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Specific Aspects of State Social Security Reform in Romania
Professor Georgeta Dragomir, PhD Danubius University of Galati [email protected] Luminiţa Iacob, B.A.
Danubius University of Galati [email protected] Senior Lecturer Georgeta Modiga, PhD Danubius University of Galati [email protected] Senior Lecturer Ecaterina Necsulescu, PhD in progress Danubius University of Galati [email protected] Carmen-Marina Dragomir, Master Student Danubius University of Galati [email protected]
Abstract: The National pension system, in the light of major economic and financial transactions that take place today, can be challenging, through the difficulties that they create and the solutions that they offer. This paper is a comprehensive study on the public pension system in Romania facing the current global crisis, based on local case studies in an attempt to identify the main gaps and to propose viable solutions. The obtained results are based on multifactorial analysis at local level, by personal processing of relevant data, the evolving activity collected from a county pension facility that meets the characteristics of the retirement pension system nationwide.
Keywords: public pension system; employment; social security; social security budget, pension reform
JEL Classification: G23, J68
Part II
3. The Analysis of the Public Pension System Based on Indicators - A Case Study from Braila County Pension House
The Braila County is part of the economic development in the South-Eastern region of Romania, its population represents about 13%. According to the existing data in 2005, the active population (of age) in the Southeast Region was 43.7% - slightly
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below 45.5%, as it was the national average - and the region's employed population was 36.1%, and in Braila was 34%, also below the national average, 38.8%.1 These features of the South-East area, as well as the developments in the local economy are reflected in the changes of values of some indicators of the public pension system at the Braila county’s level, of which the first part of this article were analyzed quantitatively and qualitatively, the number of policyholders and the main beneficiaries of state social insurance budget, the developments and correlations.
3.1. State Social Insurance Budget Execution at Local Level
In Table 14 there are presented the budget execution data for the period 2006-2010.
The necessary expenditures of the state social insurance system at the level of Braila County have exceeded the revenues each year, ending the exercise with a deficit. The deficit increases from one year to another and in 2009 it exceeds the revenues. We have identified as causes the average basis on modest tax at the level of the county, the disadvantageous ratio between the number of taxpayers and the number of beneficiaries, the coverage degree continues to decrease the social insurance system in the county and the decreased collection rate (Table no. 15).
Among individual policyholders there is a large number of people who pay late or no social security contribution. If the insured under contract may have their contract terminate automatically for non-contribution six months in a row, the debts of insurance policyholders must be pursued and repossessed. In late May 2010, according to CJP Braila databases, 1309 were provided with the contract, which reported back payments totalling 284,178 lei plus accessories totalling 9968 lei, and among policyholders with insurance declaration there were 1103 debtors, with a total debit of 1,290,082 lei, plus total accessories of 922,419 lei.
Table 14. Implementation of State social insurance budget at CJP Braila in 2006-2010 lei
Indicators
Years
2006 2007 2008 2009 2010
(Ist trimester) Total revenue -,
of which 185032966 220522350 290591432 313560610 70723199 Employer
contributions, including:
124546054 145366077 191853846 197981169 47350964 - Social security
contributions owed by 122604525 143566973 190301710 192810533 43844825
1 OIR POSDRU SUD-EST Site, http://www.fsesudest.ro/Prez-Reg-SE.pdf
employers - State social
insurance contributions owed by
unemployed persons
1941529 1799104 1552136 5170636 3506139 - Contributions of
policyholders 59484279 73611239 97634505 107152687 24975505 - Contributions due
from policyholders 56555756 69361636 91623853 99499117 22601377 - Contributions of
other policyholders 2928523 4249603 6010652 7653570 2394055 Reimbursements from
social insurance contributions
0 0 0 0 -19927
Non-tax revenue 1002633 1545034 1103081 8426754 -1603270
Expenditure –
total, of which: 286894085 361876061 529739448 631602626 168270556 Insurance and social
assistance, including: 284701926 355989305 520132496 623525309 166302630 - Pensions and
benefits for old age 280070781 351025109 513878599 616979430 164312892 - Social assistance in
case of illness 36704 1303 0 0 0
- Social assistance for
family and children 595545 44361 33950 0 0
- Aid for survivors 3998896 4918532 6219947 6545879 1989738
Personnel costs 1694050 1732363 3892743 2039544 488155
Expenditure on goods
and services 493231 4093633 5602483 6189646 1536198
Capital expenditure 4878 60760 344281 0 0
Payments made in previous years and recovered in the
current year
0 0 -232555 -151873 -56427
Surplus / Deficit -101861119 -141353711 -239148016 -318042016 -97547357 Source: Annual Accounts for the implementation of state social insurance budget of the
CPJ Braila
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Table 15. The collection degree of social insurance contributions owed by the Indicator
2006 Revenues from
employers under the CAS budget execution (lei)
122604525
Income owed by employees according to CAS reports (lei)
133839065 Cashing the CAS
employees according to the budget execution (lei)
1941529
Revenue owed to CAS employees according to nominal records (lei)
2347213 Cashing CAS employees
under budget execution (lei)
56555756 Income owed from CAS
employees according to reports (lei)
63771069
-4E+08
-2E+08 0 200000000 400000000 600000000 800000000
2006
Figure 5. The evolution of revenue, expenditures and of state social security budget deficit at CJP Braila during 2006
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CJP Braila
Table 15. The collection degree of social insurance contributions owed by the employers and the insured Years
2006 2007 2008 2009 2010
(trim.I)
122604525 143566973 190301710 192810533 43844825
133839065 161035439 207617480 220381907 51945731
1941529 1799104 1552136 5170636 3506139
2347213 2072506 1955023 6937756 3128622
56555756 69361636 91623853 99499117 22601377
63771069 78648733 102326818 112268752 26399073
2006 2007 2008 2009 2010
(trim. I) Figure 5. The evolution of revenue, expenditures and of state social
security budget deficit at CJP Braila during 2006-2010
Revenue Expenditure Deficit
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Table 15. The collection degree of social insurance contributions owed by the employers and the insured
2010 (trim.I)
43844825
51945731
3506139
3128622
22601377
26399073
Revenue Expenditure
Collecting degree CAS
employer (%) 91,6 89,2 91,6 87,4 84,4
Collecting CAS collection unemployed (%)
82,7 86,8 79,4 74,5 112,1
Collecting CAS
employee (%) 88,7 88,2 89,5 88,6 85,6
Source: C.J.P. databases Braila, own calculations
3.2. The First Developments in the Local Private Pension System
Concerning the participation of policyholders to Pillar II, we rendered in Tables 16, 17 the evolution of the number of "valid" participants, those for which transfers were made for mandatory private pensions. The number of participants per month is oscillating, whereas the contribution to the payment of Pillar II is conditioned by the presence of the insured under the nominal statements made by employers. The coverage degree of the mandatory private pension system, calculated as a percentage of the "valid" participants to Pillar II in the total number of policyholders who were registered in CJP Braila (Table 2 rd.1 + rd.6 + rd.8) is below 60%. The value of coverage degree has a modest increase from one year to another because of the new number entrants under Pillar II, by law, is annihilated by the number of people for which the contribution cannot be transferred, because it is no longer in the category of insured in the public category.
Table 16. The evolution of insured in Braila county to ensure that contributions are paid to Pillar II
Year
Months
January February March April May June July August September October November December Average
2008 - - 42793 43282 43242 45036 43983 44222 44919 44788 44624 44588 44148 2009 42977 43869 43837 43802 44033 43901 43553 43672 43872 43423 43310 43024 43606
2010 42924 43335 43212 : : : : : : : : : 43157
Source: C.J.P. Databases Braila
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Table 17. Evolution amounts transferred to Pillar II for policyholders in Braila County lei
Year
Months
January February March April May June July August September October November Average
2008 - - 784458 851206 834640 919572 930541 903511 911681 1007262 981548 1062502 2009 974414 986410 1022537 975595 956727 958107 976527 959824 950572 977405 915838 681370
2010 1145641 1172452 1193706 : : : : : : : : :
Source: C.J.P. Databases Braila Table 18. Average number of
policyholders for which the contribution was paid to Pillar II
according to their age (persons)
Table 19 The degree of covering Pillar II (%) policyholders of Pillar II of the total number of
insured Year Age categories
Year Degree of Coverage up to 35
years including
over 35 years
2008 26963 17185 2008 55,4
2009 25081 18525 2009 56,6
2010 22892 20265 2010 57,3
Source: C.J.P. Databases Braila for 2010, data from the first quarter
Source: C.J.P. Databases Braila for 2010, data from the first quarter
3. Conclusions and Solutions having a Local and National Impact
Reforming the pensions in Romania has been a long process of transformation and optimization passing through several stages of regulation, amending and supplementing or repealing certain provisions that intended to be the foundation of a sustainable pension system, which meets the requirements of society and the EU objectives.The state social security system at the level of the analyzed county keeps the main features of the system at national level in terms of small number of insured compared to the employed population, the lack of effective tools to bring more insurers into the system, the frequency of early retirement, maintaining their age retirement at a low level, the presence of weak labour market of people aged over 60 years, the indiscipline of employers and insured to not pay their obligations to
the budget. They are the main factors determining the maintenance of a sub-unitary ratio between the number of employees and the number of retirees, considering only the pensioners that are paid from the state social insurance budget. 2005 year has brought an improvement in this report, outsourcing the benefits and shifting the task of state budget pension from the former system of farmers’ social insurance.
The improvement of this report continued in the years of economic growth, 2006 - 2008, before lowering again since 2009. This and the analysis of the number of taxpayers and pensioners, prove the link between economic development and improvement of input and output, and thus of the parameters of the state social insurance. The small degree of coverage of the population taken by the state social insurance system is recorded throughout the country and it has declined continuously, even in the years when employment has increased, because a large proportion of workers in categories other than employees have not paid off the obligation to ensure. Depending on further professional development, there are future potential "candidates" to the minimum income provided by social protection system. Their monitoring is impossible, since this would be done by a computer system that includes national database that does not exist at the moment.
If we relate the Romanian pension system to the 11 common objectives set by the EU Member States by adopting the open method of coordination, we can draw some conclusions about the evolution of public pension system's reform.1
Objective 1, preventing the social exclusion, means providing a decent living style for the elderly. In the period 2003 - 2006, the poverty rate of pensioners has halved.
However, approximately 46.6% of the retired of state social insurance have the amount of the pension under the average gross salary per economy, where we concluded that this objective was not achieved. This situation worsened in 2010, with the measures to reduce the amount of retirement benefits, taken by the Government.2
Objective 2 is to maintain the living standards after retirement, pensions, by accessing to public and/or private. The average pension of state social insurance is located below the gross minimum wage in the economy in 2008 and slightly exceeds the amount in 2009, it is below half the average of gross wage. In late 2007, some 955,000 retired of state social insurance (20.6%), the pensions were below the minimum net wage in the economy about 3.2%, i.e. approximately 150,000 people had pensions less than half the minimum wage, in September 2008 their number doubled. The replacement rate compared with average net earnings fell to 43% in 2002 to 38% in 2007, returning to a value of approximately 44% in 2009. In the EU, it is recommended the replacement rate of 50%, currently impossible to achieve in Romania because of the too high dependency ratio in the
1 The idea of targeting the objectives was inspired by (Fiț, 2009)
2 M.M.F.E.S., I.N.S. (2007). Romania: Raport de evaluare a sărăciei. November 2007.
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public system. (Presidential Administration, 2009) Analyzing these data, this objective cannot be fulfilled.
Objective 3, promoting inter and intra-generational solidarity, is also questionable, given the demographic tendencies and projections for the coming years and also the continuing increase of the foreign debt.
Objective 4, the increase the employment rate is still far from being achieved, if we take into account the statistical data showing the decrease in the labour force and employment rates and the rise of unemployment. There is no immediate practical solution for this situation to improve, especially in the economic crisis that we are going through which had a major impact on unemployment.
Objective 5 refers to the extension of the active period. In legal terms the age of retirement has been increased and it will reach 60 years for women and 65 for men by 2014. Contributory periods have also been increased to 30 years for women and 35 men. But practically, the excessive early and disability retirement, many of them believed to be illegal, determine the actual average retirement age to be below to that provided by law, according to the data of various studies is of 54-56 years to less over 60 years. According to Eurostat, Romania is the EU country where the employment rate of people aged between 55 and 64 dropped the most from 2001 to 2008. Also, the employment rate of people in that age group in 2001 decreased from an average of 48.8% in 2001 to an average of 43.1% in 2009 (average over the first three quarters) while the 35-54 years age category for the same period, employment rates ranged from 76.8% to 74.8%.1 Given these figures, analyzed in correlation with the number of early retirements, we cannot consider this goal being achieved.
Objective 6, insuring the financial sustainability of the pension system, would mean in particular the improvement of the collecting degree, reducing arrears.
Since 2008 the budget registered growing larger deficits and the future projections are not more optimistic, if we consider the fact that the dependency ratio of people aged over 65 is in an accelerated growth. According to World Bank studies for Romania, by 2050 the revenues for pensions will reach only 3.4% of GDP, while expenditure on pensions will reach 9.6% of GDP. The current situation and future projections do not allow considering this goal achieved.
Objective 7, adjusting benefits and contributions in an equitable manner. Benefits and contributions in the public system in Romania are controlled by two key parameters, pension point, and respectively, the rate of contribution, both set annually by the state social insurance budget law; their changes may be annually established or even more frequently. The contribution rate to the state social insurance budget had a downward spiral during 2003-2008 and increased in two
1 AMIGO Statistics.
consecutive instalments in January and February 2009 and the fundamental point of retirement has gone through many inconsistencies. Both methods of correlation and substantiating these parameters and their long-term tendencies are unclear, so that this objective is uncertain.
Objective 8 relates to ensuring an adequate and solid pension system from the financial point of view. In Romania there was created a legislative framework for the operation of private pension funds. Basic rules are common with other European countries which adopted similar systems. The short period that has elapsed since the system began to operate does not allow a foundation for future projections in terms of tendencies, thus this objective can only be considered fulfilled only from the view of insuring a legal framework for the operation of private pension systems.
Objective 9 of the EU, the creation of pension systems compatible with the requirements of flexibility and security on the labour market can be considered fulfilled, as far as providing the legal framework for the implementation of the current European regulations.
Objective 10 regards the revision of pension system in accordance with the requirements of equal treatment between men and women. At this time, this target is not reached and it remains unclear whether the new pension law, which will enter into force on 1 January 2011, will introduce equal treatment between women and men regarding the retirement age.
Objective 11 relates to the development of transparent, predictable, flexible and adaptable to new realities pension systems, these features should lead to increased confidence in the national pension system. From an institutional viewpoint, things are relatively solved in terms of involved structures and their duties, applying the model developed in collaboration with the World Bank in all European countries that have reformed their public pension systems. Regarding the parameters, the party that interest the taxpayers and beneficiaries the most, the developments are unclear and unpredictable. So that is why not even this objective can be considered fully achieved.
As a conclusion the objectives proposed to reform the pension system in Romania have not been generally achieved, even in terms of recorded data or that of public perception. According to our analysis we can conclude that most issues arise from unbalanced financial system, between revenue and expenditure widened in the context of global financial and economic crisis, poorly managed in our country.
Few feasible opportunities to increase revenue of the state social insurance budget would be:
• an increase in social security contributions, which were used over time, exceeding the levels in most EU countries, so it is an undesirable solution;
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• an increase in tax basis of the contribution, that can be achieved by:
increasing the number of employees by creating jobs or by increasing wages, but both require a solid economic growth and it is not a short term result; efficient identification of persons have an obligation to ensure;
attracting new categories in the system; reducing the phenomenon of
“illegal labour" or "in between" (including the declaration of a wage below the real one);
• an increase of revenue collecting degree;
• a demographic policy based on increasing the birth rate.
Ways to reduce costs may include:
• stimulating activity to old age;
• raising the retirement age;
• increasing the insurance length necessary for retirement;
• harden and a more strict control on the conditions within specific categories of employment;
• reducing the conditions for early retirement;
• the introduction of equity in Romanian pension system by law, in order to prevent granting privileges from the public money, the integration of special pensions system in the public system.
Also, for a better management of the computerized record system it is useful the introduction of general computerized records in the pension system and the creation of a system of monitoring, analysis and policy in the sphere of pensions, the establishment of national databases in order to have clear evidence of people that are required to ensure, the corroboration of social security system with other systems in the field of social insurance.
State social security system aims at providing the replacement income if it occurs in people's lives the disease, disability, old age, death. But it should not be considered as the only and most important tool to fight poverty. The most effective ways in line with the EU are to stimulate employment, to increase the degree of education and training the population, in order to guarantee a decent minimum wage.
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EUROSTAT
