The women and men in the Republic of Moldova will retire at the age of 63, while the insurance period is unified and raised to 34 years. On December 17, Parliament passed a bill on the pension system reform in the final reading. We discussed the novelties brought by this with Laura Grecu, president of the National House of Social Insurance.
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– The extension of the retirement age and insurance period caused concern and dissatisfaction among the people as to the initiated reform. Why was such a measure necessary?
– During the last few years, the number of persons who contribute to the social insurance budget has significantly decreased, while the number of pension recipients is on the rise. The system dependence rate, determined by dividing the number of insured persons to the number of pensioners, was 1.43 in 2000 and declined to 1.24 in 2015. This dependence rate associated with the aging process tests the durability of the pension system, which has been in deficit during the last few years. Thus, compared with 2005, the demographic aging rate rose from 13.6% to 16.2%. According to the predictions of the UN and the Demographic Research Center of the National Institute for Economic Research of the Academy of Sciences of Moldova, the persons aged 60 and over will represent 25% of the population in 2035. Given such a situation, measures should be taken immediately, sometimes unpopular, such as the extension of the retirement age so as to ensure the sustainability of the pension system in the short, medium and long terms, ensuring thus decent living conditions after retirement for pensioners.
So, the law adopted by Parliament provides for the gradual adjustment of the retirement age for men and women to the standard retirement age of 63. Compared with the current situation, the retirement age for men will rise by one year (by four months a year until July 1, 2019), while for women by six years (by six months until July 1, 2028). The prolongation of the retirement age is dictated by the life expectancy recorded in 2016 – of 75.5 years for women and 67.5 years for men.
A number of European states began to equalize the retirement ages of women and men and to later increase these (up to 65 years in Greece, France, Czech Republic, Greece, Lithuania, Hungary, Malta, Austria, and Romania; 67 years in Denmark, Germany, Netherlands, and Spain; 68 years in Ireland, Finland and the UK). The increase in retirement age and, respectively, in the insurance period will offer the people the possibility of remaining actively engaged in work. This means, first of all, a higher pension and also active aging.
At the same time, the persons can benefit from an early old-age pension, which is a new innovative element of the pension system. The persons will be able to apply for an old-age pension three years beforehand (60 years in the case of men and women), on condition that an insurance period of 34 years is reached. The non-contributive periods are not included in this insurance period. The persons who will continue to work after retirement will have their pension recalculated once in two years.
– They say the current pension system of Moldova is discriminatory and subjective, with a nontransparent pension calculation formula. There are many cases when persons with the same social contributions get different pensions. What will the new pension system reform change?
– Starting with April 1, 2017, a new pension calculation formula will be used instead of the current calculation method, which is considered very complicated and is not understood by the people and necessitates the collection of a number of justifying documents (salary certificates, extracts from orders, etc.). The new formula will ensure interdependence between the paid social contributions and the size of the future pension. The new formula is transparent and can be easily managed. Also, the persons will confirm only the insurance period until January 1, 1999 and will not need to present salary certificates and other documents. We also plan to provide an online pension calculator for payers of social contributions, which will enable the person to calculate the future pension with approximation.
It should be noted that the pace of contribution collection is now much lower than the growth rate of the social welfare costs and this causes considerable disproportions. Respectively, the deficit of the social insurance budget is covered with state budget funds (1.34 billion lei). The sustainability of the pension system is influenced by the number of active people and that of employed people, which rose by 1.5% and 3.3% respectively, while the total number of pensioners increased by 3.1%, while the costs associated with pension payment by 16.9%. Thus, the ratio of taxpayers to pensioners is 1.24 (persons involved in the pension system total 846,000 or 70.3% of the employed population that takes part in the state social insurance system).
Statistics show that about 25% of the able to work population of the Republic of Moldova is abroad. This is a significant loss for the labor market and the social insurance system, which cannot compensate the costs from other resources. Labor migration had a negative impact on the labor market and simultaneously led to a decrease in the number of insured persons. This negatively affected the financial viability of the social insurance system. Another problem is related to the underground economy, which is estimated to represent 30%-40%, and the serious consequences of this phenomenon are felt not only in the social insurance system, but also in other social spheres. Recent polls show that almost 33% of the active population of Moldova worked illegally at the main workplace in 2014. The cases of informal employment are most frequent at agricultural companies, where more than 70% of the employees receive salaries ‘in envelope’.
– The reform is designed to equalize all categories of employees. So, there will be removed the privileged pension determination conditions. What will happen to the pensions of persons who already retired? Will these be recalculated?
– Equality means everyone’s obligation to pay social insurance contributions. The size of pension will depend on the paid contributions. The new system will make the incomes earned after 1999 match the currently obtained incomes. This will automatically lead to a rise in pensions. The pension system reform means exclusion of the privileges enjoyed by some categories of people, such as MPs, members of the government, public functionaries, local elected officials, judges and prosecutors, by calculating their pensions in the same conditions as for the other taxpayers.
For persons who retired before January 1, 1999, the pensions were already recalculated and the incomes earned by that date were valorized. The introduction of valorization of incomes gained after January 1, 1999 is one of the essential elements of the pension system reform as the current pension formula does not take into account the depreciation of money in the period when the insured incomes were obtained up to the moment the pension is determined. The current pensions will be valorized gradually.
The pensions set in 2001 – 2008 will be valorized as of April 1, 2017, while those set in 2009 – March 31, 2017 will be valorized in accordance with a schedule agreed by the Government. Also, as of April 1, 2017, the pensions of persons who will retire after this date will be determined based on a new calculation formula according to which the size of pension depends on the paid contributions and the length of the period during which these were paid (insurance period). The incomes earned after January 1, 1999 will also be valorized and this will lead to the calculation of a higher pension.
– In 2015, the average monthly old-age pension was of 1,192 lei or 76% of the minimum subsistence level, while the minimum monthly pension was 862 lei (55%). What are the estimates for the first year of the reform? When will the pension cover the subsistence level?
– As a result of the valorization of pensions set in 2001 – March 2017, the pensions will rise by 5-25% on average, while for the subsequent years even more. The rise will depend on the incomes from which social contributions were paid by each person.
The pension replacement rate (ratio of pension in percentage to average salary) is now only 26% on average, but the application of the new calculation formula will enable to substantially increase this rate. For example, for a length of service of 30 years, the replacement rate will be of 40%. Based on an average salary of 5,050 lei, the pension will be 2,045 lei, up 70% on the average pension in 2015.
– The reform also brings new novelties. For example, the period during which a parent looks after a child with disabilities, up to the age of 18, will be included in the insurance period. How will the old-age pension of these persons be determined? On what sources will the calculation formula be based?
– The reform enables to add the non-contributive periods when the person looked after a child with severe disabilities younger than 18, before being employed as a personal assistant; was a resident in mandatory post-university education; worked as a judge or prosecutor until December 31, 2005. The calculation formula for persons who claim old-age pension will be common, while the size of pension will depend directly on the incomes from which social insurance contributions were paid and on the insurance period of each person.
– Is the right to retire earlier kept for mothers with many children? Is the additional unpaid childcare leave included in the insurance period?
– Following the reform, the mothers who gave birth to and raised up to the age of eight five children and more will continue to be entitled to early retirement. From July 1, 2017, the standard retirement ages reduced by three years will be applied for this category of people. Under the new modifications proposed for this category, the pension can be provided for an incomplete insurance period, which will be 30 years and six months on July 1, 2017.
The pension law provides for the inclusion of the period during which a child is looked after, up to the age of three, by one of the parents or by the guardian if both of the parents are dead, into the insurance period. The period of looking after a child aged three to six does not represent insurance period.
– From 2017, the National House of Social Insurance will be the only institution responsible for calculating pensions. Will there be a common systemized database about the total number of beneficiaries of the public pension system and associated costs?
– Within the reform, the National House of Social Insurance will take over the duty of setting and paying pensions for the police. This does not yet mean that the retirement conditions for this category will be unified. Their pensions will be determined in accordance with Law No. Nr. 1544 of 23.06.1993 on the provision of pensions to service members and persons from the command corps and troops of the interior bodies, as until now.
To ensure an efficient institutional framework and the security of the data of recipients of pensions from among the police, the National House of Social Insurance will create a separate structural subdivision responsible for handling applications and issuing the decision on pension provision. Consequently, the national pension system will include a systematization of all the costs associated with the payment of pensions and the number of recipients by ensuring strict monitoring, and will ensure transparency and efficiency in the use and management of public finances.
