Pension Increase: Election Promises Are Turning into a Trap

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Semyon ALBU

The government announced "the largest increase in pensions in the country’s history", which goes in line with one of the main campaign promises given by Maia Sandu and the Action and Solidarity Party. But this step in no way solves numerous challenges in the public pension system.

"The largest increase in pensions in the history of the country" Pension coverageis still one of the most sensitive social issues, especially given the significant proportion of the elderly population in our country. The situation is objectively difficult. Payments themselves aremeager: with the recommended 40% of the level of wages in Moldova, it does not even reach 25%. And what is more, it constantly drops. Meanwhile, the number of pensioners is growing, as is the life expectancy in the republic. On average, one pensioner today accounts for only one worker in the real sector of the economy, with a desirable ratio of 1 to 4. This means a higher burden on the pension system. It is not surprising that the state is forced to regularly subsidize the pension fund: now - by 40%, but even more in the future. Another acute problem is that pensions are often even below the subsistence minimum. And it was this issue that PAS decided to resolve in the first place. The move was successful, based, of course, on a cold calculation (everyone knows that pensioners are the most active voters), but at the same time it shows care for the population. As a result, the minimum pension of 2000 lei became one of the mascots both in the program of Maia Sandu and the Action and Solidarity Party. Hence, when the last electoral campaign was over and the government was appointed, the latter immediately proceeded to implementation of this campaign promise. Yesterday, Prime Minister Natalia Gavrilita stated that the draft resolution is at the final stage and the ultimate decisions are to be made this week. The preliminary estimation shows that the changes planned from October 1 will target 427 thousand people. “This is the largest pension increase in the history of the country. The pension was averagely raised by 366 lei”, Gavrilita commented. She also said that concurrently pensions will be indexed by 3.86% and social benefits will be increased by an average of 450 lei. Time bomb As the logic goes, we may only be happy for those pensioners whose well-being will improve this fall, albeit not that much. However, unfortunately, the situation won't be radically changed. Moreover, numerous problems that have accumulated in the national pension system will only exacerbated. Comments of the government leave the impression that it has no strategic vision on this issue. The upcoming increase will cost the treasury nearly three billion lei this and next year, a gigantic sum for the Moldovan budget. The government hopes that all costs will be compensated in the future due to "the economy coming out of the shadows", "the  liquidated criminal schemes" and the post-pandemic growth of trade. Today, however, the authorities hope to cover them, as it is not difficult to guess, through external support: the anti-crisis disbursement of the International Monetary Fund and the second tranche of the EU macro-financial assistance. It turns out that a considerable part of this money will not serve for the long term, but will just be wasted. Experts also turn their attention to this, explaining that the increase in payments is provided by withdrawing funds from other areas, primarily capital investments, and not by economic growth and improvements in the National Social Insurance Fund. According to ex-Prime Minister Ion Chicu, if the state takes external loans to pay current expenses and to increase the minimum pension, Moldova risks very quickly reaching 60% of the debt threshold from GDP, and this can lead to collapse, "When they promised to increase the minimum pension up to 2000 lei, I don't think they knew how much it cost. They might not know that even today. You are planting a time bomb at the core of the financial and budget system, which will explode very quickly. Every year you have to take a loan, and money borrowed for immediate consumption is the biggest problem." The pension system is to be reformed? It is still difficult to understand what awaits the decaying pension system of the country in the future. The same Madam Prime Minister believes it needs to be completely changed. At the same time, as she stated, the retirement age will be inevitably increased. So, we should at least expect a revision of the law adopted in December 2020 by the socialists and the Shor party which annulled the 2017 pension reform (initiated on the IMF's strongest recommendations, it envisaged a gradual increase in the retirement age up to 63 years). It was supposed to come into effect next year, which will probably not happen. "This law is completely populist. The retirement age will one way or another be raised amid a decreasing number of working people. We are already approaching the indicator of one worker per one pensioner, and this is not normal. In this situation, it is impossible to provide people with decent pensions. In general, we stand for a complete revision of the pension system. We need to create private pension funds, we need to make sure that people themselves make a decision about the time when they want to retire, after they have gained enough experience to receive the necessary pension," said Gavrilita. Another reason for raising the retirement age back is also because otherwise it will hardly be possible to come up with a new assistance program with the IMF. The Fund, which heavily criticized the December law, of course, is not going to revise its previous recommendations. As the IMF Resident Representative in Moldova, Rodgers Chawani, notes, if the retirement age is lowered, two problems immediately arise. "First, the number of employees who contribute to the pension fund would decrease, resulting into lower contributions. Secondly, it will increase pension expenditure on the part of government at a time when mobilizing revenue is a serious challenge. This will undermine the sustainability of the system and put pressure on public debt," said Chawani. As a result, the joy of the forthcoming increase in pension payments won't last long. Be that as it may, all these maneuvers will not save the increasingly alarming situation in the National Social Insurance House. At the same time, the state is forced to finance pensions from funds intended for domestic investment, thereby curtailing the country's opportunities to develop and improve the situation. A vicious circle, so to say. It is good that the government understands the very need to change something. But so far, it has no long-term vision of how this problem can be solved, and only hopes for external assistance and a quick economic recovery. What the government is doing now only aggravates the situation. Yet, PAS is hardly the first party to be trapped in election promises.