The pension deficit increased to 1.49 percent of the GDP or 143 million euros in 2012, up from 0.9 percent of the GDP back in 2009
TIRANA, Oct. 8 – Albania’s High State Audit has requested the initiation of a complete legal reform in the social security system whose deficit in the past three years has considerably increased. In a report on the performance of the Social Insurance Institute for 2012, the High State Audit says the pension deficit increased to 1.49 percent of the GDP or 143 million euros in 2012, up from 0.9 percent of the GDP back in 2009.
The High State Audit says the reform should target the rate of covered people because only 65 percent of the current workforce participates in the social security scheme. The reform should also target a change to the current formula which acts as a disincentive because the maximum pension is limited to twice as much as the minimum pension while the maximum wage is five times higher than the minimum wage.
The new system should also target tax evasion which is very high because of informality and the declaration of lower than real income to pay less in the compulsory social security and health insurance contributions as well as the 10 percent flat tax on personal income tax.
“The pension scheme is in deficit which has jumped over 1 percent of the GDP even though 55 percent of rural areas social security contributions are financed by the state budget,” says the report.
The revenue target in 2012 was fulfilled at only 95.55 percent in 2012 creating a deficit of 2.1 billion lek or around Euro 16 million. “Financial informality which was a result of failure to meet the target of contributors in the private sector and the difference between wages at which contributions are paid and the real wages employees in the private sector get has considerably widened the deficit in the social security scheme, ” says the High State Audit.
Around 112,000 people self-employed in the agriculture sector did not pay social security contributions in 2012, causing around Euro 17 million in tax evasion.
The pension system is currently in deficit, and with the projected dramatic aging of the population over the coming decades, it will be unable to cope with increasing demands for pensions, says the IMF. The IMF mission encourages the authorities to develop a reform plan that envisages, among other things, bringing rural workers into the net, removing disincentives for participation by high income earners and raising the retirement age.
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. Controls carried out by the High State Audit show that a considerable number of businesses pay social security and health insurance contributions for a single person. 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.
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.
