Sunday, October 21, 2007

ROMANIA INTRODUCES PRIVATE RETIREMENT ACCOUNTS (PRA's)

Romania has recently joined a growing list of nations that have switched from tax-funded state budget retirement system towards private pension investment funds (link).

In a new system, those aged under 35, must opt one of 14 competing pension funds, redirecting 2 percent of individual income from state budget to selected pension fund. The rate of contribution will gradually increase to 6 percent by 2015 and social security contribution rate is about to diminish effectively.

Romania is now officially joined member of the EU, facing a significant transformation towards a modern competitive economy. As a matter of fact, Romania faces a significant anti-correlation between labor supply and the number of retired individuals.

In case of state budget funding of retirement remained in effect, this could seriously affect and hamper the long-term stability of public finance and would boost tax rates on labor supply, saving and investment upward.

According to the data, Romania also faces a significant outflow of skilled labor into advanced economies within the EU, increasing the need to restructure the system of social security and pension funding.


Particular disadvantages of state-run budget pension fund is that, in the long run, it creates a significant degree of dependency, thus increasing the risk of macroeconomic crisis such as the outburst of public debt, growing budget deficits and the brisk of financial crisis which could, in turn, reverse into rachitic output rates and increased inflation pressures.

In addition, budget-funded pension system plagues inadequte methods and poor management track, unable to respond to intense demographic pressure, i.e. the shrinking labor supply and a growing number of retired individuals.

The report notes that by 2050, Romania will have 145 pensioners on 100 employees. In fact, it is admirable that a country such as Romania chose to opt a private pension system based on income percentage contribution to private pension funds, since accumulated savings are, by empirical means, the soundest guarantee of pursuing a lifetime living standard once when person is retired.

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