Crisis of the public pension system and intervention measures

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Foto: Bloguvern.md / Cristian Căpățână Foto: Bloguvern.md / Cristian Căpățână
Publishing date: Tuesday, 09 June 2015
Views: 16951

Key messages from the report

  • The public pension system in Moldova is not financially nor socially sustainable. While the State Social Insurance Budget (BASS) recorded a structural deficit of around 1% of GDP and total expenditures account for 11% of GDP - higher than other countries in the region, the average pension does not even cover the subsistence level and the ratio between pension and the average salary is the lowest in the region.
  • The problem of the public pensions system is worsened by mass emigration of the working age population, high rate of the grey economy, the informal employment’ phenomenon (ie paying salaries in envelopes), coupled with an accelerated population aging. Therefore, the ratio of pension system contributors to its beneficiaries fell from 1.3 in 2006 to 1.2 in 2014, given that the minimum allowable ratio, according to international practices, is four taxpayers to one pensioner.
  • Moldova has the potential to increase both the size of social security contributions and its basis of calculation – ie. Wages and other incomes. In this regard, along with removing various exemptions from paying the social security contributions, it is necessary to stimulate taxpayers to enter the system be engaged in it.
  • Expert-Grup recommends switching to pension indexation (ie Inflation adjustment) based on consumer prices, which should take place twice a year, rather than annually. These measures will enhance public confidence in the public pension system, and respectively will discourage the practice of avoiding payments for social security contributions. In addition, it is necessary to eliminate the multitude of privileged pensions (paid to former government officials, judges, elected officials, etc.), which may have negligible financial effects, but nonetheless will strengthen the system’s equity and confidence from population. In addition, we recommend increasing the retirement age for women from currently 57 to 62 years, and increasing the required contribution period from 30 to 35 years, thus creating equal conditions for both men and women.
  • A key component of the reform shall be the development of a multi-pillar pension system. Pillar 1  is a defined-contribution plan where the pension value is calculated based on individual’s lifetime contributions and the interest accrued, whereas Pillar 3 is a scheme to which citizens would adhere optionally and their  accounts would be managed by private companies. We recommend creating the Pillar 2 in 2020, but only after implementing the other policy interventions and after substantially strengthening the current Pillar 1. And although implementation of Pillar 2 shall be a gradual one, establishing Pillar 3 should be an immediate priority.
  • The recommendations for strengthening the public pension system will not have the desired effect if the informal employment and "wages in envelopes" phenomenon will not be exterminated. In order to fight these practices, measures are needed to increase the costs of informal employment - ex. increasing fines for practicing informal employment and for "paying wages in envelopes" and also discouraging the use of cash. In addition, the costs of formal employment should be reduced by developing a pro-profit fiscal policy, simplification and automation of issuing permissive documents etc. Stopping these practices would automatically enable balancing the State Social Insurance Budget and increasing the pension amount to subsistence levels.
  • Public pension reform can and should be politically feasible. However, to ensure a lasting effect of these measures, the reform has to be comprehensive and include efforts from a wide range of institutions (Ministry of Labor, Social Protection and Family, National Office for Social Security, Ministry of Finance, Ministry of Economy, National Bank of Moldova, Prosecutor office etc.).

 

Download report (Romanian) 

 

The report has been launched with the financial support from the Soros-Moldova Foundation, within the project „EU-Moldova Relationships – Monitoring the Progress within the Eastern Partnership in 2014”

Tags: Natalia Chitii

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