World Bank warns pension system at risk

TIRANA – World Bank official have warned the Albanian pension system could put government in financial difficulty in the next few years because of the low rate of contributions. The current ratio is 1.4 contributions to 1 pensioner at a time when a stable pension scheme requires at least 3 contributions for one pension.
Speaking at a two day conference in Tirana last week, World Bank representatives said Albania needs to undertake long-term sustainable reforms in the pension system.
World Bank country representative Camilla Nuamah warned that the pension system could turn to deficit under the current model it operates.
Nuamah encouraged political parties to raise the issue of pension reform in their current debates. “This can be addressed only through sustainable reforms. It is not a formula that could continue until 2015 and then regulated through other reforms. We as representatives of the World Bank are very encouraged about this issue and have raised it for discussion,” said the World Bank representative.
According to the World Bank representatives, the high unemployment and informality rates and the young age of Albanian population are the main causes of the drop in revenues in social security contribution.
Earlier this year the IMF said past tax and contributions cuts that were based on boom revenue growth should be reviewed. “For example, there is little evidence that last year’s cut in social security contributions improved compliance as was expected at the time; on the other hand, it aggravated the pension deficit to 2.5 percent of GDP, a high level when placed into the context of Albania’s fairly young population,” said the IMF.
One year ago, Albania signed a US$ 5 million loan agreement with the World Bank to improve the efficiency of the pension system by strengthening the pension system administration, supporting institutional strengthening, including improved capacity for pension policy development and improving public understanding of the pension system.
World Bank’s Nuamah said last year in an interview published on the bank’s website that “Future pension reforms in Albania should focus on restructuring the pay-go scheme to strengthen the link between contributions and benefits and to improve incentives for people to participate and declare correct earnings.
“Albania needs to adopt a transparent indexation rule for pensions which is consistent with long term fiscal sustainability. Despite the legislated inflation indexation, pensions are currently increased on an ad-hoc basis, which makes the system vulnerable to political pressures, and increases uncertainty for system participants and for the fiscal outlook of the pension scheme, overall,” added Nuamah.