EXCLUSIVE Special pension reform: European Commission demands real pension cuts for magistrates and the military / PSD-PNL coalition draft results in „very limited savings and does not respect equity”

According to a letter consulted by G4Media, the European Commission is asking the authorities in Bucharest to radically amend the current draft law on special pensions (for military, magistrates, diplomats, etc.). Brussels officials point out that the draft would make only „very limited” savings and does not resolve the principle of fairness. The letter states that military pensions should be reduced by lowering the so-called „replacement rate” (the percentage that the pension represents of the value of the salary), and that for magistrates the length of service should be increased and the pension amount should be lower than at present.

More specifically, the European Commission suggests that the income replacement rate for military pensions should be 45% and that the calculation basis should be based on earnings over a full career. At the moment, the replacement rate is 65% of the last 6 months. In the draft law, the replacement rate is 65% of the last 12 months’ earnings, excluding non-permanent bonuses.

It should be recalled that Romania undertook in the NRRP to reform special pensions, which now represent an annual expenditure of around 0.8% of Gross Domestic Product (GDP) and are a source of social inequality, as they do not comply with the general principle of contributivity (with the exception of military pensions, which comply in part). If Romania does not reform its special pensions, it will lose a portion of the NRPP, the amount of which will be calculated by the European Commission.

A draft law on the reform of service pensions, known as special pensions, was tabled in Parliament in December 2022 by Social Democrat Labour Minister Marius Budăi. Government sources told G4Media that the European Commission sent correspondence last week indicating that the draft does not solve systemic problems.

Among the beneficiaries of service pensions are influential professional categories: judges, prosecutors, military, police and secret service employees. Prime Minister Nicolae Ciucă himself is a career military officer, a retired general, and has announced that military pensions should not be changed.

More specifically, the European Commission suggests that the income replacement rate for military pensions should be 45% and that the calculation basis should be based on earnings over a full career. At the moment, the replacement rate is 65% of the last 6 months. In the draft law, the replacement rate is 65% of the last 12 months’ earnings, excluding non-permanent bonuses.

It should be recalled that Romania undertook in the NRRP to reform special pensions, which now represent an annual expenditure of around 0.8% of Gross Domestic Product (GDP) and are a source of social inequality, as they do not comply with the general principle of contributivity (with the exception of military pensions, which comply in part). If Romania does not reform its special pensions, it will lose a portion of the NRPP, the amount of which will be calculated by the European Commission.

A draft law on the reform of service pensions, known as special pensions, was tabled in Parliament in December 2022 by Social Democrat Labour Minister Marius Budăi. Government sources told G4Media that the European Commission sent correspondence last week indicating that the draft does not solve systemic problems.

Among the beneficiaries of service pensions are influential professional categories: judges, prosecutors, military, police and secret service employees. Prime Minister Nicolae Ciucă himself is a career military officer, a retired general, and has announced that military pensions should not be changed.

The main conclusions of the European Commission, as they appear in the letter to the Ciucă government:

The impact assessment of the draft law shows that the draft would result in only very limited savings and would not sufficiently address fiscal sustainability and, in particular, equity. In addition, it only marginally improves the contributory nature of the system. The preliminary assessment is that the draft legislation in its current form does not meet the requirements.

We strongly recommend not to proceed with the adoption of the new legislation in Parliament and instead to carefully consider possible amendments to incorporate the results of the World Bank impact assessment (including alternative reform options).

One of the objectives of the new legislation is to keep total gross public pension expenditure (which includes all existing public pension schemes) stable over the long term (2022-2070) at 9.4% of GDP, including a brake mechanism in case the expenditure ceiling is exceeded. The ceiling applies to pension expenditure in all public pension schemes, including all special pensions, including military pensions.

Based on the World Bank’s impact assessment, the current draft law on special pensions has a very limited impact on reducing pension expenditure. The smaller the savings from the revision of special pensions, the less room for manoeuvre the government will have to increase the adequacy of public pensions in the context of milestone 214.

The bill still provides for substantially shorter contribution periods than in the general system for almost all categories, and pension benefits are calculated on the basis of earnings over a very limited number of years.

• Military pensions:
  The bill provides for an increase in the earnings reference period from 6 to 12 consecutive months in the last 5 years of service. This would have almost no impact on reducing pension spending.

Two options analysed by the World Bank seem more significant: the 45% earnings replacement rate and the full-career earnings base. Adopting either would bring special pensions closer to the contributory principle required by the IDA Annex. Taking into account career earnings should be the preferred option, as it would also enhance the fairness of the system. This option could be adopted in combination with aligning the indexation of military pensions to that of the general system, which would ensure an adequate benefit rate in the future.

• Magistrates:
  The bill provides for limiting pensions to 100% of net income for new pensioners and increasing the contribution period. This would have a limited impact on reducing pension expenditure.

Although the Constitutional Court decisions limit the changes that can be made to judges’/prosecutors’ pensions, a longer length of service, a lower pension amount and the alignment of indexation to the general system should be considered in order to bring special magistrates’ pensions in line with the contributory principle and make the system fairer.

Translated