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Adapting pensions to economy and society – Romania’s position within international context by four benchmarks

de Marin Pana , 5.11.2018

  1. According to OECD data, net pension wealth in Romania (calculated for 2016) was 8.3, a value significantly below the average of 12.3 recorded at the EU level but on a par with Ireland (with which we also share the same position of the lowest budget revenue share in GDP among the EU member states) and above Poland (6.6) and the UK (5.8).

For reference, we mention that Croatia (22.9) registers the maximum level, which is ahead of Luxembourg (22.4), the Netherlands (17.6) and Austria (17.3). Our neighbours Hungary (14.4) and Bulgaria (14.1) recorded similar values and very different compared to us. Surprisingly, Switzerland (9.1), USA (8.6), South Korea (8.5), Japan (7.6) and Chile (7.3) are close to Romania’s situation.

Pension wealth – the present value of the flow of pension benefits, taking into account the taxes and social security contributions that retirees have to pay on their pensions. This indicator is affected by life expectancy, the age at which people take their pensions as well as indexation rules. It is measured as a multiple of annual income.

  1. Net pension replacement rate in Romania would be 51.6%, according to the same official OECD statistics. It is a value that places us somewhere in the middle of the international scale, between Sweden (54.9%), Greece (53.7%) and Canada (53.4%), on one hand and Germany (50.5%), USA (49.1%) and Norway (48.8%), on the other hand.

The EU average was significantly higher (70.6%, beware how well it corresponds the proportion of 73% between the budget revenue share of GDP and the ratio between the pension replacement rates of Romania and the EU average), while our neighbours within the EU appear again together and far above us (Hungary with 89.6% and Bulgaria with 88.9%).

Net pension replacement rate – pension entitlement divided by pre-retirement incomes, taking into account income taxes and social security contributions paid by workers and pensioners. It measures the capacity of a pension system to replace earnings, the main source of income before retirement and is expressed as a percentage.

  1. The ratio between pension duration and working time places us very close to the EU average, according to Pension adequacy report 2018 issued by Eurostat (2016 data). With 52%, we are positioned on the same level with Hungary and Croatia, one percentage point above the EU average, where Poland (51%), Bulgaria (49%), Germany and the Netherlands (48% each) are positioned.

For reference, the gap is between 41% in Estonia, preceded by the northern countries Sweden (46%), Latvia (46%) and Denmark (44%) – where the relatively low life expectancy, especially in men from former socialist countries, plays an important role – and Luxembourg (71%), Slovenia (65%) and France – Belgium – Greece trio (62% each).

It is interesting the mention from the report that draws attention to the fact that, beyond life expectancy, this indicator depends on the average age for entering the labour market and the average age for exiting the same market. Especially that we are present with the highest average age for entering the labour market, close to 28 years (Denmark appears at the opposite side, with only 19 years of age), although we have a relatively low unemployment.

  1. Theoretical replacement rate is projected to record the largest decline in Romania between 2016 and 2056. With a 45% decline, we are in a worse situation than Poland (-41%) and at a far distance from Croatia and the UK (-16% each).

At the opposite end, surprisingly, our neighbour from the south and accession colleague Bulgaria (+ 17%) is positioned, followed by Estonia (+ 6%) and Germany (+ 5%). In the other countries, the report estimates that there will be no significant changes.

Theoretical replacement rate – the reference case for calculating the evolution of this indicator is that of a male worker with an uninterrupted career of 40 years under a standard contract. In countries where a full seniority of more than 40 years is required, this situation will correspond to an incomplete career, while in other EU member states it corresponds to the maximum pension possible.

The report draws attention to the fact that standard benefits are projected, in the vast majority of countries, to decrease over time. It also suggests that a 40-year career will be in most cases more appropriate in 2016 than in 2056 and compensation will have to be made by longer working times.

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