Currently, public pension systems PAY-AS-YOU-GO (PAYG) from more countries in the world based solely on solidarity between generations are facing increasingly difficult problems to solve. Causes due to evolution. And demographic trends of aging while reducing the birth rate, increasing the average lifetime, inflation, growing costs in the period following the early post active retirement. Last but not least, reducing the dependency ratio, meaning the decrease number of taxpayers while increasing number of retirees.financial crisis, pension crisis, pension systems, pension system reform,demographic evolution

Assoc. Prof. Narcis Mitu Ph. D

Daniela Pîrvu Ph. D Student

English

Research Papers in Economics

 
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FINANCIAL CRISIS  AND THE PENSION SYSTEM 
Prof.  Gheorghe Matei Ph. D  
University of Craiova  
Faculty of Economics and Business Administration 
Craiova, Romania  
Daniela  Pîrvu Ph. D Student 
University of Piteşti 
Faculty of Economics  
Piteşti, Romania  
 
Abstract: Currently, public pension systems PAY-AS-YOU-GO (PAYG) from more 
countries  in  the  world  based  solely  on  solidarity  between  generations  are  facing 
increasingly difficult problems to solve. Causes due to evolution. And demographic trends 
of aging while reducing the birth rate, increasing the average lifetime, inflation, growing 
costs in the period following the early post active retirement. Last but not least, reducing 
the dependency ratio, meaning the decrease number of taxpayers while increasing number 
of retirees.  
JEL classification: E60, H55, I38  
Key words: financial crisis, pension crisis, pension systems, pension system reform, 
demographic evolution  
1. INTRODUCTION  
All the problems of the pension systems were accentuated by the global financial 
crisis has become an important economic dimension and the influence of increasingly large 
social  terms.  in  this  context  more  and  more  organizations  hospitalized!  National  and 
regional  experts  are  concerned  about  its  many  social  effects  of  global  financial  and 
economic crisis, especially over pensions. It is estimated that despite the severity of the 
financial  crisis,  its  effects  are  minor  compared  to  the  effects  caused  by  aging  and 
population reduction; within the European Union, the demographic crisis could have an 
impact 10 times worse, as noted in The World Bank report "Pension Crisis" (Pensions in 
Crisis: Europe and Central Asia Regional Policy Note), published in the December 2009 
and The European Union Report ”The public pension system in Romania, threatened by 
the demographic evolution” (published in March 2009). 
2. PENSION SYSTEM CRISIS 
In the average rate conditions of dependency (ratio of population over 65 years 
with the population aged 15-64 years) in Europe will double by the year 2060 (Table no. 1) 
pressure on public pension systems will become unbearable. 
 
 
 
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Table no. 1 Evolution of the number of pensioners in some European countries 
Country  Number of 
pensionaries 
Percent of 
the 
population 
How the wealth will 
rise until 2040 
Life expectancy (in 
years) 
Germany  16,4 thousand  20,0%  Up to 33,0%  77   men / 82,2 
women 
France  12 thousand  21,0%  Up to 40,0%  77,5 men / 84,4 
women 
Italy  15,3 thousand  25,0%  Up to 32,6%  79 men / 84 women 
Spain  8.6 thousand  18,4%  Up to 36,0%  79 men / 83 women 
Great  
Britain 
10 thousand  16,0%  Up to 25,0%  77,2    men / 81,5 
women 
Hungary  2,5 thousand  23,0%  Up to 30,0%  69,2 men / 77,4 
women 
Source: The European Union Report ”The public pension system in Romania, threatened 
by the demographic evolution”, March 2009 
 
In  Romania,  the  great  advantage  recorded  after  1990  due  to  aggressive 
demographic policy promoted by the old regime, there was a large number of taxpayers 
who support public pension system. This is only temporary advantage against a negative 
natural increase of population, work in conjunction with migrations forged in different 
countries, especially Western, and even early retirement age onwards the age of 50 years a 
large  number  of  people  active  economic  restructuring  and  institutionalization  fund  or 
medical reasons. If in 1990 more than three employees sustained a pensioner, when there 
were  2.6  millions  retired  in  2001  included  the  number  of  pensioners  that  reached  4.5 
million  in  2009  and  has  5.5  million,  of  which  about  900  000  are  retired  on  medical 
grounds.  It  is  estimated  that  approximately  25%  of  pensioners  in  medical  cases  are 
incorrectly  classified  in  a  degree  of  disability.  Relationship  between  employees  and 
pensioners  has  today  reached  a  nearly  one  (0.98  employees  /  1  retired).  If  current 
conditions persist retirement in 2050 half of Romania's active population will be retired. 
Aggressive population policy in the late 60s of the twentieth century only delayed the 
aging process and saved temporary pension. After 2030, when those born at the time they 
reach retirement age, the pension system will collapse because of low labor input together 
with  massive  inflows  of  pensioners,  which  will  contribute  to  the  degradation  rate  of 
dependence. 
Public pension systems in countries of the world are very diverse in terms of shape 
and  size.  However,  no  pension,  was  structured  as  well,  not  proved  immune  to  the 
economic and financial crisis. In this context, some governments have tended to operate 
some changes in the policy area in response to growing deficits higher pension budgets, 
while  other  reforms  have  stalled,  delayed  or  postponed  them,  preferring  to  borrow  to 
maintain existing public pension systems. 
As shown Anita Sehwarz, author of World Bank Report "financial crisis affects 
every part of the pension system differently, and although the magnitude and distribution 
in time may be different, each component is adversely affected. Sudden decreases in the 
efficiency and reduce the overall tax base have reduced the public funds available for 
pension and unemployment at the same time, growing, low pensions and the depreciation  
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of  financial  assets  are  adversely  affected  systems  and  funded  by  contributions  from 
employers to employees. 
It was found that in countries where fiscal balances were affected by the pension 
schemes  were  taken  to  change  social  policies  aimed  at  promoting,  on  the  one  hand, 
increasing  resources  and,  secondly,  to  reduce  costs.  If  they  concern  only  short  term 
benefits in the future is likely to generate additional costs because according to World 
Bank simulations, even her most. scenario yields severe financial crisis "before the crisis in 
view of demographic aging. deficits of pension schemes in the future on three levels to 
show what is currently registered and is estimated to remain at this level for another 20 
years, before improving slightly (see Figure no. 1). 
 
Source: The World Bank report "Pension Crisis" (Pensions in Crisis: Europe and Central 
Asia Regional Policy Note), December 2009, page 6 
Figure no. 1 Projected fiscal deficits of public pension systems due to global crisis 
 
In Romania in 2009 the public pension system has a deficit of 1.5 million Euros, ie 
20% of its revenue, while the average pension increased by 5% but not to an improving 
standard of living for pensioners but is merely an anti-inflation measure. Even if the public 
pension system operates well above its real possibilities, it fails to provide decent pensions 
for most of the pensioners who have worked and contributed to achieving and exceeding 
the complete contribution. 
Policymakers should seize the current crisis to address long-term problems that 
could lead to bankruptcy of pension systems while the number of pension recipients is 
steadily increasing. 
3. PENSION REFORM 
Public pension reform is not possible after a single prescription in all states, but 
must take into account the specificities of each country taking into account a combination 
of long-term. Many of the recommendations made by experts of international institutions 
for long-term pension reform can be taken into account in Romania in this respect we 
consider: 
a) public pension system: 
- Raising the retirement age and its equalizing men and women. Reform since 
2000 gradually increased the retirement age to 57 for women and for men 62 to 60 years 
for women and 65 men. In some Western European countries the retirement age exceeded   4
65 years: Iceland and Norway, the standard retirement age is 67 years and above who 
receive  a  supplementary  pension  bonus  up  to  70  years  in  Denmark,  Netherlands  and 
Germany the retirement age is 67 for men and 65 women (Germany aimed at retirement 
age to 70 years for men and 67 women) in Britain has passed the age of retirement at 68 
years, until 2045, by increasing your retirement age men and women each year in Italy was 
provided equalize retirement ages for men and women by the year 2018 by increasing the 
retirement age of women working in welfare payments public from 60 to 65 years; 
However, there is an opinion that the life expectancy statistics and other physical 
and mental ability of a man 70 years or a woman of 67 years. The question arises whether 
a person reached the age may work quantity and quality as a person takes 55-60 years. 
With age, obsolescence increases and decreases an individual's ability to work in line with 
a younger person will have problems of efficiency could influence the activity of an entire 
company. In the same time, even if the old staff has the advantage of experience, there is 
no  guarantee  that  can  quickly  accumulate  information  and  technologies,  market,  as  a 
younger  person.  Raising  the  retirement  age  might  give  me  a  lower  quality  of  life  in 
general, and increased social spending, take account of actual demand for labor, health 
condition or older if they are motivated to work. 
- Early retirement penalty. Many European countries, including Romania, have at 
one  time  based  employment  policy  on  the  idea  that  early  retirement  would  create 
preconditions youth labor market entry. In fact, early retirement and more secured pension 
systems and countries like Finland and Britain have realized that such a policy leads to 
increased  taxation  of  labor  and  creates  distortions  in  the  economy.  In  Slovenia,  early 
retirement  pension  is  reduced  with  0.5%  reduction  determined  by  every  month  of 
anticipation. In Romania, for its word partial early retirement is reduced compared with the 
period of contribution made and the number of months that has reduced the retirement age; 
- Only switch to inflation indexation of pensions in payment and giving up other 
more generous indexation, wage developments related to the economy. According to The 
World Bank estimations, the public pension system deficits are to evolve (see figure no. 2 
and no.3 ): 
 
Source:  The  World  Bank  report  "Pension  Crisis"  (Pensions  in  Crisis:  Europe  and 
Central Asia Regional Policy Note), December 2009, page 13 
Figure no.2 Development of pension deficits in the next 60 years  
  5
 
 
 
Source: The World Bank report "Pension Crisis" (Pensions in Crisis: Europe and 
Central Asia Regional Policy Note), December 2009, page 15 
Figure no. 3 Deficits estimated in terms of indexation of pensions by inflation and increasing 
age of retirement 
-  Awareness  through  information  campaigns  among  the  public  that  pension 
payments are to be less generous than in the past, if you want one of their sustainability. 
b) Private pension systems: 
- Adoption of means to mitigate financial market volatility on pension funds by 
adopting multifond model type or providing security for the entire period of accumulation 
efficiency (existing safeguards for those enrolled in the mandatory private pension funds in 
Romania); 
- Accelerate the legislative and supervisory reforms to allow private pension funds 
to achieve returns as high for participants. 
If the public pension contributions are not active savings to invest, but are spent 
immediately to pay pensions in the current period in Pillar II (privately managed public 
pensions) and third pillar (private pensions in full) system has proven viability and product 
performance  for  participants.  Average  yield  of  private  pension  funds,  mandatory  and 
optional in Romania in 2009 by 15-16%. However, in countries such as Romania, Estonia, 
Latvia and Lithuania, the authorities have reduced contributions to pension pillar (where 
Romania has been delayed already scheduled to increase 0.5% annually). This temporary 
measure has a short term, increase government revenue, but long-term policyholders will 
collect  less  money  in  their  private  pension  accounts  and  therefore  will  have  lower 
pensions. Since they have contributed more to the public system during this period, it 
should compensate the reduction rate of contribution. The impact of this compromise on 
short and long term depends on many factors, and overall it is impossible to favor both the 
government and policyholders; 
-  Proactive  development  of  financial  markets  by  the  authorities  by  issuing 
variable-yield bonds in inflation. 
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4. CONCLUSIONS 
In the current economic and financial crisis, public pension systems around the 
world have been more affected than private schemes. As a result, global, state pensions 
shown  much  less  sustainable  than  systems  based  on  capitalization  and  private 
management,  the  conclusion  should  stay  from  now  on  the  public  policies  of  social 
insurance. 
In  Western  Europe  and  the  rest  of  the  developed  countries,  private  saving  is 
stimulated by significant tax deductions that the long term, win both the individual (higher 
income) as State Hi (reducing pressure on public pension budget) 
Regarding Romania, goals to be achieved should not cover only public pension 
reform  but  also  increase  viral  contributions  Pillar  take  it,  with  more  attractive  tax 
incentives for participation in voluntary third pillar private pensions. 
Basically, private pensions, which complement the public system of pensions for 
cation participant must mean a diversification of income, but also a risk reduction for a 
decent financial inefficiency. 
 
REFERENCES  
1.  EFRP:  Global Economic Crisis - no reason to give back  from the way of 
private pensions (May 2009) 
2.  EFRP:  Directions for the European pensions reform and a report on the 11 
private  pension  systems  in  Central  and  Eastern  Europe  (October 
2009) 
3.  EU report:  Public  Pension  system  in  Romania,  threatened  by  demographic 
change (March 2009) 
4.  EU:  Romania, among the countries with the largest long-term risks of the 
public pension systems (October 2009) 
5.  OECD:  Economic crisis makes private pensions more necessary than ever 
(April 2009) 
6.  OECD:  Securing  yields of private pension funds should be avoided (June 
2009) 
7.  OECD:  What  guarantees  and  restrictions  are  there  in  world  of  private 
pensions (July 2009) 
8.  * * *  Romania with the Pillar II Pension Fund returns compulsory private 
contributions to the initial schedule (June 2009) 
9.  * * *  Romania’s  agreement  with  the  EU  with  IMF  makes  conditions 
double:  speeding  Pillar  II  and  reform  the  public  pension  system 
(June 2009) 
10.  * * *  World  Bank  on  the  introduction  of  private  pensions  in  Romania: 
reform can be difficult but successful (July 2009) 
11.  * * *  World  Economic  Forum:  What  should  the  states  do  to  increase 
pension level (September 2009) 
 

among the countries with the largest long-term risks of the public pension systems

Economic Crisis - no reason to give back from the way of private pensions

EFRP: Directions for the European pensions reform and a report on the 11 private pension systems

guarantees and restrictions are there in world of private pensions

OECD: Economic crisis makes private pensions more necessary than ever

OECD: Securing yields of private pension funds should be avoided

Public Pension system in Romania, threatened by demographic change

Romania with the Pillar II Pension Fund returns compulsory private contributions to the initial schedule

Romania’s agreement with the EU with IMF makes conditions double: speeding Pillar II and reform the public pension system

World Bank on the introduction of private pensions in Romania: reform can be difficult but successful

World Economic Forum: What should the states do to increase pension level

FINANCIAL CRISIS AND THE PENSION SYSTEM

FINANCIAL CRISIS AND THE PENSION SYSTEM

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