INTERNATIONAL EXPERIENCE IN PENSION REFORM

PENSION REFORM UNDER AN AGING POPULATION IS A WORLD-WIDE AGENDA

PUBLIC PENSIONS: REFORM DRIVERS Fiscal Pressure –Short-term pressure and consequences of un-sustainability: macro instability and crowding-out of other social expenditure –Long-term pressure and aging of population Need to align Systems with Socioeconomic Changes –Increase in life-expectancy and old-age pension –Increase in life-expectancy and disability pension –Divorces and widow’s pensions –Provide affordable and adequate benefits Challenges and Opportunities in Globalization –Mobility across professions and countries –Reacting to shocks – diversified retirement income? –Financial Sector development – a crucial element to a absorb shocks and to diversify risks

FISCAL COSTS OF PUBLIC PENSIONS

REFORM TRENDS AND LESSONS Move toward multi-pillar scheme with –Reformed unfunded first pillar, with better contribution benefit link or flat benefit and higher retirement ages –Often new second funded pillar –Developing voluntary and funded pillar –Zero pillar providing poverty alleviation for elderly Country innovations –Notional Defined Contribution System to reform first (unfunded and earnings-related) pillar (Sweden, Latvia, Poland, Italy) –Clearing house approach to reduce costs of funded schemes (Sweden, Poland, Argentina, Croatia, Slovak Republic, Bulgaria, and soon Chile?) –Introducing nation-wide voluntary schemes with opting-out option (NZ, UK) Toward harmonization/coordination of schemes across occupations, sectors and countries (for equity and portability reasons) – challenge for European Union

PENSION REFORMS IN EU 10+1

RISING AND EQUILIZING RETIREMENT AGE EU10+1+MD RETIREMENT AGE IN 2007PLANNED RETIREMENT AGE (YEAR) MENWOMENMENWOMEN HUNGARY62 POLAND6560 CZECH avg.63 (2013) SLOVAK6258 avg.62 (2014) ESTONIA (2016) SLOVENIA (2009)61 (2008) LATVIA (2009) LITHUANIA BULGARIA (2009) ROMANIA (2014)60 (2014) CROATIA (2019) MOLDOVA62 (FROZEN 2003) 57 (FROZEN 2003) 65 (PLANNED 1999) 60 (PLANNED 1999)

NEED TO RISE AND EQUILIZE RETIREMENT AGE Source: WB Working Paper 129, 2008

RISING AND EQUILIZING RETIREMENT AGE IN OECD

DECLINING REPLACEMENT RATES Source: WB Working Paper 129, 2008 Moldova

DUE TO CHANGING INDEXATION FORMULA Moldova 50 50

AND REDUCING ACCRUAL RATES Source: WB Working Paper 129, 2008 MOLDOVA 1.2% UP TO 35

WIDENING CONTRIBUTION BASES AND UNIFICATION OF CONTRIBUTION RATES AND PROGRAMS Moldova still excludes certain income categories from contributions (hotmeals, transport, bonuses, honoraria, perdiems...), Efforts to equilize contribution rates and bases, but still different (minimum) contribution bases, Gradual incorporation of special systems into general and reducing privileges (to improve labor flexibility and equity), Attempts to incorporate farmers and self- employed into the general system,

TO REDUCE HIGH CONTRIBUTION RATES MOLDOVA 29%

OR INTRODUCE THE MANDATORY FUNDED PILLAR

SECOND PILLAR’S PAST “PROFIT RATES”

LINKS TO FINANCIAL SECTOR DEVELOPMENT?

EXPERIENCE WITH SECOND PILLAR FEES

READINESS OF THE FINANCIAL SECTOR FOR SECOND PILLAR General readiness indicators include –Macroeconomic stability –A sound financial infrastructure –An adequate regulatory and supervisory capacity –A government ’ commitment for continuing structural reforms –administrative framework (contribution collection, reporting, individual accounts, payments system) How does Moldova score on readiness indicators?

CONCLUSIONS Wide variety of pension system designs worldwide Moldovan 1998/1999 PAYG reform is similar to others in the region Public choice to raise current replacement rates or search for long term sustainability Unification strategy (continuation of 1998/99 pension reform) could provide fiscal space Policy makers could then consider reducing contributions or second pillar introduction For pension funds to deliver the adequate rates of return will require major and sustained reforms in financial sector