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Seven million Romanian workers face significant cuts to their future pensions under reforms agreed this month by the ruling social democratic PSD party led by Prime Minister Mihai Tudose.
Romania is cutting future retirement payments because the government is struggling to meet its ambitious promises on tax cuts, wage rises and investment without breaking an EU-mandated fiscal deficit limit, set at 3 per cent of gross domestic product.
Working Romanians aged under 35 automatically save a fraction of their social security contributions into private pension schemes to supplement their state pension.
But Romania’s government has decided to cut accompanying state contributions to the so-called second pillar of private pension schemes from 5.1 per cent to 3.75 per cent from 2018 onwards.
Mihai Bobocea, secretary-general of the Romanian Pension Funds’ Association (APAPR), said the cut in government contributions was “a significant blow” to the system, and would damage trust in private pension plans.
“We estimate this decision is likely to slash future retirement income by at least 20 per cent for all plan members, as well as providing less capital to fund local businesses via the stock exchange,” said Mr Bobocea.
Romania’s private pension funds produced annualised returns of 5.3 per cent after fees and inflation between 2008 and 2016, among the best of any retirement scheme in Europe, according to Better Finance, a Brussels-based investor rights group.
Mr Tudose suggested in September that second-pillar private pensions, which have combined assets of around 38.3bn lei ($9.7bn), could become optional, but the government appeared to have retreated from that position as a result of public opposition. Some observers believe the government will press ahead with plans to dismantle the current system when public pressure abates.
“Romania has been able to build excellent private pensions and should not start to dismantle them by lowering the level of government contributions,” said Janwillem Bouma, chairman of PensionsEurope, a Brussels-based trade association for retirement funds.
Rapid improvements in life expectancy are expected to increase the number of retirees over 65 to almost 30 per cent of the total population by 2040, which will lead to additional pressures on the state-funded pension system.
“This will pose major challenges unless appropriate policy measures are taken to counterbalance these effects,” said Mr Bouma, adding that more private pension savings were needed to strengthen Romania’s economic growth.