Ionela Simion worked at the post office of Romania for 40 years. He had to deal with all kinds of “crazy people,” as he puts it. Drunken men who came to the cash register to take children to drink, unruly men who took out their anger on the women at the cash register, pensioners who complained that their pension was being stolen a week before it was due… But how many he did not see her life!

Now Ionela has become one of THEM. Among pensioners. She does not know that the current complex system will cope with a large number of people living longer, while there are fewer and fewer Romanians entering the labor market and paying contributions.

See below, by county, how Romania has aged over the last 10 years (the number of octogenarians in 2022 compared to 2012 and their percentage increase)

In Constanta, the number of people aged 80+ has increased by almost 40%. In Ilfov, Hunedoara or Brasov, the increase of people over 80 years old is more than 30%.

According to the results of the census, the phenomenon of population aging has increased, the average age of the population has increased to 42.4 years compared to 40.8 years in the previous census, explains Adrian Codirlasu, vice president of the Association of Financial and Economic Companies. Banking Analysts in Romania (AAFBR).

These events, he explains, are caused by two demographic trends: declining birth rates and migration.

According to UN estimates, at the level of 2050, the population of Romania will reach approximately 15.7 million inhabitants

This is assuming net migration between 2015 and 2050 of only 425,000 residents. According to INS estimates, at the level of the 2060s, the population of Romania will reach 13.2 million people.

Between 2025 and 2035 there will be a peak of retirements, the “decree” generation. In these conditions, there will be an accelerated growth of state pension expenses, caused both by an increase in the number of pensioners and an increase in the pension score, in the conditions of a reduction in the number of the working population due to migration and negative growth. .

As a result, there is a significant risk that the state pension system cannot be maintained in its current form, Adrian Codirlasu believes. That is, the current retirement age, the plan to increase pension points, the current (tax) social insurance contributions are no longer sustainable.

“Probably, the choice will be between a combination of the previously mentioned parameters, namely: an increase in the retirement age, a trend that is already observed on an international scale, and/or a slower growth (or permanent preservation) of the pension score,” says the expert.

Another possible solution is to increase taxation by increasing social contributions

This phenomenon is characteristic not only of Romania, but also manifests itself in many countries. “In general, the higher the level of development, the more the population growth slows down or even becomes negative, the latest example is China, where the population decrease was recorded for the first time. Based on world experience, the first option is to increase taxation, which applies to the employed population, to support the payment of pensions. Next comes a reduction in payments to current pensioners,” the expert believes.

An example of a reduction in benefits is the taxation of pensions (for example, the payment of health insurance premiums).

The third option is to raise the retirement age.

“This option practically reduces the total pension paid to the participant. This will make it possible to contribute funds to the state pension system for a longer period of time and receive a pension within a shorter period of time. The use of this option is actually an acknowledgment of the default of the state pension system. This is similar to a bond default: for example, a bond issuer delays paying the bond’s coupon or principal because it does not have the financial resources to repay the bond. A current example of such an approach, raising the retirement age, is the French government’s proposal to increase the retirement age,” says Adrian Codirlasu.

In comparison, to highlight the inefficiency of the public pension system in Romania, the proposal to raise the pension age in France is lower than the current retirement age in Romania, with a longer life expectancy in France compared to Romania.

A Romanian receives about 55%-60% of the amount of contributions during his working life

“In Romania, the current tax related to the state pension system is 21.25%. In a simple calculation, without taking into account the time value of money, an active person receives 21.25% of salary for the state pension system for 35 years and then receives almost 45% of salary as a pension. Under these conditions, he receives about 55%-60% of the amount of contributions during his working life. If you also take into account the time value of money, the amount received (as a percentage of contributions) is even smaller,” the specialist states.

In the event of the depositor’s death, the funds deposited in level I remain (are) the property of the state, which has no obligations to the heirs. Returning to Tier I contributions over 35 years of contributions requires a life expectancy of 88 years, which is 14 years higher than the average life expectancy in Romania.

“Social contributions are actually a tax on labor, not a benefit for the payer. Although the Tier II income is substantial, the contribution amount of 3.75% of 21 21 salary (versus 21.25% in the state pension system) has been capped to compensate for the loss of “income” from the state system. In order to ensure financial independence in retirement, a large part of the effort will be made by your personal savings and investments, so that you are as little dependent on the public pension system as possible. The prudent approach is for Gen Xers and below (those born between 1961 and 1980) to consider when planning their savings and investment behavior that the state pension will be very small relative to their financial needs at retirement and will provide only the minimum living wage, sums up the Romanian expert.