Academy of Economic Studies

of Moldova

Individual work
Theme: Pension funds

Performed by Artur Catanoi

Situation analysis
The public social insurance system is an integral part of the state social protection system, with the main
objective of providing cash benefits to insured persons who are unable to obtain wage revenues due to
certain risks (aging, temporary or permanent lack of working capacity, maternity, unemployment, etc.)
and is based on collection of social insurance contributions from employers and insured persons and
distribution of benefits to beneficiaries.
The pension system in Moldova operates based on the pay-as-you-go scheme, which consumes 8.8% of
GDP. In 2010, only about 37.5% of the working population was contributing to the social security system,
and pensions were paid for about 84% of citizens who have reached the retirement age, i.e. a total of
460,500 people, or 13% of the total population. Thus, the pension system has a significant role in
ensuring a decent standard of living for the population. In 2011, expenditures for payment of pensions
were about 70% of the total social security budget.

The pension system currently faces the following challenges:

Small quantum of benefits and low replacement rate
The quantum of the average pension for retirement age was only 70.6% of the subsistence minimum for
pensioners in 2010. Over 90.1% of the total retirement-age pensioners receive pension amounts lower
than the subsistence minimum for pensioners. The replacement rate or, in other words, the ratio between
the average retirement-age pension and average salary recorded in the economy, is only 28.2%, while the
European Code of Social Security establishes its recommended value at 40%.

Small number of contributors and reduction of the dependency rate

The coverage of the pension system and the number of insured persons is decreasing. From 2001 to 2010,
the number of active population decreased from 1.6167 million to 1.2354 million, and the number of
employed persons from 1,499,000 thousand to 1,143,400. Thus, the number of taxpayers in the public
social insurance system has fallen to about 860,000 in 2010. This is mainly due to population emigration
in the past decade.
On the other hand, the number of pensioners of all categories has remained stable, falling by about 4.1%
compared to 2001 and accounts for 627,100 in 2011. Thus, the ratio between active population and
pensioners of all categories is 2:1 and the ratio between working population and pensioners is 1,8:1. It
should be noted in this context that for the stable operation of pay-as-you-go pension systems it is
necessary to maintain the ratio between contributors and pensioners at around 4:1 - 5:1.

Demographic ageing
The further development of the public pension system will worsen due to demographic trends. The ratio
of population aged over 60 years to the total population was 14, 4% in 2010 compared to 13, and 6% in
2000. According to international practice, a population is considered "ageing" when the ratio of elderly
exceeds 12%.

Different retirement age

The current pension system sets the retirement age at 57 years for women and 62 years for men. The
minimum insurance period, i.e. the mandatory payment of social insurance contributions, is at least 15
years for a partial pension or at least 30.5 years for a full pension. According to current legislation, the
total number of work history required for an old-age pension will be extended to 35 years by 2020.
Compared to other countries in Central and Eastern Europe, the retirement age in Moldova is lower for

both men and women. On the other hand, life expectancy in Moldova is also lower compared to those
countries.

Low level of contributors insured income

Through social insurance contributions paid, the size of the pension depends directly on the incomes of
the active and working population. According to the National Social Insurance House, the average salary
of people employed through individual contract was about MDL 2,133 in 2010. Another Moldovan
reality is provision of salaries under the table. This means the reported wages of insured persons are small
and the direct consequence is the low level of pensions.

Unfair distribution of funds

Moldovan legislation stipulates privileged pension terms for certain categories of citizens: judges,
prosecutors, elected officials, civil servants, MPs, members of government, locally elected officials and
customs employees. The difference between these terms and the general conditions for old-age pensions
consists in lower retirement age and lower number of years worked necessary. The stated objective of
such privileges is for the state to reward the special merits of these categories.

Social insurance guarantees for migrant workers

Given the increase in labor mobility between countries and the migration of working-age population, the
optimization of the social insurance systems have become an important component of the social policy
promoted by the state. The negative effects of migration are usually long-term and it takes time for the
consequences to become visible. However, they do when migrant workers and their families who worked
or lived abroad return back without any social insurance entitlements earned. Under these conditions,
migrant workers and their family members often are disadvantaged economically and socially in
comparison with the citizens of that country, being deprived of the right to social security, including
pensions. Hence, the migration processes have led to the urgent need to conclude bilateral agreements on
social insurance with the main host countries for migrant workers.

Strategic vision
An equitable and sustainable pension system ensuring a decent living after retirement is indispensable for
social cohesion. The current inadequate level of pensions in Moldova and its continuing diminishing trend
generate an alarming growth of pressure. The funding of any pension increases from outside the pension
system reduces the chances of success of other reforms, including those of other development priorities.
Thus, the pension reform will primarily minimize the risk of these adverse effects.
The cumulative pension system has a positive impact over long term on economic growth mainly
due to the following factors:
1. Financial market development. Under the cumulative pension system social contributions are invested
using financial markets, which get a significant boost as a result of pension system reform, and financial
market development is positively associated with growth. Financial market development is seen as a
reward to the reform transition costs that, according to the experience of other countries, vary from 0.5%
to 4% of GDP annually depending on the parameters of the pension system reform.
2. Labor market optimization. In pay-as-you-go pension systems social contributions are often treated as
taxes, this amplifying the negative phenomena of salaries paid in envelopes and illegal work. Also, in
pay-as-you-go pension systems staff pre fers early retirement, and labor force mobility is reduced. All
these have a negative impact on labor market operation. The structure and operation of the cumulative
pension system leads to a reduction of these deficiencies, hence contributing to labor market optimization,
which sets the ground for economic growth.