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ANALYSTSIn 2050, there will be no one left to pay the public pensions

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In 2050, there will be no one left to pay the public pensions

The pension system is in danger, market analysts say, and they claim that in 2050, there will be no one to pay the public pensions. Adrian Codirlaşu, president of CFA Romania, told us: "In the pension system we have increases that, according to local forecasts, but also according to IMF figures, will lead to an additional budget deficit that will be difficult to finance in the future, starting with 2021.

When Generation X retires, that is, in 2050, in Romania there will only be 15 million people, according to the UN forecast, which means that there will be no one to pay the public pensions.

The only solution is, in my opinion, the private pension system and personal savings. But in the private pension system there was an attempt to nationalize it in the last two years, and the system came out weakened, because as a result of the imposed terms, there were losses, as additional capital was lost and we also had a decrease of the contribution to private pensions".

In the opinion of Adrian Codirlaşu, the future is the private pension system: "We have to concern ourselves with our future safety, to be aware that we can only rely on ourselves and start saving, in any way we can. It would be cautious to devise a plan.

We have to consider that when we retire, we will not have any public pension, and make the financial decisions accordingly. We need to be aware that everything will be up to us. Government members should support the development of the private pension system, based on contributions, not on state promises that may be unsustainable".

Dochia: "The measures which will probably be passed include the raising of the retirement age"

Among the measures that are likely to be discussed and which will and will also produce results will be the raising of the retirement age, because Romania still has a retirement age - 65 years - which is rather low on a European level, analyst Aurelian Dochia says. According to him, in many countries there is a strong opposition to such a measure, with street protests, but it is one of the most logical measures. Aurelian Dochia also told us: "It is likely that all the additional pension systems will be rationed and the manner of calculating the retirement will be revised, especially leading to the cutting of the big pensions. I think that every effort will be made so that pensions can be paid. But crises can arise and, under the imperative of getting money at any costs, desperate measures can be taken to reduce pensions or suspend certain rights, measures that are not sustainable in the long term".

The specialist believes that a discussion on pensions should start from the topic of demography, saying: "Let's see how the population structure has evolved so far, and how it will from now on, because we know very well that pensions represent funds allocated to people older than a certain age, and they are generated by people who are of working age. Obviously, changes in the number and structure of people of the different groups will have a huge impact on pensions. Here is the first problem. Demographic changes are one of the things we know very accurately. There are calculations that can tell us with great precision what the demographic structure will be in ten or twenty years. We know that if we look at the demographic evolution, then things are quite worrisome because - not only in Romania, but in all the developed countries - there has been a trend of an increase in the number of old people, due to increase in the median lifetime, and as a result of the fact that the birth rate has decreased and, therefore, the number of the people that are of working age is shrinking. These factors create an extremely strong imbalance in the pension system and just solving it is a major headache for all pension systems in Europe and the world.

Many pension systems base their financial calculations on assumptions that are often not very realistic, but actually overly optimistic about the incomes with which pension expenses can be covered, and for that reason we have a number of cases where pension systems are not sustainable, if they are not going to have enough money to pay their liabilities in the next 10-30 years".

Aurelian Dochia continued: "In Romania, there are two types of pensions - the general pension, paid by the state public insurance budget, and the 2nd Pillar private pension system, as well as a voluntary private pension system - the 3rd Pillar, but which is a lot smaller. From experience, we see that the basis of the entire system of ensuring income for people of a certain age remains the public state pension system. The 2nd pillar was conceived and should be seen as a supplement to the public pension system, but not as a substitute, because the amounts paid here are much lower than those taken from the employees for the 1st pillar and however well managed they might be, they will never be able to cover the amount of a normal pension".

There are many cases in the world where the 2nd pillar pension system is going through certain crises, Mr. Dochia warns, and he says that there have been other crises years ago, in countries which had pension systems similar to the Romanian one, with the companies involved going bankrupt, and the people who contributed to their creation losing their money.

"That system isn't 100% safe, in fact, just like any other system", he said. "It would be good for the 2nd Pillar to be complementary to the 1st pillar and supplemented by individual savings, either by contributing to the 3rd pillar, or through individual investments. A good strategy is the one where one has a greater diversification ".

In Romania, pension levels have increased rapidly over the last few years, both through the increase of the pension point and through various legislative changes that have created advantages for certain sectors, at least, attracting the specialist's attention, emphasizing: "It has gone too far, by extending some benefits that were granted only to people who worked in difficult conditions. The retirement criteria have been greatly relaxed and these generous measures have contributed to creating pressure on the demographic act, the number of pensioners has increased greatly compared to the number of employees and the pressure placed on the pension budget is very high ".

The future in the medium and long term, if we look at the next decades, will not be easy at all, says Aurelian Dochia. "There is a certain demographic curve that favors the coming years, but later, things will become more complicated and I do not know how we are going to meet the requirements to provide pensions for a growing number of pensioners, given that the number of people that work is decreasing and will continue to decline".

The pressure on the pension system is very high and the political decision-makers must be very careful with the decisions in this sector, the economist points out, adding: "Unfortunately, the pension law tried not to upset anyone and everyone received pension benefits. Thus, spending on pensions has increased greatly and it's enough to look at next year - if all proposals made in relation to raising the pension point and applying the new pension law are implemented - the budget deficit will increase greatly. For years, the budget deficit includes billions of lei to cover the pension budget shortfall. Where that money is going to come from in the future, I don't know. We have elections in 2020 and no one can afford to lose the votes of the retirees. I think that in the short term the solution is to increase the deficit and to take out new loans, but at some point the bill must be paid and we will see who will foot it".

Radu Crăciun: "The state failed to have an balanced approached when it comes to the retirees in various generations"

The evolutions in the pension system have been divergent, says Radu Crăciun, president and CEO of BCR Pensii. He said that while the compulsory private pensions have been under constant attack, coming to the point where there dismantling, the public system benefited from very generous approaches, even beyond a reasonable sustainability limit. In other words, the state has failed to have a balanced approach to the retirement of different generations, providing benefits to current pensioners to the detriment of tomorrow's pensioners.

Given the low level of revenue collection, the demographic trends and the inevitability of a recession, the recent pension raises cannot be sustained without an even more substantial taxation of the active workforce, according to the specialist.

In his opinion, we should, generally speaking create the premises for the population saving more in the long term, because the government will be within a predictable period unable to provide a reasonable social protection, due to the demographic decline. Every individual will be on their own and will have to first of all depend on their own savings, says Radu Crăciun: "People need to be told that, the tearing of the umbilical cord which has tied pensioners to the state for decades, and for that a mass financial education program is necessary".

The second measure which should be taken, according to the expert, is the increase of the contribution to the 2nd pillar of private mandatory pensions, so that the accrued amount would be high enough to offset the decline of the public pension system. Furthermore, a system of generous and targeted fiscal deductibles is needed, which would incentivize long term saving through various instruments: optional pensions, occupational pensions, life insurance, health insurance, etc."

Given the low level of revenue collection, the demographic trends and the inevitability of a recession, the pensions increases of the last period cannot be sustained without an even more substantial taxation of the active workforce, according to the specialist.

Considering the major social impact, money for pensions will always be found, Radu Crăciun believes: "The costs could become higher though and lead to higher taxes, lack of investment, inflation, stagnation."

In his opinion, it is imperative to increase budget revenues by at least 30% and to reallocate budgetary expenditures from consumption, salaries and welfare, towards development. According to the specialist, this means a rethinking of salary and pension increases, as well as a rethinking of the special pension system and the low retirement ages.

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