Romania’s Pension System: The Weight of the Past

In Romania before 1989, as elsewhere in the Soviet world, retirement support was one of the few rewards that the regime offered its citizens. Retirement provisions were based exclusively transfers, through the State, from the current working population to the pensioners. Technically, the system was a Pay As You Go System. The difference was that retirement provisions, like every other facet of the economy, were planned. Workers did not choose, but were told, when to retire. Early retirment was not envisioned. Sick live was strictly controlled and limited. There was no unemployment, and the penalties for any enterprise which evaded payments to the system were prohibitive (The State Bank was simply prohibited from paying wages until wage taxes had been paid). Transfers in cash and kind to the pensioners were strictly limited to the resources available. As a consequence, before 1989, Romania.s retirement system can be considered to have been consistently in excess. In the years which followed the overthrow of Nicolae Ceausescu, the public retirement system lost the constraints imposed by a command economy, and its implicit tensions became manifest. As the dispersion of wages increased under the pressure of even proto-market forces, disparities between benefits and contributions appeared, and the pressure for tax evasion grew. Tax discipline deteriorated. Furthermore, the new Government extended the pension system it had inherited, increasing the benefits and relaxing the qualifications, in response to political pressures. The result was that the system became fiscally imbalanced, and that, paradoxically, though privileges multiplied, actual average benefits declined. By 1997, the public pension system was in deficit, and the average real benefit had fallen to 45 % of its level in 1990. In 1998, Romania began an ambitious reform of its pension system, and proceed with a plan to introduce by stages a completely new three-pillar system. The form entailed a radical change of the public pension system (including the transition to a "point" system, unification of regimes, and increases in retirement ages), and a diversion of one third of the mandatory social security tax to a new private system of Universal Pension Funds. This paper presents and analyses the weight of the past. It describes the institutional weaknesses of the pre-reform system and analyses the demographic pressures threatening it. It concludes with a calculation of the implicit debt of the pre-reform system in 1997.