousands)
Source National Pensions Chamber (CNPAS)
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  The decrease of the ratio between average state
pension and the net average salary
1989 - 2007
Source National Pension Chamber (CNPAS)
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Source National Pensions Chamber (CNPAS)
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The Rate of Social Security Contributions 1989
- 2007
Source National Pensions Chamber (CNPAS)
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The contributions for pensions in 1992 -2007
Includes persons working on their own
Optional for farmersSource National
Pensions Chamber (CNPAS)
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ATTENTION

• THE CONTRIBUTION FOR PENSIONS COMPRISES OF
• The contribution of the individual 9,5 in any
  situation
  
• The contribution of the employer the difference
  to the share of contribution corresponding to
  conditions (groups) of labour
  
• Persons working on their own account pay the
  entire contribution for pension
  
• Starting with December 1st, 2008
• Special working conditions (1st gr.) - 37,5
  
  
• Different, particular working conditions (2nd
  gr.) 32,5
  
• Normal working conditions (3rd gr.) 27,5
• The individual contribution share includes the
  quota for the privately managed pension funds
  (2) in the first year

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Source National Pension Chamber (CNPAS)
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• It can be noted that the total number of
  retired persons has more than doubled, the number
  of tax payers has been reduced by half.
  
• The contributions for pensions have increased
  from approx. 14 in 1990 to over 30 currently.
  
• A significant erosion of the pension/salary
  ratio, as well as of the real purchasing power of
  the pensions.
  
• Reasons for this situation
• subjective reasons, conditioned by political
  measures which led to using the pension system as
  a gate for solving other critical situations
  related to unemployment, labour groups, early
  retirement, etc.,
• objectives reasons, like the demographical ones.

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ROMANIA DEMOGRAPHIC EVOLUTIONS
Population ageing
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The forecast of the life expectancy evolution

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Birth rate evolution
Migration of active population
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• Very low average number of employees (approx.
  4,6 millions)
  
• ? The tax payers/pensioners ratio was approx. 41
  in 1990, but under 11 in 2007
  
• ? In 1990 the pension represented approx. 55
  from the gross wage, in 2007 it represents 40
  
• ? 19.2 of the population is over 60
• ? the minimum work period allowing retiring is
  currently 11 years and 8 months for both women
  and men

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• The demographic challenges are magnified by the
  level of occupation rates, particularly for older
  workers.
  
• In 2006 the occupation rate of the population
  aged between 15 and 64 years was 57,7, compared
  with EU average of 63,8 (for 2010 the target of
  70 was established by the Revised Lisbon
  Strategy).
• The occupation rate for persons aged between 55
  and 64 years was 39,4 in 2006, under the average
  of 43 registered in EU and under the target of
  50 set up by the Lisbon Strategy.
• Under these conditions, starting with 1996, in
  Romania, as in the majority of European or world
  states, requests have been made to develop and
  implement a complex and comprehensive pension
  reform, which should lead to balancing and
  strengthening the public pensions system, as well
  as, moreover, to the diversification of the
  sources of ensuring income at the retirement age.

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• Carried on with difficulty and significantly
  delayed comparing with the other countries in the
  area, the pension reform in Romania took place in
  2 stages.
• The 1st stage, (with the entering into force in
  2001 of the Law 19/2000) has foreseen
  
• Increasing the standard retirement age from 57 to
  60 years in women and from 62 to 65 in men
  gradually till 2014
  
• Introducing a new pensions calculation
  methodology which ensures a close tie between
  contributions and the level of benefits, based on
  a points/score system that takes into
  consideration the income received during the
  working career
• The minimum contribution period for both genders
  will gradually increase from 10 to 15 years until
  2014
  
• Awarding additional points even after meeting the
  cumulative retirement conditions, in order to
  stimulate the participation on the labour market.

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• The 2nd stage (starting with 2005) has consisted
  of finalizing and implementing legislation
  concerning the multi-pillar pension framework, in
  parallel with the strengthening of the first
  pillar, represented by the public pensions
  system. A key element of this strengthening was
  the elimination of the non-contributive payments
  from the public pensions sphere, such as
• The payment of the farmers pensions was
  transferred to the state budget beginning with
  2005
  
• The payment of child care allowances (for
  children under 2 years) and medical leaves was
  transferred to the state budget, i.e. to the
  health insurance budget, starting with 2006.

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SHORT DESCRIPTION OF THE PUBLIC PENSIONS SYSTEM

• Types of payments
• Pension for the age limit
• The age limit pension is granted to insured
  persons who fulfill, cumulatively, at the
  retirement moment, all conditions regarding the
  standard retirement age and the minimal work
  period.
• The standard retirement age increases gradually
  from 57 to 60 in women and from 62 to 65 in men,
  from 2001 until 2014.
  
• The minimal work period increases gradually in
  both women and men from 10 to 15 years, from 2001
  until 2014.
  
• The complete work period increases gradually
  from 25 to 30 years for women and from 30 to 35
  years for men, from 2001 until 2014.
  
• The insured persons who fulfill the legal
  conditions for an age limit retirement may
  continue their activity only with the consent of
  the employer.

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Anticipated retirement

• The insured persons who have surpassed the
  complete due work period with at least 10 years,
  can request an anticipated retirement maximum 5
  years before the standard retiring age.
• When determining the work period for granting
  partial anticipated pension, the following
  periods shall not be taken into consideration
  
• when the insured person benefited from disability
  pension
  
• When the insured person attended university
  education day courses, with the condition of
  graduating such courses
  
• When the insured person has completed the
  military service, as full term, short term,
  concentrate, mobilized or imprisoned
  
• The amount of the anticipated pension is
  determined under the same conditions as the age
  limit pension.
  
• When reaching the legal standard retirement age,
  the anticipated pension becomes age limit pension
  and is recalculated by adding the assimilated
  periods and the eventual work periods within the
  anticipated time.

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Partially anticipated pension

• The insured persons who fulfilled their complete
  work period may request partial anticipated
  pension, on the account of reducing the standard
  retiring age with maximum 5 years.
• When determining the work period for granting
  partial anticipated pension, the following
  periods shall not be taken into consideration
  
• when the insured person benefited from disability
  pension
  
• When the insured person attended university
  education day courses, with the condition of
  graduating such courses
  
• When the insured person has completed the
  military service, as full term, short term,
  concentrate, mobilized or imprisoned
  
• The amount of the partial anticipated pension is
  determined on the basis of the amount of the age
  limit pension, by reducing it in comparison with
  the work period accomplished and the number of
  months used for the reduction of the standard
  retiring age

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The evolution of the average number of pensioners
who benefit from partial anticipated retirement
2001-2006
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Successors pension

• The children and surviving spouse are entitled to
  successor pension, if the deceased was a retired
  person or fulfilled all conditions for receiving
  a pension.
• Children can benefit of the successor pension
• - until the age of 16
• - if they pursue further studies, as set by the
  law, up to the moment of graduation, until
  reaching the age of 26
  
• - for the entire duration of disability of any
  degree, if the latter occurred during the period
  when the person was in a situation provided by p.
  a) and b).
• As a rule, the surviving spouse has the right to
  successor pension during the entire life, when
  reaching the standard retiring age, if the
  marriage lasted at least 10 years.
• The amount of the successors pension is
  established by applying a percentage over the
  average points achieved by the upholder, relevant
  to the pension, depending on the number of
  rightful successors, as follows
• - for one successor 50
• - for two successors 75
• - for three or more successors 100

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Disability (invalidity) pension

• The privilege of disability pension is applied to
  insured persons who have lost their total or at
  least half of the working capacity, because of
  
• Accidents at work
• Professional diseases and tuberculosis
• Usual diseases and accidents not related to work
• Also benefiting from disability pension are
• Insured persons who fulfill military obligations
• Pupils, apprentices and students who have lost
  their complete or at least half of the working
  capacity due to accidents or professional
  diseases that have occurred during and because of
  the professional activity.
• Persons who have lost total or partial working
  capacity or are mutilated as a consequence of
  participating in the fight for the victory of the
  Revolution of the December 1989, or in connection
  with the revolutionary events from December 1989,
  and who were part of a social insurance system
  previous to the occurrence of the disability

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Disability pension
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Death Benefit

• The death benefit shall be granted in the case of
  the death of the insured person, the pensioner or
  a family member who does not hold his own social
  security and was being supported by the main
  holder at the time of death, to only one person
  who can prove that s/he bore the expenses related
  to the death and who can be, as appropriate the
  surviving husband, the child, parent, tutor,
  curator, heir, with or without meeting the
  conditions of the common law, or any other person
  who can document that s/he bore the expenses
  related to the demise.
• In the case of the death of a child unfit for
  work, regardless of age, the death benefit shall
  be granted conditionally upon presentation of the
  certificate proving the persons belonging to a
  disability group, or in the absence of such
  document, the medical certificate confirmed by
  the doctor, expert in social insurance, which
  certifies the disease that led to the disability
  and the date of its occurrence.
• The death benefit shall be granted in the amount
  foreseen by the Law on the state social insurance
  budget, and published by the CNPAS, valid at the
  date of the death.
• In the case of the demise of a family member, the
  amount of the benefit shall be half of the amount
  of the benefit of an insured person or
  pensioner.
• The death benefit shall be fully covered from the
  state social insurance budget.

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PENSIONS CALCULATION

• The amount of the pension is calculated by
  multiplying the average annual score, achieved by
  the person during the working period, by the
  value of a pension point.
• 1. The average annual score, achieved during the
  working period, is determined by dividing the
  number of points that resulted from adding the
  annual scores of the person during the working
  period, to the number of years corresponding to
  the full working period.
• The annual score is determined by dividing to 12
  the score gained in the respective year by adding
  the number of points achieved every month.
  
• The number of points gained every month is
  calculated by comparing the individual monthly
  gross wage, including additions and supplements,
  or, as appropriate, the insured monthly income
  that has made up the basis for the calculation of
  the individual contribution to the social
  insurance, to the average gross monthly wage of
  that particular month, as informed by the
  National Institute for Statistics and Economic
  Studies.

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• 2. The value of one pension point is established
  by the Law on the state social insurance budget
  and is determined by bringing up to date the
  value of the pension point from the month of
  December each year related to, at least, the
  inflation rate, foreseen for the next budgetary
  year.
• Depending on the evolution of the macroeconomic
  indicators and the financial resources, the value
  of the pension point may be increased by means of
  the laws meant to correct the state budget on
  social insurance.
• The value of the pension point cannot be smaller
  that 37.5 of the gross average wage used as
  grounds for the state budget on social insurance,
  starting with January 1st, 2008, and respectively
  45 of the gross average salary used as grounds
  for the state budget for social insurance,
  starting with January 1st, 2009.

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THE EVOLUTION OF THE PENSION POINTS VALUEin the
period between 01.04.2001 01.01.2008
     
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TAX PAYERS TO THE PUBLIC PENSIONS SYSTEM

• I. Persons who carry on their activities based
  on an individual work agreement or public
  servants
  
• II. Persons who carry on their activities in
  elective positions or who are appointed within
  the executive, legislative or judicial authority,
  during the mandate, as well as cooperative
  members of a trade cooperation organization
• III. Persons who were in one of the following
  situations
  
• a) singular associate, associate, partner or
  shareholder
  
• b) administrators or managers who signed
  administration or management agreements
  
• c) members of the family association
• d) persons authorized to carry out independent
  activities
  
• e) persons employed in international
  institutions, if not insured by those
  
• f) other persons who have an income from
  professional activities.
  
• Persons mentioned above, who wish to supplement
  their insured income, or not mentioned above, may
  get the public system insurance, based on a
  social insurance agreement (contract).

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FARMER PENSIONS IN ROMANIA

• The evolution of legislation
• 1977 -1992
• Law nr. 4/1977 concerning pensions and other
  social insurance rights of the members of CAP
  
• - the members of the cooperation owed a personal
  contribution for the pension supplemented by 10,
  15 or 20 lei monthly.
  
• - pensions were calculated based on the work
  experience (at least 10 years with a minimum of
  200 calendar days annually) within the
  agricultural cooperative and the income of the
  cooperative.
• Law nr. 5/1977 regarding pensions and other
  social insurance rights of the peasants with
  individual households from the non-cooperative
  areas
• - Pensions were calculated as a fixed amount,
  depending of the period of contributing to the
  pensions fund and the value of the products
  delivered annually to the state fund.
• - The personal contribution was in the monthly
  amount of 40 lei for each member over 18.
  
• - The contribution period had to be at least 10
  years.
  
• The insurance in the pensions system was
  mandatory for farmers.

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• II. 1992 2001
• Law nr. 80/1992 regarding pensions and other
  social insurance rights of the farmers
  
• Covered by the social insurance were farmers and
  owners of forest lands, as well as their family
  members over 15, who were doing unpaid work
  within the individual household or within the
  agricultural associations.
• The insurance in this system was optional, by
  signing an insurance agreement.
  
• For the persons over 18 covered by the social
  insurance the contribution was 7 from the
  monthly income, which could not be smaller than
  half of the basic minimum gross salary in the
  country.
• The pensions were calculated by applying 60 on
  the average monthly income, for the last 10 years
  that the contributions were made.
  
• For the persons who have carried out their
  activity in the former agricultural cooperatives
  and who have paid the minimal legal contribution,
  the reasonable/useful time for retirement was
  calculated.
• The reasonable/useful time was established by
  comparing the number of norms achieved to the
  smallest number of norms planned by the general
  assembly of the CAP.

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• III. 2001 2008
• Law nr. 19/2000 foresees the following
• For each year of useful time spent in the former
  agricultural cooperatives a score of 0,25 points
  is granted, which gradually increased to 0,57255
  in 2007
• Joining the system is optional, the contribution
  being the same as for persons working on their
  own account
  
• For the agricultural pensioners who did not
  contribute to the public system set up in 2001
  the pensions are covered from the state budget,
  not from the social insurance one.

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SHORT CONCLUSION
Correspondingly to these legislative amendments
acknowledging the fact that the level of services
from the public pensions system is not able to
cover the needs of the pensioners other
legislative amendments are needed in order to
eliminate the existing inequities between
different categories of pensioners, as well as a
progressive growth of the level of services
offered within the public pensions system.
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