Similar to Moldova’s protracted transition to a free market, however, the reform of the country’s pension system is largely a story of “unfinished business”, Yuliya Smolyar, World Bank Senior Social Protection Specialist, and Victor Neagu, WB Communications Officer, say in an analysis.
The experts note that the reform of the pension system was initiated in the late ‘90s to try to fix some of the more pressing challenges by restoring fiscal balance and helping put payments on a sustainable track – essentially meaning that payments were now made in cash, rather than in galoshes or umbrellas, IPN reports.
The 1998 pension reform envisaged a phased increase in the retirement age up to 65 years for both men and women, and clear linkages between salary contributions and pension payments. This aimed to motivate Moldovans to participate in the system, but after a few years of implementation, the gradual increase in retirement age was put on hold. And, because the retirement age didn’t increase, the planned increase in the value of pensions was put on hold too.
The current minimum pension policy has the noble goal of preventing the impoverishment of the elderly. However, it leads to high redistribution from better-off to poorer retirees and therefore weakens the link between contributions and the level of pensions – discouraging contributions to the system, said the WB experts.
The analysis says the deteriorating demographics, outward migration as well as low labor force participation, and high informality have led to a sharp decrease in the number of insured persons and a shrinking contributors’ base. In just one decade (2002-2012), the number of insured people fell by 40 percent in Moldova, while the contribution coverage decreased substantially and stands today at 0.76 pensioners per 1 contributor. By 2020, because of aging and demographic trends, the ratio is projected to rise to 1 pensioner per 1 contributor.
At the request of the Government of Moldova, the World Bank completed a comprehensive pension sector analysis, which formulated a number of reform options. The analysis shows that if the current system is not changed, people will get less and less in return for their contributions, so they will be less and less motivated to contribute.
The experts believe a number of urgent actions could help improve the current public pension system – such as the revision of the pension formula to re-establish the link between contributions and pension payments, an increase in the retirement age, and leveling of the retirement age for women and men. There has been talk of setting up a fully-funded defined-contribution pension scheme. International experience shows that Moldova needs stronger and cleaner financial institutions and a viable public pension system for a fully-funded defined contribution pension scheme to work.
