Romania with new pension law

The government approved a new pension law which gradually increases the pension point until 2022, Labour Minister Lia Olguta Vasilescu announced. The negative fiscal impact of the law implementation will reach RON8.4bn (EUR1.8bn) or 0.9% of GDP in 2019, RON24.8bn in 2020, RON58bn in 2021 and RON81bn in 2022. The state spends nearly RON62bn annually on paying pensions to around 5.2 million pensioners currently. The additional amounts needed to cover pension hikes by 2021 will come from the 70% increase of budget revenues in mandatory social contribution accounts, Vasilescu said. Still, we note that revenues from social contributions increased by less than 40% this year even after the transfer to employees was implemented. Thus, the minister probably refers to an estimated increase in the following years, even though she did not explain how she came up with the 70% increase.

Pensions will be recalculated annually using another calculation method linked to inflation rate and gross average wage increase as of 2022. Pension point will reach 45% of gross average wage by then, from the current 25% (RON1,100). The law also readjusts the presently applied calculation method, which is linked to the pension point, aiming at eliminating discrepancies regarding contribution period and work conditions, according to Vasilescu. Nevertheless, no pension will decrease, she emphasized.

Most of the law provisions are intensely criticized by unions and economists. The unions say it is in fact widening discrepancies, not eliminate them. In addition, it does not protect pensioners when former employers eluded contributions payment. At the same time, many economists warned that the budget is unlikely to afford the major fiscal impact, especially since uncertainties regarding wage dynamics and economic outlook increased.

The pension law will go to MPs for debate and vote in the following days. It will very probably pass, even though we expect at least the Fiscal Council to issue another warning on its high pressure on Romania’s public finances stability.

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