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1. Introduction 2. Actuary expertise 3. Basics of the pension legislation of the Republic of Moldova 4. Demographic situation in the Republic of Moldova 5. Current macroeconomic situation 6. Background information on pension insurance 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
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Pension system of the Republic of Moldova: actuary expertise
AnnexAnalysis of the risks of the Non-Financial Defined Contribution (NDC) and Financial Defined Contribution (FDC) pension systemsThe 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:
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:
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 :
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:
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:
As result the pension system reform was focused on the following:
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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