PUBLIC PENSIONS SYSTEM

1. ROMANIA PUBLIC PENSIONS SYSTEM JUNE 2008 MIHAI SEITAN

2. 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.

3. 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.

4. 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.

5. 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 government’s reach (in the absence of a quick and coherent reform) was the substantial raise of the social insurancecontribution (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.

6. STATISTICS ON PUBLIC PENSIONS Tax payers and beneficiaries, 1990-2007 (in thousands) Source: National Pensions Chamber (CNPAS)

7. The decrease of the ratio between average state pension and the net average salary 1989 - 2007 Source: National Pension Chamber (CNPAS)

8. Source: National Pensions Chamber (CNPAS)

9. The Rate of Social Security Contributions 1989 - 2007 Source: National Pensions Chamber (CNPAS)

10. The contributions for pensions in 1992 -2007 * Includes persons working on their own ** Optional for farmersSource : National Pensions Chamber (CNPAS)

11. 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

12. Source : National Pension Chamber (CNPAS)

13. 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.

14. ROMANIA – DEMOGRAPHIC EVOLUTIONS Population ageing

15. The forecast of the life expectancy evolution

16. Birth rate evolution Migration of active population

17. Very low average number of employees (approx. 4,6 millions) • → The tax payers/pensioners ratio was approx. 4:1 in 1990, but under 1:1 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 monthsfor both women and men

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

24. 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

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

26. Successor’s 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 successor’s 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%

27. 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

28. Disability pension

29. 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 person’s 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.

30. 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.

31. 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.

32. THE EVOLUTION OF THE PENSION POINT’S VALUEin the period between 01.04.2001 – 01.01.2008

33. 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).

34. 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.

35. 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.

36. 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.

38. 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.