Romania’s Pension System: The Weight of the Past

In Romania before 1989, as elsewhere in the Soviet world, retirement support was one of the few rewards that the regime offered its citizens. Retirement provisions were based exclusively transfers, through the State, from the current working population to the pensioners. Technically, the system was a Pay As You Go System. The difference was that retirement provisions, like every other facet of the economy, were planned. Workers did not choose, but were told, when to retire. Early retirment was not envisioned. Sick live was strictly controlled and limited. There was no unemployment, and the penalties for any enterprise which evaded payments to the system were prohibitive (The State Bank was simply prohibited from paying wages until wage taxes had been paid). Transfers in cash and kind to the pensioners were strictly limited to the resources available. As a consequence, before 1989, Romania.s retirement system can be considered to have been consistently in excess. In the years which followed the overthrow of Nicolae Ceausescu, the public retirement system lost the constraints imposed by a command economy, and its implicit tensions became manifest. As the dispersion of wages increased under the pressure of even proto-market forces, disparities between benefits and contributions appeared, and the pressure for tax evasion grew. Tax discipline deteriorated. Furthermore, the new Government extended the pension system it had inherited, increasing the benefits and relaxing the qualifications, in response to political pressures. The result was that the system became fiscally imbalanced, and that, paradoxically, though privileges multiplied, actual average benefits declined. By 1997, the public pension system was in deficit, and the average real benefit had fallen to 45 % of its level in 1990. In 1998, Romania began an ambitious reform of its pension system, and proceed with a plan to introduce by stages a completely new three-pillar system. The form entailed a radical change of the public pension system (including the transition to a "point" system, unification of regimes, and increases in retirement ages), and a diversion of one third of the mandatory social security tax to a new private system of Universal Pension Funds. This paper presents and analyses the weight of the past. It describes the institutional weaknesses of the pre-reform system and analyses the demographic pressures threatening it. It concludes with a calculation of the implicit debt of the pre-reform system in 1997.Romania, pension systems

Les modèles démoéconomiques hybrides à deux classes d’agents comme outils d’analyse de l’équilibre des régimes de retraites

As part of my research, I tried to extend the use of the demo-economic model developed in order to study the linked impacts of demography and economy on a given pension plan. The demo-economic model used is a neo-Cambridgian model with two types of agents in a closed economy. We improved the structure of the model in different ways. On the one hand, these improvement allow a more detailed description of the pension plan, on the other hand its main originality is to allow a macroeconomic linkage with an endogenous or exogenous growth function. This modeling is very useful in countries where historical pension data are not available. In addition, we integrated elements of equity price dynamics into the model to determine consistent asset allocation strategies throughout the life cycle (LCAA).Mes recherches visent à développer le champ d'utilisation des modèles « hybrides » pour répondre aux questions soulevées par l’évolution des systèmes de retraite face au vieillissement démographique. Il s’agit de modèles d’équilibre général dans lesquels seuls les comportements clés en matière de réaction au phénomène du vieillissement démographique sont spécifiés de façon détaillée. Le recours à ces modèles s'est avéré particulièrement utile dans les pays ne disposant pas de données statistiques assez anciennes ou assez fiables pour envisager l'utilisation de techniques alternatives. De même des pistes de recherche périphériques relatives au complément de retraite par épargne m’ont conduit à utiliser un modèle de croissance hybride pour y intégrer des variantes de la dynamique du prix des actifs risqués afin de déterminer des stratégies contrastées d’allocations d'actifs de cycle de vie (LCAA)

Non Gaussian returns and pension funds asset allocation

International audiencePurpose We will demonstrate the importance of taking into account \mean reversion in asset prices and will show that this type of modeling leads to a high share of equities in pension funds' asset allocations. Design/methodology/approach Firstly, we will study the long-run statistical characteristics of selected financial assets during the 1895-2011 period. Such an analysis corroborates the fact that, for long holding periods, equities exhibit lower risk than other asset classes. Moreover, we will provide empirical evidence that stock market returns are negatively skewed in the short term, and show that this negative skewness vanishes over longer time horizons. Both these characteristics favor the use of a semi-parametric methodology. Findings Our empirical study led us to two major findings. Firstly, we noticed that the distribution of stock returns is negatively skewed over short time horizons. Secondly, we observed that the fat-tailed shape of the returns distribution disappears for time periods longer than five years. Finally, we demonstrated that stock returns exhibit \mean-reversion\. Consequently the optimization program should not only take into account the non-Gaussian nature of returns in the short run, but also incorporate the speed at which volatility \mean reverts to its long-run mean. Originality/value To simulate portfolio allocation, we used a CF VaR criterion with the advantage of providing an allocation that is independent of the saver’s preferences parameters. A backtesting analysis including a calculation of replacement rates shows a clear dominance of the “non-Gaussian” strategy, as the retirement outcomes under such a strategy would be positively affected