Deficit in pension system continues widening

Finance Ministry data shows the deficit in the pension system rose to 29.36 billion lek (around Euro 206 million) in the first eight months of this year compared to 28.77 billion lek (Euro 202 million) during the same period last year.
TIRANA, Sept. 22 – While Albania has already approved a pension reform, gradually increasing the retirement age initially only for women, the deficit in the pension system continues widening and fiscal benefits are expected only in the long-run.
“Fiscal benefits of the reform (under the pessimistic scenario) are likely to be pronounced in the long term, and would depend on increase in participation. In the optimistic scenario where the improved benefit structure is expected to attract greater numbers of contributors over time, the projected average pension deficit in 2015-2024 is 1 percent of GDP, compared with 2.2 percent under the current scheme,” says the IMF in its latest country report on Albania. “Under the pessimistic scenario, where the number of contributors does not increase, the new scheme will generate little saving in 2015, and run an average deficit of 1.6 percent of GDP during the first 10 years, with the improvement coming mainly from the higher contributory wage,” adds the IMF which is assisting the Albanian government bring back the economy to sustainable growth.
Finance Ministry data shows the deficit in the pension system rose to 29.36 billion lek (around Euro 206 million) in the first eight months of this year compared to 28.77 billion lek (Euro 202 million) during the same period last year.
International financial institutions such as the World Bank and the IMF have described Albania’s current pension system as unsustainable due to weak participation, in part because the scheme limits the benefits to only twice the minimum benefits, while allowing contributions up to five times minimum contribution. The excess of benefits over contributions is particularly severe in rural Albania. “These factors, together with significant benefit increases in recent years, have led to a rapid worsening of the pension deficit.”
In late July 2014, the left-wing Socialist Party-led majority approved a pension reform drafted under World Bank assistance in a bid to reduce the huge gap in the system which secures 45 percent of funding from other government revenue, proposing an increase in the retirement age for women and the introduction of social pensions for people aged 70 and over who have not contributed to the system.
“The main reason that makes this reform necessary is that pensions will be lower and lower in the future and the deficit under the current system will continue widening,” said Prime Minister Edi Rama.
The new system envisages that starting January 2015, the retirement age for women, currently at 60, will gradually increase by two months per year to reach 63 years old by 2032. The increase in retirement age for men, currently at 65, will continue only after 2032, to reach 67. The retirement age for both men and women is expected to increase to 67 years old by 2056.
The increase in the retirement has sparked reactions considering Albania’s high youth unemployment rate of around 34 percent, but experts say it is a necessity considering the huge deficit and the projected ageing of the population.
Tahseen Sayed, the World Bank Country Manager for Albania, described the reform as a necessity to protect the current and future elderly.
“Even now, when Albania is still young, problems in its pension system are emerging which would leave today’s young at risk for poverty in old age,” she said.
“Today almost one of eight Albanian is over the age of 65 while by 2050 two of every eight Albanians will be over this age. This has a twin-pronged implication for Albania. It means that aging will happen even faster in Albania than in some of the older countries. Albania is projected to have a greater share of the population over the age of 65 than countries like France, Sweden, Serbia, and Montenegro,” she added.
The minimum amount to benefit a pension will continue remaining 15 years of contributions while pensions will be calculated based on the social pension plus 1 percent of the amount paid in social security contributions each year. An individual contributing for 40 years will benefit 40 percent of their average wage plus the social pension which will be indexed to inflation each year. Some 5,000 people aged 70 and over who have not contributed to the system, are expected to benefit monthly social pensions of around 6,646 lek (Euro 46.5) starting from January 2015.
Pension reform
The Albanian government initiated the reform in the pension system targeting to curb the escalating deficit in the scheme and preventing a possible social crisis considering that half of the working wage population does not pay social security contributions and could remain without a pension at retirement age.
Currently, an estimated 56 percent of people of working wage are out of the social insurance scheme, which has a deficit of 45 percent and is financed by other tax revenue.
Government says the new system will establish social pensions at a subsistence level for those who have not been able to pay social security contributions because of informality or joblessness. The new system will offer a long-term solution to the high pension deficit and the low number of contributors, two issues which make the current scheme financially unaffordable.
The scheme will also lift restrictions on the maximum pension so that whoever pays more will benefit more at retirement age.
The new pension scheme also envisages social pensions to people aged 70 and over who have been unable to contribute, which will be similar to the current social assistance to people living below the subsistence level.
The deficit in the pension scheme for 2013 rose to around 44.5 billion lek billion lek (Euro 311 million), up from around 40 billion lek in 2012, unveiling the need for an emergency reform in the pension system which suffers poor collection rates due to widespread informality, according to Finance Ministry data. 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. Albania has more than 500,000 pensioners.
According to the World Bank, Albania’s 8.2 percent of the GDP expenditure on social protection is just below the 10 percent limit which risks investments in other key priority sectors such as education and health.
As the pension reform initiated back in 2002 concluded in 2012 with the retirement age having gradually increased to 65 years for men and 60 for women, the number of new pensioners in Albania will double, having extra costs for government to cover the deficit in pension scheme, experts had warned. Social security contributions currently stand at 24.5 percent, of which 15 percent is paid by employers and 9.5 percent by employees. Meanwhile, health insurance contributions are at 3.4 percent, shared by 1.7 percent between employers and employees.
The minimum monthly pension for urban areas stood at 11,562 lek (Euro 81) compared to 7,841 (Euro 55) for rural areas in 2012, according to INSTAT. The maximum pension stands at 23,123 lek (Euro 162).