Unless reformed, the social insurance scheme could collapse. This warning comes from those specialists working for the country’s private insurance companies. They are even predicting a date of a collapse, somewhere around year 2012.
The original insurance scheme, inherited from the Communist era, was designed as all encompassing, covering the risks of old age, disability, health costs, maternity leave, and more. These benefits were to be financed through payroll contributions assessed on both employer and employee, but in differing degrees for different benefits. The insurance scheme was made up of two components: the State Social Insurance plan and the Cooperative Farmers Social Insurance plan, both financed on a pay-as-you-go basis.
The State Social Insurance plan revealed the first signs of being unsustainable in 1957, causing deficits and requiring increased budget allocations. The figure reached about 35 percent of expenditures during the 1980s because of a large increase in the number of pensioners, which almost tripled between 1980-1992, and a reduction in the number of contributors, which began to decline immediately after the fall of the Communist regime.
During recent years, the inherited problems of the State Social Insurance plan were exacerbated by the prolonged economic recovery, high unemployment, and the increasingly informal labor force. All these factors have decreased payroll contributions while the number of beneficiaries, most of whom have full pension rights, was increasing every day. The Albanian governments repeatedly tried to manage the incoming fiscal crisis by juggling funds and patching the system. First, the government began to transfer funds across the branches of the social insurance. Surpluses generated in certain branches of social insurance, such as maternity leave, were transferred to cover deficits in the pension scheme.
Second, the government tried to compress benefits, which damaged the credibility of the insurance scheme. Notably, employees with high income had to pay 29.9 percent of their salary for almost 40 years and they would receive pensions valued at about 25-29 percent of their last salary for some 20 years. (Life expectancy for a 65 years old Albanian is placed at 16 years.) It became clear that this is not a wise investment for a high income individual. The individuals, realizing that their benefits will be low regardless of how much they contribute, choose to declare nothing or report lower earnings, in the majority of the cases they declare the minimum wage decided by the state. Hence, according to data from INSTAT for the year 2005, in the private nonfarming sector were employed around 217,000 people, but only 60 percent, or 158,000 people, contributed to the Social Insurance plan. It is common knowledge that private businesses pay better salaries than the state. However, almost 50 percent of the employees in the private sector declare they are making only minimum wage compared to one percent in the public sector.
The Cooperative Farmers Social Insurance carries is own problems. It was only created in 1972. Until then, the social insurance scheme did not include people living in rural areas. For the rural scheme, however, contributions are much lower then for the State Social Insurance Plan, ranging from 9 percent for mountainous regions to 15 percent for other rural areas; moreover, these rates are applied to a hypothetical annual income fixed in 1993 at ALL 10,800. The Government contribution has amounted to around 85 percent of the total in recent years, making this system’s contribution appear largely in name rather than substance. On the other hand, with 35 years of contributions required to collect a full pension, few rural workers qualify yet for full pension, and the majority of them receive only partial pension. In addition, the pension paid in the rural system is currently lower than in the urban system.
However, the government has obliged itself to increase the rural pension to meet the level of the urban one by about 2012. To achieve this equality, the government has been raising rural pensions each year significantly more than urban pensions. In 2006, rural pensions were raised 20 percent while urban pensions were raised only 5 percent.
The third problem is the consequence of corruption and chaos. In 2005, Albania should have some 370,000 people above retirement age. However, over 440,000 people receive pensions of some type. It is clear that the number of retired is inflated because of two factors. First, families continue to receive pensions for relatives who passed away years before. Second, people who are not entitled to benefits receive pensions of some kind. Forged documents from closed mines are especially attractive because miners, as a special group, are entitled to early retirement and shorter period of service.
All the above-mentioned factors, increased numbers of urban beneficiaries, illegal “pension planning” by contributors, the increase of the number of rural beneficiaries and their respective pensions are causing a huge deficit in the Social Insurance Scheme. According to data released by the Social Insurance Institute, the gap between contributions and benefits was around ALL 2 billion in 2003, ALL 1 billion in 2004, and only ALL 143 million in 2005, and rocketed again to ALL 2.9 billion (or Euro 25 million) for the first 6 months of 2006. According to data revealed in an interview with the vice-director of the Social Insurance Institute, Ali Jemini, the deficit for the current year is only ALL 3.9 billion (while expenses are ALL 52.5 billion and income around ALL 48.6 billion), and constitute only 7.5 percent of total expenses.
The World Bank labeled the current Social Insurance program as overgenerous to rural beneficiaries and low-income former contributors. However, in the future, it will not include some 40 percent of the elderly, and it will not be able to provide enough pension for a decent life to beneficiaries.
Can the Social Insurance scheme collapse? If left unattended, the answer is an unequivocal yes and reform is needed. The World Bank has proposed two different options. The first option is to fix the social insurance system, making it self-sustainable, removing the various disincentives, treat rural workers equal to urban ones, and other reforms. In general, people are going to get what they have saved through their contributions and the pension scheme will have a smaller redistributive character. The government can then focus its fiscal resources (used today to subsidize the pension plan) on providing poverty relief for those not covered in the system. It is clear that this scheme cannot work without enforcing the rules, such as forcing or convincing workers to declare their complete salaries and contribute to the program.
The second option is to abolish the entire program and provide social pensions to everyone above the retirement age, say 65 or 67 years old. The World Bank thinks that the social pensions should be provided along with a voluntary pension system, ideally managed by the private sector, but regulated and supervised by the government with tax advantages potentially provided for this form of long-term savings by the government. However, if the Albanian financial market is unable to support a well-regulated private pension fund industry, either individuals would have to rely on whatever financial market instruments did exist, or the government could consider setting up an interim public agency with a limited mandate.
The New Social Insurance Program
The government, assisted by the IMF and World Bank, has now decided to change the entire social insurance program. It is opting for the first option, to repair the old program. The new social insurance program is going to be organized around three pillars that together represent all the four pillars advised by the World Bank. The first pillar (known as the zero pillar) is going to be the means-tested “Economic Help”. Economic Help is going to act as a basic, noncontributory pension providing support similar to what was found in the older program. This pillar is used today to help an entire family, instead of being given to a single individual. In the future, it is going to be used to help those who fall outside the social insurance program.
The second pillar, (combining pillar one and two in the World Bank advice) the real social insurance program, is going to be a mandatory contribution-based program. In the new insurance program, benefits are going to be linked even more to contributions and the ‘pay-back’ character of the program is going to be reduced, if not eliminated at all. The contribution rate is going to be reduced and the retirement age is probably going to be increased. Currently, the World Bank considers the retirement age for women as comparatively low. The contributions generated by the second pillar would be divided into two parts, the first managed by the Social Insurance Institute and the second part is going to be managed by private companies. The third pillar, entirely contribution-based and voluntary, is going to be open to everyone who wants to have additional savings for their retirement.
It is clear that the new insurance program demands enforcement of the second mandatory pillar and a public supervisory board to monitor the private companies and the way in which they manage the contributions. Officials note that it does not matter how good the program looks on paper, what matters is enforcement. That, it is widely believed, is the Achilles’ heal in Albania.
