Policy Briefing Series [PB/03/2014] Pension Reform in Moldova - Summary of Proposals - Ulrike Bechmann, Adrian Lupusor and Ricardo Giucci German Economic Team Moldova Chişinău, February 2014 German Economic Team Moldova
1. Main challenges Structure 2. Sustainability analysis 3. Reform options: Proposals and suggestions 4. Conclusions Contact German Economic Team Moldova 2
1. Main challenges Financial situation of the pension system Contributions are not sufficient to cover pension expenditures Mains reasons: Limited contribution base and widespread underreporting of wages Result: Deficit in social insurance system of currently 13% of expenditures (or 1.2% of GDP) has to be covered from the government s budget, thus weakening the fiscal position Pensions are too small On average only 1000 MDL per month, below the subsistence level of 1500 MDL Replacement rate (i.e. ratio of average pension to average wage) at only 28% On top: Demographic change will aggravate those challenges in the foreseeable future Thus: Serious need for reform German Economic Team Moldova 3
2. Sustainability analysis: Deficit expected to rise Revenues, expenditures and deficit (status quo) Note: Nominal revenues earmarked for old-age pensions, pension expenditures of the state social insurance budget (thousands MDL) and the core deficit (%) Source: Own calculations based on NBS data German Economic Team Moldova 4
2. Sustainability analysis: Beneficiaries will soon outnumber contributors Contributors and beneficiaries (status quo) Note: Projected number of effective contributors and beneficiaries of the pension system Source: Own calculations based on NBS data German Economic Team Moldova 5
3. Reform options: Strong impact of equalizing retirement age for men and women Gradual increase in the retirement age for women from currently 57 to 62, over a 10 year period (2015-2024) Revenues, expenditures and deficit Note: Nominal revenues earmarked for old-age pensions, pension expenditures of the state social insurance budget (thousands MDL) and the core deficit (%) Source: Own calculations based on NBS data German Economic Team Moldova 6
3. Reform options: Little impact of higher contributions Simulation: Increase of contribution rate by 1 percentage point Revenues, expenditures and deficit Note: Nominal revenues earmarked for old-age pensions, pension expenditures of the state social insurance budget (thousands MDL) and the core deficit (%) Source: Own calculations based on NBS data German Economic Team Moldova 7
Further proposals and suggestions for reform Promote equality and transparency Proposal: Abolition of privileged pensions; Same contribution Same pension Limited financial impact, but positive impact on perception of pension system Further proposal: Contributors should be better informed about their future pensions De-shadowing of economy Import goal, but difficult to achieve Possible unorthodox instrument: Lifting the minimum wage, which is thought to be well below the actual wage paid in the economy However: Further research is needed here, as a higher minimum wage could have negative impacts on the economy and especially on some regions of the country But also a more equal distribution of contribution payments between employer and employee could contribute to de-shadow the economy German Economic Team Moldova 8
Discussion: How to increase incentives for higher and longer contributions? The pension formula The specification of the current pension formula (since after 1999) = 1.4% +2% +2% Whereas is the calculated monthly pension is required years of insured service (30/32 years for women/men) is the actual years of confirmed service is the actual pension age is the statutory pension age and is the average monthly insured income (nominal income) 1.4% and 2% are the current accrual rates German Economic Team Moldova 9
Suggestion for further research: Increase of accrual rates Adjust accrual rates Reward years of contribution Source: Own calculations. German Economic Team Moldova 10
4. Conclusions There is a serious need for reforming the pension system Main proposal: Gradual lifting of retirement age of women from 57 to 62 Effect: Immediate financial stabilisation of the system, holding till 2040 Further recommendations Abolition of privileged pensions More equal contribution shares from employers and employees Not recommended: Lifting of contribution rate Little improvement in financial situation Less incentives for contributors to participate in the system Ideas for further discussion Raising minimum wages in order to increase the volume of contributions? Raising of accrual rates in order to increase the incentives to participate in the system? German Economic Team Moldova 11
Contact Ulrike Bechmann bechmann@berlin-economics.com Adrian Lupusor adrian@expert-grup.org Dr. Ricardo Giucci giucci@berlin-economics.com BE Berlin Economics GmbH Schillerstr. 59, D-10627 Berlin Tel: +49 30 / 20 61 34 64 0 Fax: +49 30 / 20 61 34 64 9 German Economic Team Moldova 12