ARHIVELE OLTENIEI - Universitatea din Craiova

Reforming Romanian Pension System: The Necessity of Supplementary Private Pensions 303sufficient resources to offset the increasing needs of ageing people because,from a budgetary point of view, it is almost three times more expensive tosupport an elderly than a young person.One of the possible solutions to ageing problem is a reduction of thenumber of beneficiaries, fact that can be most effectively achieved if the averageretirement age is increased. Such a reversal in the evolution of the averageretirement age and labor force participation of elderly people appears necessaryas a response to increasing life expectancy and as a means to curb expenditures.Many European countries have been reluctant to announce and put into practicesuch a policy option, on the one hand, because of the high unemployment, on theother hand, because of the people’s reaction. For example, in Romania, thesocial request is flatly favorable to anticipated retirement, this option being takenin spite of any other option, either re-qualification or unemployment 2 . However,such a change in any case needs to be announced well in advance, with a leadtimeof 15 years or more. This was the solution adopted by Romanian legislatorwho increased the average retirement age from 57 to 60 years for women,respectively 62 to 65 years for men, age which was meant to be reached in 13years from the moment of coming into force of Law no. 19/2000 concerning thepublic system of pensions and other social insurance rights. If the labor marketfor the elderly has not improved in the meantime, the policy could always bepostponed. It appears that postponement, or even cancellation of this measurewould probably do less harm to the individual than would a sudden,unforeshadowed introduction.Reforming pension system raised two questions: defined benefit ordefined contribution? and PAYG or funding? The system based on definedbenefit present the advantage that insured know with a fair degree of certaintywhat will be their future pensions, but due to unfavorable demographic andeconomic conditions these promised pensions might be impossible to financeand needs a particularly strict financing discipline. In the case of definedcontribution, is easier to secure necessary financing as final benefits depend oncontributions actually collected, but does not secure adequate benefits for thosewith low earnings and incomplete occupational careers, fact that requiressignificant social assistance intervention. PAYG scheme has the followingfeatures: low administrative costs; indexation without technical problems;requires regular adjustment of contributions, politically difficult; sensitive toshort-sighted political decisions; sound and politically disciplined governancenecessary. On the other hand, the system based on private funds is characterizedby the following: less sensitive to political manipulation; in some cases mayprovide higher benefits; high economic risk attached to future benefits; highadministrative costs; protection against inflation difficult and costly; stateregulation and guarantees necessary.House, 2005, p. 17.2 Smaranda Dobrescu, Mihai Şeitan, Private Pensions, Bucureşti, Juridical Publishing