Pension scheme is failing

Tirana Times
By Tirana Times September 21, 2019 11:23

Pension scheme is failing

Story Highlights

  • Albania, along with some Eastern European countries, is exposed to the phenomenon of population aging which in itself leads to a decrease in the number of employees and contributions to pension schemes. But the country is currently in a state of high informality of work that also exacerbates the deficit.

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TIRANA, Sept. 20- The current public pension systems will have to be completely reformed in a not too distant future, to avoid the defects that are emerging everywhere in the world. This is an insight from a World Bank in-depth global analysis of the difficulties that insurance schemes are facing with aging populations and the inefficiency that some countries have in collecting social security.

Albania, along with some Eastern European countries, is exposed to the phenomenon of population aging which in itself leads to a decrease in the number of employees and contributions to pension schemes. But the country is currently in a state of high informality of work that also exacerbates the deficit.

The World Bank points out that the informal economy and employment have grown dramatically in countries such as Albania, Bulgaria, Romania, and Serbia, as well as in most of the countries that emerged from the former Soviet Union in 2018. Increasing job informality worsens dramatically the balance between contributors and retirees. This balance resulted in large deficits, even when legal contribution rates were above 20 percent.

Most countries in the region have simply not indexed pensions with inflation and have periodically raised the minimum wage to mitigate the deficit. Due to the collapse that would include current pension schemes, some countries have set flat universal pensions for everyone. 

For example, in Georgia almost half of the expenditure of the pension scheme by 2006 was financed from the general budget and most people received minimal pension. Forecasts suggested that a large proportion of older adults would not even qualify for the minimum pension. Then in 2008, the Georgian government realized that the old system was no longer viable, thus the contribution-based pension was replaced by a universal flat-rate pension. Meaning regardless of previous employment, all retirees get the same pension rate. 

The link between legal salary, contributions and benefits from the national pension system failed. This is the first time that a contributing “de jure” plan has been replaced by a non-contributing plan. But it is unlikely to be the last case. Some Eastern European countries may soon face similar choices as their population pyramids are being overthrown.

The long-term population aging challenge of the fiscal policy facing most high-income countries is equally daunting. In 2016, the average pension spending in European Union (EU) countries exceeded 10 percent of GDP. This rate is very high when compared to levels in low and middle income countries.

In Japan, the rapid aging of the population over the last 50 years has made the contributing model increasingly difficult in an environment without economic growth. The Japanese authorities have by law stipulated that a portion of VAT proceeds be used to finance the basic pension at 50 percent. Germany is now facing similar demographic pressures as Japan and is adjusting its social security system financing accordingly.

The oldest examples of countries that chose to fund pension systems from the general budget are Australia and New Zealand. New Zealand introduced a universal flat-rate pension in 1891 and has maintained it while Australia applies a similar scheme.

 

Tirana Times
By Tirana Times September 21, 2019 11:23