BLACK SEA BLOG: Romania's unseemly battle over pensions

By bne IntelliNews July 31, 2007

Bogdan Preda in Bucharest -

After nearly 18 years of piecemeal reform in the retirement system in post-communist Romania, the promise of big bucks from private pension funds is finally here. With this, however, has come a frenzy of funds and their managers, advertisers and advertisements, politicians and endless arguing, pledges and electoral games – all of which is helping to tie a new rope around the already-thin necks of Romanian taxpayers and existing retirees.

Most of Romania’s nearly 5.6m pensioners rely solely on state pensions simply because there were no alternative schemes when they toiled in a communist system more than 18 years ago. The private pension schemes that followed the collapse of communism happened too late and were too expensive for most of Romania’s younger pensioners to take part in, because the value of their state pensions shrank as the country struggled through a lasting and painful economic transition.

Today, Romania’s state-pension system is nearing collapse, with 4.7 registered contributors having to finance the pensions of the 5.6 retirees. Put more simply, there are 6 pensioners for 5 taxpayers in a country of 22m. The government of Prime Minister Calin Tariceanu, however, insists the country’s economic growth, forecast at 6% this year, will be enough to finance a 40% increase in state pensions from 2008. President Traian Basescu, who has been at loggerheads with Tariceanu for the past two years, accuses the government and prime minister’s National Liberal Party of bribing pensioners in return for their electoral support

Besides the imbalance between the number of pensioners and workers, Romania also has the highest number of medical retirees in Europe – 800,000, or a seventh of its total retired population. Were illnesses widespread enough to have caused such massive early retirements on health grounds? Definitely not. The exodus into early retirement on poor health grounds was caused by fears of unemployment at a time when wages were too small and a looser healthcare system made it possible for tens of thousands to simply bribe their way into early retirement, especially those in rural areas who could rely on growing their own food to survive rather than having to work for peanuts. This is yet another example of how ordinary Romanians found a way of dealing with the painful transition when their leaders were failing to create enough wealth to keep them working.

Political football

Tariceanu’s government in July managed to pass the pensions bill with help from the Social Democrats, the biggest opposition party, despite resistance by the president, who had insisted the government publicly state where the money for this increase in pensions would come from. The government answered, vaguely, that greater revenue from taxes and economic growth would suffice for the increase next year, as well as for another increase from 2009. Finance Minister Varujan Vosganian said the higher pensions would cost the budget about €2bn, equal to a bit less than 2% of GDP in 2008.

The truth is that Romanians, living in one of the EU’s poorest countries, do need higher pensions and its pensioners need far better protection from the vagaries of old age, especially access to health services. Yet Romanians also need a sound system in place that each and every succeeding government agrees with and respects. Why? Simply because retirement is too serious and sometimes too short to be played with like a political football. We’re all headed there sooner or later and so should treat it with the utmost respect and decency.

The questions remain whether Romania can afford such a large increase in pensions and if this increase will be enough to tide the system over until a new generation of retirees is in a position to supplement their pension with the private pension system introduced as of last year?

The answer is yes to both, but the increase, as usual, comes at a price. This time, it will be in the form of a rise in other taxes or less spending on other projects. So far the government has given no indication of what such measures might involve. Increasing the main taxes would be suicidal for Tariceanu’s government, because it came to power in 2005 on a pledge to lower personal income tax to 16% from levels as high as 40%, while also cutting the corporate tax rate from 25% to 1%, making it one of the lowest in Europe.

Increasing pensions is probably doable in today's Romania, but the trouble is that 40% at once is perhaps too much. Furthermore, last year’s track record of four budget revisions shows that financial planning in Romania is poor, and usually comes as a result of political compromise. That’s precisely what scares economists - when governments spend public money while claiming at the same time the system will survive intact.

There's another worrying aspect to this pensions ruckus, at least from the point of view of a lack of decency. As if political maneuvering using pensioners wasn’t bad enough, tomorrow’s wave of new pensioners, who are entitled to also benefit from the private pension schemes, are being targeted by aggressive and sometimes offensive advertising campaigns.

One such TV ad, aired continuously at prime-time on most channels, has one old retiree, looking resigned and deceived, complaining to another man in his early 40s that there’s almost nothing he can do with a monthly state pension of RON500 (the equivalent of about €150). As the younger, blue-collar employee listens intently to the old man’s story, a background voice advises the younger man to act wisely to avoid ending up in a similar situation by paying into a private supplementary retirement scheme.

The advice is probably right, but the fact the ad by the fund management arm of the country’s largest bank uses one of Romania’s millions of retirees who, through no fault of his own, hasn't had the chance to subscribe to one of these private pension schemes during communist times is indecent and heartless.

Sadly, it shows just how far some people are prepared to go as this pensions issue becomes such a serious business on many fronts in today’s Romania.

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