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Cronicile

Wonderful world of salaries and pensions in the next 4 years: “we have a problem!”

de Marin Pana 22.2.2017

The Minister of Labour Lia Olguta Vasilescu confirmed last week in a TV show that the pension and salary increases will apply in the next four years exactly as they are written in the electoral leaflet of the main governing party.

If applied as they have been presented, a major issue for the Romanian economy is worryingly taking shape: the sustainability of the pension system.

To simplify the understanding of the figures presented, we have made an annual breakdown of the progress of pensions and salaries, so that we can compare the clearly different growth rates and the different time horizons of the measures envisioned. We should note that the topic of the SF pension growth of 27% in 2021 (+ 104% compared to 2016!), although existing in the program, has not been explained.

*

  • Evolution of pensions and salaries between 2016 and 2021 (nominal data, lei)
  • Year
  • Pension point
  • Minimum guaranteed pension
  • National gross minimum wage
  • National average minimum wage
  • Gross average wage in the public system

*

In summary, we are dealing with benefits that the states created for pensioners on the grounds of generally presumed needs (over five million pensions increase, regardless of their size and other over two million contributions to the public healthcare system are eliminated, besides the already existing deductions, and not for people with low incomes) – see table below.

*

  • Measures        No of pensioners who benefit from them
  • Increase pension point of 1,000, as of 1 July 2017
  • Cease contributions to healthcare system
  • Eliminate tax on pension below 2,000 lei
  • Increase minimum guaranteed pension

*

Also for the employees with the national minimum wage (number of employees benefiting from the increase of the minimum wage to 1,450 lei, as of 1 February 2017, is 1,269,259) and the public-sector employees (whose productivity is hardly quantifiable), for whom there have been multiple increases announced, leading to an extreme + 44% in just two years, as an average for the public sector and a maximum of EUR 3,600 per month (for now, only 16,200 lei) for the doctors from the emergency units.

What shall we do basically, given that the annual deficit of the pension system has already reached over four billion euros and the dependency ratio is going to quickly deteriorate once the generation of the decree children from late 1960s will retire?

Well, we increase salaries at a presumed rate of around 40% and increase pensions by 60% (see table below).

*

  • Evolution of pension and wage increases between 2016 and 2021 (%, nominal)
  • Year
  • Pension point
  • Minimum guaranteed pension
  • National gross minimum wage
  • National average minimum wage
  • Gross average wage in the public system

*

Under the announced government program, the national gross wage growth would systematically fall behind the pension increase, except for the inconsistent and unexplained 2018, when would be both anyway twice the officially forecasted economic growth.

The effect on the pension system deficit is to be counted in some more billion euros annual deficit, covered no one knows how (what about the rapid growth of public debt?).

Private sector – state sector “score” = 26% – 56%

Moreover, the average wage in the economy, with the private sector inevitably being the main budget source, appears to be strongly unbalanced and favouring the public-sector employees, as we can see by comparing the overall evolution of the gross average wage with the public system. Where we shall encounter in 2018 a two-fold increase compared to the national level (+ 20% compared to + 10%).

Although the analysis does not venture beyond 2019 (an interesting annual breakdown giving a perspective on more years for retirees and fewer years for employees), we can quantify the private sector – public sector increase score for the three years between 2017 and 2019 at about 26% – 56% (if you find it hard to believe, try a simple equation based on the number of employees in each sector and the increases already announced).

Even if all could be “well and good”, how could Romania generate a productivity growth in the private sector of 26% in three years? And even if the country succeeded such a miracle, how could it reach + 56% in three years for employees and + 60% in four years or + 104% in five years for pensioners without increasing the taxes applied to this sector?

In this flurry of questionable benefits put on paper, something would still be missing. What the pension and wage REAL growth would be (against a background of price and exchange rate stability), namely the purchasing power they provide.

If a real GDP growth of about 20% in four years supports real wages 40% higher and real pensions 60% higher, Nobel Prize for economics will be waiting for a winner from Romania at the beginning of the next decade. The pension system will be anyway “burnt out” then and the current taxpayers will feel unhappy about not having been born earlier.

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