“It is important that businesses declare the real wages of employees and that individuals pay the full social security contributions in order to have a healthy pension scheme,” said minister Veliaj.
TIRANA, April 16 – As a pension reform targeting the increase of the retirement age and the reduction of huge deficit is about to conclude, the Albanian government has warned businesses will have to pay social security contributions for their employees on real wages otherwise they will face tough penalties.
“It is very important that under the new scheme which will be implemented starting January 2015, all businesses must pay social security contributions at their real wages,” said Social Welfare Minister Erion Veliaj.
The declaration of minimum wages for employees with tax authorities and the payment of the remaining amounts in cash is a widespread practice among Albania’s private sector.
“It is important that businesses declare the real wages of employees and that individuals pay the full social security contributions in order to have a healthy pension scheme,” added Veliaj.
According to him, the new scheme 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 new 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 social pension will be awarded only after lack of alternative income has been proved, similar to the current criteria of benefiting social assistance,” said Veliaj.
Speaking of the proposed increase in the retirement age for men to 67, up from 65 currently and to 65 for women, up from 60 currently, Veliaj described the measure as a necessity due to the increase in life expectancy.
“Today, it is a fact that people live longer even because of their university engagements, and enter the labour market at an older wage. Therefore it is necessary that the retirement age increases at the same pace to the increase in the life-expectancy,” added Veliaj.
The proposal to increase the retirement age has sparked fierce reactions due to the high level of youth unemployment at around 30 percent.
Pension deficit widens
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 Albanian government has initiated a reform in the pension system which targets curbing the escalating deficit in the scheme and preventing a possible social crisis considering that half of the working wage population does not pay social insurance 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.
Social Welfare Minister Erion Veliaj says the government is trying to find a new formula which will provide pensions for real contributors to the scheme, the poor and those who pay contributions in private schemes. “One pillar is that there should be a social pension that ensures subsistence level for everybody despite the amount of contributions paid, the second pillar foresees the lift of the ceiling for payment of social security contribution which will allow people who pay more to benefit more while the third pillar involves private pensions,” minister Veliaj has said.
The changes are based on recommendations by the World Bank but the official version has not been introduced yet.
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.
