All transition countries inherited pension systems based on the principles of pay-as-you-go and defined benefit (PAYG-DB). In the early years of operation, such systems had advantages over a fully-funded, defined-contribution (FF-DC) system. For, under a PAYG-DB arrangement, those who retire receive pension benefits immediately and contributions initially tend to exceed the payments. These advantages, however, disappear later on, when population (and employment) growth rates decline and when people live longer after retirement. Under such circumstances, an FF-DC programme has the advantages of greater flexibility and transparency, hence greater financial viability. The changeover from PAYG-DB systems to FF-DC systems is therefore a worldwide trend.

Although Romania has undertaken many necessary and difficult reforms to public pensions to contain the fiscal cost of ageing, much more remains to be done. Replacement rates are low and falling to a degree that undermines workers’ willingness to participate in the state pension plan, particularly at contribution rates that are among the highest in the region.

pensions system, pay-as-you-go, reform, public pension