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The pension reform – why does Romania need private pensions?
International studies show that a major part of the modern world faces severe demographic problems: birth and fertility rates are drastically decreasing and the average age of the population is constantly growing. In other words, the population is both decreasing and ageing in more and more states.
The increase in living standards throughout the last century, together with the developments and progress in medical services are the driving factors behind population ageing. Young people today are now focusing on their careers and professional development and don’t have time to give birth to children anymore. At the same time, more and more people benefit from more advanced medical services, which increases life expectancy and the average age of the population.
All these trends started showing a few decades ago, and the effects of population ageing on a global scale start to be more and more visible. Romania is in the same situation, even more severe than the European average. All recent international studies (conducted by the World Bank, the International Monetary Fund, the European Union, the European Bank for Reconstruction and Development, the United Nations and the Romanian research institutes) point out the same findings: Romania’s population is rapidly decreasing and ageing, which, unless adopting the necessary reforms, will lead to the explosion of the demographic bomb in a few decades.
Here are some statistical facts:
- Romania’s population has decreased by 1.8 million inhabitants during 1990-2008, from 23.2 to 21,4 million inhabitants;
- Until 2050, Romania’s population is set to decrease by a further 4-5 million inhabitants, to reach 16-17 million inhabitants (according to research conducted by EU, WB, IMF and the UN);
- The most pessimistic scenario shows a possible decrease to 13,3 million inhabitants by 2050 (according to research by EBRD published in 2008);
- The birth rate in Romania decreased from 13.7‰ in 1990 to 10‰ in 2008 and is set to continue falling;
- The fertility rates in Romania decreased from 2.3 new born babies per woman in 1989 to 1. new born babies per woman in 2008 and stagnated at this level during the last 12 years;
- The average age of mothers at their first birth giving increased 22.3 years in 1990 to almost 26 years in 2008;
- Life expectancy in Romania increased from 70 years in 1990 to 74 years in 2008 and continues to grow.
These figures show that the population is rapidly decreasing and ageing, the trend looking quite irreversible. And all these trends took place in the last 18-20 years alone!
The decreasing and ageing population puts a heavy burden on the public pensions budget, which has to rely on less contributors (active employees) to support more beneficiaries (pensioners). Romania’s demographic problems show that its public pension budget is no longer sustainable in its current form and needs a major reform, to avoid collapsing sometimes during the next decades.
That is why, in 2007, Romania introduced the private pensions system, based n the model tested and recommended by the World Bank. The multi-pillar private pensions system includes the 2nd pillar – mandatory schemes and the 3rd pillar – voluntary schemes. Nowadays, over 30 countries throughout the world have such a system put in place – most of them are in Central and Southern America and in Central and Eastern Europe. In the CEE, no less than 11 countries run such a system.
In all those states, including Romania, the public pensions system already feels the impact of the demographic bomb:
- in 1990, Romania's public pensions system relied on 8.2 million employees to contribute, while 2.5 million pensioners benefited;;
- in 2008, only 4.9 million employees were left to contribute in the system, while the number of pensioners went up to 4.7 million. In the public pensions system (PAYG = pay as you go), the state collects contributions from employees and redistributes the money among existing pensioners. Demographics show that this redistribution logic is no longer viable, as contributor's numbers will fall and the number of pensioners is already going up. The exit from this dilemma takes the form of the private pensions system, allowing each active person to save for their own future retirement. Pension reform in the world
All over the world, countries reformed or are in the process of reforming the PAYG public systems, introducing private pensions schemes. The causes are he same everywhere: pensioners live longer, the number of employees decreases, public pensions fail in providing adequate, decent replacement rates for workers and PAYG systems are overburdened because of demographic developments.
CENTRAL AND EASTERN EUROPE. In Central and Eastern Europe, 11 states already adopted the World Bank's multi-pillar private pensions model:
At the end of 2008, there were over 300 different private pension funds in the 11 CEE countries, managing assets of 60-65 EUR bn. On behalf of over 35 million participants.
EUROPE. In Western Europe, private pensions systems are very much different than the Eastern ones. The common practice is that of occupational pensions, offered by employers to their own workers. Most of the times, practice came before legislation and the formalization of these systems. Not all Western European countries run private pension systems, although their PAYG systems also suffer from the same drawbacks as it is the case in the East.
GLOBAL SCALE. On a global scale, more and more states turn to private pension systems to ease their demographic problems and the overburdening of their PAYG public systems. The occupational model so popular in Western Europe can also be found in the United States of America and other countries. The differences among private pension systems all over the world are more complex than those among different European systems. At the end of 2008, on a global scale, pension funds' assets were of approximately 20-25 EUR trillion. The number of persons saving for their retirement using different private pension schemes exceeds one billion.
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