Romania’s current population structure statistics reveal the most vulnerable ratio of the country’s economy – the ratio of employees/retirees. The number of employees, who pay taxes that feed the public pension fund budget, has been lower than the number of retirees for fifteen years.
In 1990, there were 8.1 million employees and 3.5 million retirees. The situation has changed dramatically in the meantime and in 2012, the number of employees was down to 4.3 million paying for 5.3 million retirees. Economic analysts say this is the worst anomaly of the Romanian economy and society.
“At this rate, I think Romania will be unable to pay pensions in ten years from now and will have to borrow money. Our economy has deteriorated so much that we must not expect any miracles; the more time passes, the more expensive it becomes,” believes university professor Mircea Cosea, who used to be a member of the Party of Social Democracy in Romania (PDSR) until 1997 and of the National Liberal Party (PNL) until 2007.
He added the number of pensioners shot up because of ill-advised political steps taken after 1990, when political parties chose to offer early retirement to the personnel of major state-run companies instead of resorting to layoffs that would have caused social unrest and loss of votes.
Deindustrialization halved the number of employees in the economy in the last twenty-three years. The most visible such example is steel plant Arcelor Mittal Galati (former Sidex), which was employing 27,000 in 2000 and had fewer than 8,000 left by the end of 2012.
Most of the staff that left did it by retiring. The layoffs were not conducted with efficiency in mind alone, but also because Sidex is now producing five time less steel than in did in 1989 and three times less than in 2000, as only one of its five furnaces is still running.
Pension fund deficit came close to EUR3 billion last year, unemployment has been rising since the beginning of 2013 and the number of employees is rising at an infinitesimal rate, considering the economy has yet to get back more than 500,000 – 600,000 jobs it lost during the crisis.
“Clearly this model is not sustainable and this is the worst structural problem of Romania’s economy and social security system. Few people contribute to the general consolidated budget – 4.3 million employees out of an active population of almost 10 million,” says Marin Preda, dean of the Department of Sociology of the University of Bucharest.
“Payment allocations are much higher than the pension budget can afford to pay because there are very many retirees.”
Whereas the difference between the number of retirees and employees was small in the first year the former outrun the latter, 1998, (5.5 million to 5.3 million), by 2012 it got worse, so there were 1.2 million more retirees than employees.
“In an economy where the retirees/employees ratio is above one, the pressure on the budget is much heavier, obviously. This ratio has been around 1.3 in Romania for a number of years now, and the impact is really heavy on the social health insurance budget for instance,” says economic analyst Laurian Lungu, managing partner of advisory firm Macroanalitica.
“Such an economy is always operating under the threat of tax hikes, most often out of the blue, to offset the deficits of various budgets (pension, health care) in case the economy is subjected to negative shocks.”
Private sector pays taxes, public sector pays electoral campaigns
The incapability to create jobs is due to the lack of a long-term strategy to do it, Cosea says.
“Although Romania says the market economy and democracy help the private sector, this is not true. The private sector pays all sorts of taxes and the public sector has remained a means to finance ruling political parties. Expensive electoral campaigns have driven Oltchim and CFR Marfa where they are today,” Cosea added.
Every government regardless of its political color is afraid to take steps to restructure the public sector because they generate social unrest and loss of votes.
“We need a new long-term governing vision, a plan every president and government should stick to. Stimulating job creation, a process that takes a lot of time, should start by reducing labor taxation, by providing support to international marketing of Romanian exporter companies and shifting foreign trade to non-EU members and by changing the attitude towards those vital services for a society: education and healthcare,” he added.
An increase in labor productivity can also lead to a functioning system with fewer employees but as long as most jobs do not create goods and services that could generate high added value, this is not possible.
Many pensioners could have kept working
Romania is now witnessing two alarming demographic trends: population decline and aging. The main causes are the migration abroad, caused by the difficult economy during transition and the negative birth rate after 1990, says Eugen Sinca, chief analyst of BCR, the largest local bank.
“If the trend does not reverse, the pressure on the public pension and health insurance system can be expected to increase around 2035, when the generations born in 1967-1970, years with unusual birth rates because the policies of the [communist] party at the time, are due to retire,” Sinca added.
Statistical data of the National Statistics Institute show more than 1.1 million retirees were below 65 years of age, either having reached their retirement age (with full or partial length of service) or having chosen early retirement or partial early retirement. There are also 769 people below 65 years of age living on disability pension.
“There are still many young retirees who could have kept working. But this is not the biggest problem, because they would have reached their retirement age some day. The big problem actually is that the governments have used the pension system as a way to compensate for the lack of jobs in the economy,” Professor Preda explained.
The increase in the number of retirees is not only Romania’s problem, other European countries that were once under communist rule are experiencing it, too. In Romania’s case, it is compounded by the low collection rate of the general consolidated budget revenue as a percentage of the gross domestic product.
“Our collection rate of the consolidated budget revenue is 30% to 31% of GDP, while in other countries it is 45%, therefore the government has very little money available. In Western countries, a ratio of 0.6 retirees per employee is already regarded as alarming,” Professor Preda added.
What solutions could make it better
BCR’s chief analyst says the progression of the retirees/employees ratio shows continuing the private pension system reform is necessary, so that people could have a decent income to live on in their old age. It is also necessary to implement a public healthcare system reform to improve service quality.
“Population decline and aging are producing three major economic effects: the economic growth slowdown by affecting workforce contribution, an increase in the pressure on the state budget and an impact on domestic savings, therefore continued reliance on foreign capital,” Sinca said.
“The first consequence would be that economic growth will be possible to stimulate through an increase in productivity rather than an increase in capital and much less or not at all through an increase in workforce.”
Getting rid of the inefficiency areas in the energy and transport sectors on short term and boosting research and development spending in view of a shift to a high-tech economy in the long run can contribute to keeping economic growth at 3% to 4% over the next decades, he added.
Professor Marian Preda says that the current number of retirees being what it is, the country would need seven or eight million employees paying taxes. However, job creation would require state budget money for investments.
A solution to get funding would be to improve absorption of European funds and possibly gradually raise retirement age especially for women, he added.
The solutions to address this situation have to be devised with the long-term picture in mind, since demographic projections are not good and in case nothing changes, things will get worse in ten years from now.
“The main idea is to improve public service quality. People are seeing this quality as much lower than what they pay for in taxes now,” says Macroanalitica’s Laurian Lungu.
“A change in this perception would lead to an increase in the number of employees in the economy either because of the return of those working abroad or because of those who are now informally employed. Of course, there are other solutions, as well, such as partial privatization of public services. Or a higher immigration for that matter.”
Yet another solution might be changing people’s preferences for keeping their savings. Romanians prefer non-liquid assets such as unlisted stocks, which account for 47% of their financial assets unlike 16% in Poland and 5% in Germany, says BCR’s Eugen Sinca.
“People’s savings and investment process has to be directed to assets whose value is known at all times in order to improve predictability of old age income.”
(English version by Loredana Fratila-Cristescu)