Romania bravely raises the pensions

The ruling social democrats are accused that they destabilise the country financially, as they win over the voters with their concept of „income-led growth“

Vladimir Mitev

This article was published on 30 July 2019 on the site of the Bulgarian newspaper ”Word”.

On 8 July 2019 Romanian president Klaus Iohannis promulgated the new Pensions Law, which outlines a significant growth of pensioners’ income in the following years. The law is a successive measure of the Social Democratic Party, which represets the relatively poorer nd more vulnerable part of the voters. Just as it happened with other similar actions – such as the introduction of special VAT for food in 2015, the current action is criticised by the business circles.

Experts, who are worried about the macroeconomic stability warn that as a result of the law the financial system’s deficits will increase. In his turn, the minister of labour Marius Budai points out that at this moment Romania spends only 6% of the GDP for pensions, in comparison with the medium European level of 13%. He is convinced that if Romania’s GDP has grown to 202 billion euro in 2018 from 171 billion euro in 2016, there are financial resources for bigger pensions.

Before presenting the new law, there is a new for some general information. The standard retirement age in Romania is 65 for men and 63 years for women. The minimal period of contribution payments, after which retirement is possible, is 15 years – both for men and women. The complete period of contribution payments, which is necessary for retirement is 35 years.

The new law allows the women, who have covered the minimal contribution payment period, have given birth to 3 children and have grown them until the age of 16, can receive if asked for decrease of 6 years of the retirement age. Such a decrease is also possible if among their children are there adopted children, grown at least until the age of 13 years. Besides, the disabilities pensioners with first level of disability have the right to receive not only a pension, but also a benefit for attendant. This benefit amounts to 50% of the gross minimal wage for the month, in which it is paid.

The standard pension, which every Romanian receives, is caclulated by the multiplication of the penion coefficient (which in every given moment is a certain, fixed sum) by the annual pension points, which each citizen receives on the basis of his income for the corresponding year. The monthly pension points are the proportion between the gross monthly income of the citizen and the gross middle income for the month, according to the data of the Romanian National Statistical Institute. For each year the annual personal pension points are determined, when the monthly pension points are summed and divided by 12.

This means that in order to grow the pensions, the pension coefficient needs to be raised. At this moment it is 1100 lei (233 euro). According to the promulgated Pensions Law as of 1 September 2019 it will become 1265 lei (268 euro), as of 1 September 2020 – 1775 lei (376 euro) and as of 1 September 2021 – 1875 lei (397 euro). Afterwards, the pension coefficient will follow the pace of inflation. In other words, until 2021 only on the base of the pension coefficient the Romanian pensions will rise with more than 70%.

This jump provokes the worries of the opposition and of the financial circles, that Romania might enter in financial instability, because of the grown obligations upon the pensions. According to the calculations only until 2019 the buget will need 8,4 billion lei (1,76 billion euro) more, in order to respect the lifted pension coefficient. In 2020 the necessary additional sum will increase to 24,8 billion lei (5,24 billion eur), in 2021 it will amount to 58,1 billion lei (12,28 billion euro). In 2022 the necessary sum in plus will be 81,1 billion lei (17,13 billion euro).

The figures may appear to be great, but Romanian social democrats claim that spite of all the warnings that the country heads to the abyss, it achieves some of the biggest level of economic growth in the EU instead. This is the essence of the strategy of ”wage-lead growth” of the economist Cristian Socol. He likes to prove with figures that his strategy have both turned Romania in one of the most vibrant economies in Europe and have given more money to people’s pockets and the ensuing greater consumption has led to additional economic activity.

Socol has announced that he retires from activity to the benefit of the social democrats in the days around the vote for the Pensions Law. But his strategy seems to remain in force.

Social democrats know that in order to continue to rule, they have to give preferences to their electorate, which in general is older in age, lives in smaller towns and villages and relies to a greater extent on the state for its incomes. Their hope is that the greater incomes, including from pensions, will stimulate consumption, which will transfer to greater economic growth and Romania will leave the bottom of European rankings.

But how long will the greater income lead to greater growth and the greater growth to more resources for redistribution? The critics of the social democrats’ line constantly draw dark scenarios for the country’s future. According to an article of RFI, which is based on data from the Romanian National Bank, the current account deficit for the first five months of 2019 has grown with more than 830 million euro and has reached 3,4 billion euro. It is 32,6% larger that the current account deficit in the first months of 2018. Romanian export grows, but the import grows faster, provoked by growing consumption. As a result, import prevails over export with 6,3 billion euro. Foreign investment, which developed the Romanian economy a lot in the last year is down. For the same period it is below 1,5 billion euro. And the external debt of Romania has grown by 4 billion euro in the first five months of 2019.

Such data have been published for years – even back in 2015, when the special level of VAT for foods was introduced, in order to stimulate consumption and leave money in the poorest members of society.

“You read more and more often interpretations on the governmental debt – it fell, it increased, it is sustainable or not”, writes Cristian Socol at his blog on the site of the newspaper “Adevarul”. Socol continues: “Wrong interpretations and conclusions are made, which manipulate those who have no economic knowledge. The correct evaluation of the debt indicators is made through the observation of their dynamics as a share of the GDP and as an absolute sum. As far as the sustainability is concerned, as I said, the macroeconomic indicators are judged not by their nominal levels of growth. They don’t matter and their usage is mere tabloidization of the macroeconomic analysis. The sustainability or the insustainability of these indicators’ evolution is studied according to the thresholds of sustainability or alert, beyond which the economic disbalances need to be eliminated”. After that Socol explains that in 2018 the share of the state debt to the GDP is lower than in 2016. In 2018 1 euro of economic growth has required less debt than in 2016. Romania also has the lowest combined private and state debt in the EU.

After the social democrats failed on the European elections and their leader Liviu Dragnea was jailed, what matters for them is not to lose their traditional electorate. The battle for its hearts, minds and stomach apparently presumes the audacity to walk against the prescription of the financial elite. Or could it be that the social democrats simply have no other option, because if they merely fighted to apply “a left version” of the same dominating economic discipline, they wouldn’t have won elections? Just as it happens with the fight against corruption, Romania has different camps with regard to the economic policy. This creates tensions and contradiction, but also leads to development…

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