Academy of Economic Studiesof Moldova

Individual workTheme: Pension funds

Performed by Artur CatanoiSituation analysisThe public social insurance system is an integral part of the state social protection system, with the main objective of providing cash benefits to insured persons who are unable to obtain wage revenues due to certain risks (aging, temporary or permanent lack of working capacity, maternity, unemployment, etc.) and is based on collection of social insurance contributions from employers and insured persons and distribution of benefits to beneficiaries.The pension system in Moldova operates based on the pay-as-you-go scheme, which consumes 8.8% of GDP. In 2010, only about 37.5% of the working population was contributing to the social security system, and pensions were paid for about 84% of citizens who have reached the retirement age, i.e. a total of 460,500 people, or 13% of the total population. Thus, the pension system has a significant role in ensuring a decent standard of living for the population. In 2011, expenditures for payment of pensions were about 70% of the total social security budget.

The pension system currently faces the following challenges:Small quantum of benefits and low replacement rate

The quantum of the average pension for retirement age was only 70.6% of the subsistence minimum for pensioners in 2010. Over 90.1% of the total retirement-age pensioners receive pension amounts lower than the subsistence minimum for pensioners. The replacement rate or, in other words, the ratio between the average retirement-age pension and average salary recorded in the economy, is only 28.2%, while the European Code of Social Security establishes its recommended value at 40%.

Small number of contributors and reduction of the dependency rate

The coverage of the pension system and the number of insured persons is decreasing. From 2001 to 2010, the number of active population decreased from 1.6167 million to 1.2354 million, and the number of employed persons from 1,499,000 thousand to 1,143,400. Thus, the number of taxpayers in the public social insurance system has fallen to about 860,000 in 2010. This is mainly due to population emigration in the past decade.

On the other hand, the number of pensioners of all categories has remained stable, falling by about 4.1% compared to 2001 and accounts for 627,100 in 2011. Thus, the ratio between active population and pensioners of all categories is 2:1 and the ratio between working population and pensioners is 1,8:1. It should be noted in this context that for the stable operation of pay-as-you-go pension systems it is necessary to maintain the ratio between contributors and pensioners at around 4:1 - 5:1.

Demographic ageing

The further development of the public pension system will worsen due to demographic trends. The ratio of population aged over 60 years to the total population was 14, 4% in 2010 compared to 13, and 6% in 2000. According to international practice, a population is considered "ageing" when the ratio of elderly exceeds 12%.

Different retirement age

The current pension system sets the retirement age at 57 years for women and 62 years for men. The minimum insurance period, i.e. the mandatory payment of social insurance contributions, is at least 15 years for a partial pension or at least 30.5 years for a full pension. According to current legislation, the total number of work history required for an old-age pension will be extended to 35 years by 2020. Compared to other countries in Central and Eastern Europe, the retirement age in Moldova is lower for both men and women. On the other hand, life expectancy in Moldova is also lower compared to those countries.

Low level of contributors insured income

Through social insurance contributions paid, the size of the pension depends directly on the incomes of the active and working population. According to the National Social Insurance House, the average salary of people employed through individual contract was about MDL 2,133 in 2010. Another Moldovan reality is provision of salaries under the table. This means the reported wages of insured persons are small and the direct consequence is the low level of pensions.

Unfair distribution of funds

Moldovan legislation stipulates privileged pension terms for certain categories of citizens: judges, prosecutors, elected officials, civil servants, MPs, members of government, locally elected officials and customs employees. The difference between these terms and the general conditions for old-age pensions consists in lower retirement age and lower number of years worked necessary. The stated objective of such privileges is for the state to reward the special merits of these categories.

Social insurance guarantees for migrant workers

Given the increase in labor mobility between countries and the migration of working-age population, the optimization of the social insurance systems have become an important component of the social policy promoted by the state. The negative effects of migration are usually long-term and it takes time for the consequences to become visible. However, they do when migrant workers and their families who worked or lived abroad return back without any social insurance entitlements earned. Under these conditions, migrant workers and their family members often are disadvantaged economically and socially in comparison with the citizens of that country, being deprived of the right to social security, including pensions. Hence, the migration processes have led to the urgent need to conclude bilateral agreements on social insurance with the main host countries for migrant workers.

Strategic vision

An equitable and sustainable pension system ensuring a decent living after retirement is indispensable for social cohesion. The current inadequate level of pensions in Moldova and its continuing diminishing trend generate an alarming growth of pressure. The funding of any pension increases from outside the pension system reduces the chances of success of other reforms, including those of other development priorities. Thus, the pension reform will primarily minimize the risk of these adverse effects.

The cumulative pension system has a positive impact over long term on economic growth mainly due to the following factors:

1. Financial market development. Under the cumulative pension system social contributions are invested using financial markets, which get a significant boost as a result of pension system reform, and financial market development is positively associated with growth. Financial market development is seen as a reward to the reform transition costs that, according to the experience of other countries, vary from 0.5% to 4% of GDP annually depending on the parameters of the pension system reform.

2. Labor market optimization. In pay-as-you-go pension systems social contributions are often treated as taxes, this amplifying the negative phenomena of salaries paid in envelopes and illegal work. Also, in pay-as-you-go pension systems staff pre fers early retirement, and labor force mobility is reduced. All these have a negative impact on labor market operation. The structure and operation of the cumulative pension system leads to a reduction of these deficiencies, hence contributing to labor market optimization, which sets the ground for economic growth.