In my first blog on Moldova’s pension system, I discussed challenges and reform options. My second one focused on the incentives to contribute into that pension system. Now, in this third blog, I am going to discuss Moldova’s retirement age: why it is important to raise it ... and why it is equally challenging to do so.
To better understand the issues faced by public pension systems today, it is important to remember that they are generally pay-as-you-go schemes. This means that those who work today pay the pensions of those who are retired.
This particular system was first introduced in Germany back in the 19 th century, when the workforce was growing – a very different situation from what we have today. Rapidly ageing societies, longer life expectancy at retirement, lower fertility and migration are all adding pressures on pension systems in many European countries, including Moldova.
In Moldova, life expectancy at retirement is similar to that in transition countries in the region. In 2013, it stood at 15.7 years for men and 19.6 years for women. Coupled with large-scale emigration and a shrinking population, Moldova’s pension system is going through difficult times.
From 2002 to 2012, the number of pension contributors shrank from 1,491,000 to 830,000. This, in combination with a high number of pensioners, drove up the ratio of pensioners per contributor. Over the same 10 year period, the ratio rose from 41 pensioners per 100 insured persons to 78 per 100.
This means that, going forward, Moldova will have fewer workers to support a growing number of pensioners. There are three ways to deal with this challenge in a pay-as-you-go system. First, by reducing the level of benefits. Second, by lifting the current contribution rate. Third, by increasing the current retirement age.
But which option should Moldova choose?
The country’s replacement rate of 28 percent, which is the percentage of average salary replaced by an average old age pension, is already one of the lowest in the Europe and Central Asia region. Reducing it further will jeopardize the social acceptance of the pension system, as current and future workers won’t feel they are getting a fair return for their contributions and won’t be motivated to contribute into the system.
At 29 percent, labor taxes in Moldova are already higher than the average of 20.4 percent in the region. Raising taxes may put an unbearable burden on businesses and will decrease the country`s competitiveness.
So, the best option is to increase the retirement age. Moldova will not manage to put this decision on hold forever. It is a choice between putting the burden on the shoulders of children or parents. Striking the right balance is difficult, but inevitable.
With the current life expectancy, people can stay productively employed longer and earn higher incomes. There is no compelling reason why a productive and active woman, for example, should spend about 25 percent of her adult life being subsidized by the younger generations. Gradual equalization of retirement ages for women and men and increasing the retirement age to 65 years would save money for better pensions for future Moldovan retirees.
Western societies that raised the pension age are also promoting active ageing and helping their senior workers stay longer in the labor market. The measures include workplace adaptations to fit older workers’ needs, as in the case of companies such as BMW and CVS, enabling flexible work arrangements, putting in place gradual retirement options and providing age-sensitive training. Moldova could do the same.
We may choose to ignore the problems of the pension system. We may choose to ignore urgent solutions – but we won’t be able to ignore the consequences of inaction. To manage change effectively, it is better to be prepared and address the problems of tomorrow by acting today.
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