Active ageing and reforming pension system. Main challenges

• Author: Valentina Vasile
• Position: Professor Ph.D. and Senior researcher I, 'Nicolae Titulescu' University, Bucharest
• Pages: 262-280

262 Lex ET Scientia. Economics Series

LESIJ NO. XIX, VOL. 2/2012

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ACTIVE AGEING AND REFORMING PENSION SYSTEM.

MAIN CHALLENGES

Valentina VASILE*

Abstract

Active ageing and economic crisis create a great pressure on pension systems, from the

financial sustainability and performance of the old architectures of the 3 tired system point of view.

Reforms of public pension systems during the last years highlight that demographic ageing is a

major influence factor on financial sustainability of the national insurance and social assistance

systems, with long-term effects. Associated with “classic” demographic ageing (low birth-rate,

increase of the average life expectancy) for some new member states, such Romania, labour mobility

on medium- and long-term and the change of its largest part into emigration, heightens labour force

ageing and diminishes participation to insurance systems (due to the low portability of pensions). To

these are added also the specific effects generated by the crisis that have put pressure on decreasing

social expenditures, in reverse trend against the demand generated by demographic ageing.

Romania, and also several EU member countries are involved in large-scale actions of reforming

pension systems both as answer to the increase in the numbers of elderly population, and implicitly

of associated social expenditures, but also for stimulating the extension of active life. The increase in

the standard retirement age and its correlation to life expectancy constitute priorities of changing the

methodology in pension computation. The reformed policies in the field of pensions pursue as well

restricting accessibility and diminishing early-age retirement schemes in parallel with stimulating

the employability of individuals aged 50 and over. In this paper we present the main policy action in

order to stimulate and develop a new model of old age insurance and a new pattern of incomes after

retirement, and also to investigate the support measures among EU member state for active ageing

and increase incomes for elder persons.

Keywords: active aging, reforming pension system, financial sustainability

JEL Classification: J40, J2, B26

Introduction1

The impact of the financial crisis on private pensions and financial restrictions of the state

have strengthened the necessity of developing sustainable, combined/multi-tiered pension systems,

the creation of financial balances on each component, as well as assuring medium- and long-term the

individual sustainability. As a result, assuring decent life at old age turned into an actual challenge,

the weaknesses of the public system triggering the rethinking of the association scheme for various

types of pensions, for assuring total comfortable/decent incomes (EC, 2011)2. Moreover, in some EU

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* Professor Ph.D. and Senior researcher I, “Nicolae Titulescu” University, Bucharest, email:

valentinavasile2009@gmail.com).

1 Present paper represent an synthesis of the Chapter 1 of the Study “Analiza evoluiilor şi politicilor sociale în

UE în ultimii trei ani – pensii suplimentare/private şi impactul î mbtrânirii populaiei” Strategy and Policy Studies

(SPOS) 2011, Study no 4, European Institute from Romania, Bucharest, 2011, coord Valentina Vasile

2 Concluding the first European semester of economic policy coordination: Guidance for national policies in

2011-2012, Communication from the Commission to the European Parliament, the European Council, the Council, the

European Economic and Social Committee and the Committee of the Regions COM(2011) 400 final, EC, Brussels,

7.6.2011, http://ec.europa.eu/europe2020/pdf/communication_en.pdf

Valentina Vasile

263

LESIJ NO. XIX, VOL. 2/2012

countries is pursued to ensure the compatibility of the pension system’s structure and the possibility

of benefiting from pension under various systems of public or private insurance, irrespective of the

fund’s type where the contribution was made and the location of the person at retirement age.

Economic development level, social model and pension system

The level of economic development and the social model represents main determinants of the

national pension systems evolution and performance. The main restrictions of the financial

sustainability were: economic dependency ratio, the employment rate and average level of incomes

of the contributors of the public and private pensions

An economic developed country can afford to build up public insurance systems for pensions

that would promote to a large extent the safety of old-age income, supporting at legal and

institutional level and by adopted policies the participation to the system and the development of

complementariness. Private pensions become attractive for supplementing incomes from the public

system and are used as additional safety system by persons with decent and/or comfortable incomes.

In the case of weak state insurance systems, where the pensions becomes insufficient and there is no

adequate (decent) ceiling of the minimum pension, or where the principle of the social minimum

pension is not applied, private pensions are attractive as alternative to public insurances in particular

for persons with incomes above average or high, in general non-wage employed population, for

whom in many countries, the public pension pillar is optional. The attempt has been made in the last

years to increase the contribution base by attracting within the system all types of active population,

yet the deterioration of the economic dependency ration leads to the option of aggregating sources for

incomes on retirement by broader participation, hence more risky to the private system of old-age

insurance.

If the public pillar is mainly based on the PAYG system, the private one, in its constructive

variants has as ground principle capitalisation and preserving the purchasing power of the saved

amounts (contributions) by investment portfolio.

If, at the beginning, the private systems were predominantly optional, and represented an

individual, singular option of the beneficiary, in the last decades, as social relationships and social

accountability of the companies and of the state as market stakeholders developed, private pension

systems evolved supported by companies or by the state: a) occupational pensions related especially

to the activity of the social partners, and firstly of the trade unions and guilds/professional

associations, and b) compulsory private pensions supported under various forms by the state,

respectively by fiscal deductions, management support systems for the funds, by regulating

supervision and guaranteeing institutions, etc.

Also individual insurances remain, yet they develop and diversify, gravitating around the idea

of life insurance (pension insurances on the life insurance system), and represents a specific market

insurances for those with average and high incomes and a culture of managing incomes oriented on

the market mechanisms (as form of risk management and of active participation on the market for

generating positive yields of saved funds).

The multi-tiered system is present in several countries of the world, and at EU level was

promoted the coordination policy (EC, 2004)3 for insuring financial flows between national funds

and for rendering efficient systems.

Population ageing has developed specific systems of insuring elderly persons, based on

integrated adequate health services, social assistance centred on the particular needs, e tc. In the field

of pension insurances was pursued the development of individual insurance culture and of extending

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3 Regulation (EC) no 883/2004 of the European Parliament and of the Council from 29 April 2004 regarding

the coordination of social security systems.