Draft bill provides for a uniform public pensions system

Following its attempts to improve public spending through the uniform pay system for public sector workers, the government is now introducing a uniform public pensions law, the draft of which has been tabled for parliamentary debate. The law aims to make the state pensions fund more sustainable and to eliminate striking discrepancies and inequities between the various categories of retirees.

Rationale behind public pensions reform

The successive transformations arising from the economic reforms introduced during Romania’s transition period has gradually tipped the balance between passive and active state revenue: in 2009, Romania had some 5.7 million retirees and 4.9 million taxpaying employees. Although the cumulated social insurance contributions paid by employers and employees have gradually increased over recent years to more than one third of workers’ monthly gross salary, in 2009 the pension budget deficit was in the region of €1.5 billion – or 15% of annual pension spending.

The shortage of employment was one of the reasons that prompted people to resort to retirement due to health reasons (about 900,000 new retirees in 2009), which was sometimes not entirely warranted, or to early retirement (over 100,000 persons in 2009). Moreover, a dramatic increase arose in special pensions for former members of parliament (MPs), along with military, law enforcement and judicial personnel, whose pensions are much higher than those of other pensioners, despite the lower length of service and social insurance contributions.

Against this background, the Romanian government (Guvernul României) submitted a bill to reform the public pension pay system. The move was attributed not only to budget constraints – but also to the startling inequities in pensions, with the differential between the minimum pension (€83) and the maximum pension (€8,300) reaching a ratio of 1 to 100. As a result, the government faced mounting pressure from international financial institutions to reform the system.

Draft pension bill announced

In early October 2009, the country’s Prime Minister, Emil Boc, called a meeting with the representatives of the national trade union confederations and employer organisations to inform them of his decision to assume responsibility for the new pension law. The prime minister explained that the draft was not due for parliamentary debate as one of its aims was to abolish the special pensions granted to former MPs. Prime Minister Boc added that he ‘would feel honoured if his cabinet were to be dismissed due to the pension bill’.

The draft bill was posted on the government’s website. Subsequently, the Ministry of Labour, Family and Social Protection (Ministerul Muncii, Familiei şi Protecţiei Sociale, MMFPS) called for a public debate on the bill.

One week later, the cabinet was dismissed and, on 27 October, the parliamentary group of the Democratic Liberal Party (Partidul Democrat Liberal, PDL) – the suspended prime minister’s party – resubmitted the bill to the Romanian parliament (Parlamentul României).

Provisions of draft bill

In brief, the draft pension bill provides for:

• a single pension scheme for all retirees and compulsory social security contributions for all those who wish to qualify for the scheme;

• non-discriminatory treatment in respect of rights and obligations;

• a gradual increase in the retirement age and in the full length of service regarding social security contributions;

• a gradual levelling of the standard retirement age for men and women;

• the harmonisation of special pension systems with the uniform pension scheme, and their recalculation accordingly;

• the inclusion of persons with authors’ rights among those obliged to pay social security contributions;

• disincentives for early retirement and unwarranted retirement due to health reasons.

Reactions of social partners

At a debate in the Economic and Social Council (Consiliul Economic şi Social, CES), the country’s trade unions proposed that social security contributions should also be made compulsory for casual employment arrangements, service agreements and copyrights, which heretofore have been exempt from such obligations. They highlighted that the purpose of their proposal was to deter tax evasion and to better cater for the social protection of these categories of workers. Journalists, for example, fall within one of these categories. However, organisations representing certain groups of retirees – particularly the privileged ones – demanded that the recalculation be removed from the draft.

A number of other proposals are still being negotiated, such as: the creation of occupational pensions, or a pension amount calculated in proportion to the national average gross salary.

On the whole, the public hearings held by the government and the national trade union confederations revealed approval for the pension system reform, as well as a general acceptance for a pension amount equal to at least 45% of the national average gross salary. No consensus has yet been reached on the retirement age for men and women, or on the special status with respect to copyrighting, or on the provisions for a better social security collection system.

Commentary

The uniform public pensions law, as well as the framework law regarding uniform pay for public sector employees, are two of the more welcomed and necessary pieces of legislation – notwithstanding the level of controversy they may still generate.

One question that remains concerns the amount of tax revenue, which greatly depends on the number of employees and, in turn, the minimum wage level in the private sector. If the rates of social security contributions are high, employers will seek to keep the minimum wage low and to keep as many workers as possible on the minimum wage, to the detriment of economic performance.

Constantin Ciutacu, Institute of National Economy, Romanian Academy