Legislation Publications Pension models About project Statistics
Legislation Publications Pension models About project Statistics

1. Introduction

2. Actuary expertise
2.1. Contents of the actuary expertise
2.2. Actuary control cycle
2.3. Actuary expertise tools

3. Basics of the pension legislation of the Republic of Moldova
3.1. General principles
3.2. Social insurance contributions and taxable basis
3.3. Pension types and conditions of their assignment
3.3.1. Old age pensions
3.3.2. Disability pensions
3.3.3. Survivors pensions
3.3.4. Pensions to some categories of citizens
3.3.5. Social pensions/benefits
3.3.6. Pensions paid from the state budget
3.4. Minimal pension and guaranteed minimum
3.5. Pension formulas
3.6. Pension indexation

4. Demographic situation in the Republic of Moldova
4.1. Dynamics of population number and sex/age structure
4.2. Birth rate
4.3. Mortality and life expectancy
4.4. Marriage and divorce rates
4.5. Population natality and reproduction
4.6. Demographic forecast

5. Current macroeconomic situation
5.1. Tendencies of population economic activity
5.2. Development of basic forecast

6. Background information on pension insurance
6.1. Number of pensioners
6.1.1. Analysis of the number of pensioners
6.1.2. Distribution of the number of pensioners by pension types
6.1.3. Sex/age number of pensioners
6.2. Pensioner’ standard of living
6.2.1. Average size of pensions
6.2.2. Compensation of lost wage
6.2.3. Gender differences in pension sizes

7. Modeling outputs

8. Outputs and perspectives of the development of pension system of the Republic of Moldova

9. Annex: Analysis of the risks of the Non-Financial Defined Contribution (NDC) and Financial Defined Contribution (FDC) pension systems
9.1. Principles of the design of NDC pension system
9.2. Principles of the design of FDC pension system
9.3. Experience of applying FDC schemes
9.4. Comparison of NDC and Funded schemes

Pension system of the Republic of Moldova: actuary expertise


Analysis of the risks of the Non-Financial Defined Contribution (NDC) and Financial Defined Contribution (FDC) pension systems

The process of population ageing changes in principle the demographic population structure in the world and socio-economic balance between generations. This process raises the question of the forms of social assistance of the old population and makes new demands to pension systems.

The population ageing against a background of the reduction of the number of the able-bodied ages makes the traditional Pay-As-You-Go pension systems very expensive in future and increases the burden on working population. This also generates a range of questions, including:

  • high and increasing tax tariffs (conditioned by the increase of the life expectancy and share of population of pension age) to the work remuneration fund for financing of the distributive system that could lead to the unemployment growth;
  • evasion from payment of taxes and “flight” to informal sector, where the productivity is lower;
  • incorrect distribution of state resources, since the deficit fiscal incomes are used for pension payment, not for the development of the education, health or infrastructure;
  • non-transparent transfers between generations (quite often for the groups with higher incomes);
  • as well as the increase of the great concealed state pension debt (the great concealed state pension debt means the value of accumulated rights of the pensioners and workers) due to which the pension system loses its financial stability.

All these issues are specific not for all countries with Pay-As-You-Go pension systems, however, they occur in the majority of developing and also developed countries. This points out to the nonrandom character of these issues, lying in the nature of the economy and strategy of traditional schemes with fixed payments.

In growing economies, the state solidarity systems represent the source of serious political conflicts and populist promises. Therefore, the governments of many countries try to limit the role of state distributive systems and increase the responsibility of workers in pension insurance, encouraging private pension savings.

At the end of the XXth – beginning of the XXIst centuries due to the emerged issues in pension insurance many world countries have implemented the reforms of these systems. The main goals of these reforms were:

  • reduction of the burden on working population (in future);
  • implementation of insurance principles;
  • decrease of the concealed state pension debt.

The main tendencies in the process of reforming were the following: transition from social protection, based on distributive principle, to private funds and inside the private sector, transition from the plans with fixed payments to plans with fixed contributions1.

Three groups of countries could be emphasized :

  • countries, which implemented the FDC system, as a component of the mandatory system. So, the countries of Latin America – Bolivia, Mexico, Salvador and Chili, as result of the reform created FDC systems of mandatory individual pension accounts, in which the pension size depends on the volume of pension contributions and income from investments. Many countries of the Eastern Europe and CIS – Hungary, Kazakhstan, Slovenia, Latvia, Bulgaria, Estonia, Croatia, Russia, Macedonia, and Lithuania – realized the transition to the combined or multilevel pension systems on the path to market economy.
  • Sweden, Italy, Poland, Latvia, Russia, Kyrgyz Republic and Mongolia implemented NDC accounts.
  • Other countries, including Moldova, Georgia and Armenia only adjusted some parameters of the current pension system to the socio-economic situation.

At the beginning of ‘90th the economic crisis aggravated the situation in the social sphere of the Republic of Moldova. The issues in the social protection and pension insurance spheres appeared at the same time with the production decrease, inflation growth and decrease of population standard of living. They grew up constantly, and by the middle of 1996 took a lingering character.

Since the adoption of the Law on state pension insurance in the Republic of Moldova the pension legislation has been amended considerably. This was conditioned by the economic situation in the country, including the status of financial system. The economic crisis, high inflation rates, certain transformations, such as monetary reform, determined the necessity of amending pension legislation.

Systematic non-payments and the debts of the economic agents had a negative impact on the financial situation of the pension insurance system. This was caused by:

  • - inefficient fiscal system,
  • - considerable decrease of employed in the national economy,
  • - evasion from tax payment,
  • - decrease of the share of salaries in the structure of population incomes,
  • - high tariffs of social insurance contributions.

The general pension insurance level went down. The costs of the consumer goods and services grew up more rapidly than the sizes of pensions. The correlation between the average pension and minimum consumer budget decreased from 38,2% in 1993 to 18,8% in 1997, while between the minimal pension and minimum consumer budget – from 27% to 14,1%, correspondingly.

The burden of social payments on economically active population of the country grew up. The correlation between the number of pensioners and working population increased from 51,1% in 1992 to 61,4% in 1996.

The necessity of transformations in the pension insurance system was also confirmed by the forecast of its development. The projections, carried out by the Ministry of Social Protection, Family and Child, related to the level of deductions to the pension insurance system showed that for the maintenance of the pension insurance level under the existing tendency of the country economic growth and situation on the labor market, the percentage of deductions to the pension insurance system should increase by 45% and over. This situation could not ensure the efficient development of pension system due to high level of social contributions. In developed countries the percentage of deductions to the pension system is on the level of 15-20%.

The outputs of the projections also showed the negative impact of the worsening of demographic situation on the development of pension insurance system: since 2008 the correlation between the number of pensioners and able-bodied population shall worsen considerably.

Thus, at the end of ‘90th the sharp necessity in the reform of the pension system and bringing it to conformity with the new economic realities came to a head.

The main factors, determining the sharp necessity in reforming the pension insurance system were considered the following:

  •  reduction of entries of financial means to the National social Insurance Fund that has led to the delay in pensions and other social benefits’ payment;
  •  decrease of the level of pensions and other social payments’ insurance;
  •  increase of the burden of social payments on economically active population;
  •  high tariffs of social insurance contributions that does not induce to the increase of production level, create deduction-leveling and does not stimulate their payment;
  • imbalance in the establishment of the sizes of contributions, deducted by the employers and workers;
  • considerable share of indirect costs for social insurance;
  •  irrational distribution of means that does not allow to direct the necessary means to the social insurance to vulnerable population;
  •  loss of the relation between the pension size and worker’s contribution;
  •  contradictory pension legislation;
  •  inefficiency of social insurance management system.

As result the pension system reform was focused on the following:

  • provision of population with adequate material assistance at old ages, loss of the capacity for work, loss of the breadwinner;
  • observance of the principles of social justice due to the establishment of a transparent and clear pension system, where the majority of citizens benefit by pensions depending on their contribution to the system;
  • achievement of the equilibrium of financial system and observance of financial discipline;
  • creation of a pension insurance system, meeting the interests of all generations.

So, in Moldova in the framework of the reform launched in 1999 the one-level pension system, based on the existing redistribution of insurance contributions, was preserved, however, a new pension formula considering the accumulated pension rights has been introduced. This allowed to relate directly the contributions to the size of paid pensions and make the system more transparent. At the same time the gradual increase of the pension age and required length of service has started.

However, as the analysis of the results of the functioning of the adjusted pension system of the Republic of Moldova showed, the changes introduced in its structure did not allow to handle completely with the consequences of the demographic change, financial instability and inadequate level of pension insurance. At present the state pension system of the Republic of Moldova represents a quite complex hybrid, including many elements of the old pension system, inherited from soviet time, and at the same time reflecting the specifics of the transition from old system to the new system.

In this relation there is a question about the necessity of further reforming of pension system. As one of the variants of such reform it is examined the possibility of using the scheme with fixed contributions.

It is to be mentioned that now the FDC and NDC pension schemes are used quite actively by different countries in the practice of the creation of current pension systems. The analysis of the international experience could help in making the right choice in the process of taking the decision on the main directions of further reform of the pension system of the Republic of Moldova.

Further the main principles of the design of the NDC and Funded pension schemes shall be considered. At the same time the issues to be taken into consideration in the implementation of these schemes in the state pension systems shall be identified.

1. Blake D., Cairns A., Dowd K. Pension metrics: stochastic pension plan design and value-at-risk during the accumulation phase //Insurance: Mathematics and Economics.-2001.-№29.-p.187-215

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