European Commission on Romania’s Pillar II contributions cut: short-term positive effect on government revenues, but could hit capital markets and generate obligation to pay old-age pensions in the future

The European Commission said on Wednesday, in the specific recommendation to Romania, that the cut of social contributions transferred to the second pension pillar (Pillar II) from January 2018 is set to have a positive short-term effect on government revenues, but could affect capital markets and generate the obligation to pay old-age pensions in the future.

Romania’s government has partially reversed the past systemic pension reform by lowering the proportion of social contributions transferred to the second pension pillar from 5.1 percent of gross wages in 2017 to 3.75 percent from January 2018.

“This cut is set to have a positive short-term effect on government revenues and thus on the general government balance. However, that fiscal gain is set to dissipate in the long term as the social contributions diverted from the second pillar are be accompanied by an obligation to pay old-age pensions in the future,” the report said.

The private pension system including mandatory pension funds (Pillar II) and voluntary pension funds (Pillar III) recorded a positive trend until 2017.

According to European Commission data, the total net assets of the Pillar II pension funds increased from 0.2 percent of GDP in 2008 to roughly 4.6 percent of GDP in 2017.

“The recent reduction in the contributions to the pre-funded second pillar pension funds eased short term fiscal concerns but could have negative implications for the development of capital markets,” the European Commission warns.