“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,” says Prime Minister Edi Rama, pointing out that last year’s deficit rose to $430 million.
TIRANA, April 30 – Government has finalized the much roumoured pension reform 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.
Introducing the final package this week, Prime Minister Edi Rama described the reform a necessity considering the current low pensions and the widening gap in the social security contributions.
“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.
Albania has 570,000 pensioners and some 700,000 contributors to the scheme with the gap in the pension system increasing to $430 million in 2013, added the Prime Minister.
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 30 percent, but experts say it is a necessity considering the huge deficit and the projected ageing of the population.
“The draft proposes two options on the reformation of the pension system. The first option is based on the improvement of the current system proposing changes to the formula of the pension calculation. For the first time, the system envisages the introduction of social pensions. The document also foresees a review of supplementary pension for senior officials. Their retirement age will increase but will drop for miners. A legal framework will be drafted on early retirement for miners and artists,” said Social Welfare Minister Erion Veliaj.
The second option consists in the complete reformation by shifting into notional accounts under which the amount of the pension is determined by individual contributions plus their investment returns.
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.
“Option 1 focuses on the improvement of the parameters of the current system. Option 2 proposes a paradigmatic reform moving towards a notional accounts system. Both options are grounded on improving the earning-related component of the system incentivizing individuals to be part of the scheme and contribute on full wage. Both options reduce the deficit and guarantee higher benefits than the current scheme. Until 2030 both options have almost the same performance in reducing the deficit. After this year, Option 1 runs a lower deficit than Option 2 and the difference between them widens gradually to 1 percent of GDP towards the end of the forecast period,” says the pension policy paper drafted under World Bank assistance.
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.
Government says the document will undergo public consultations until a final version is agreed and voted in Parliament to enter into force starting January 2015.
Opposition Democratic Party MP, Sherefedin Shehu, a former deputy Finance Minister, says the new reform government has introduced will further lower pensions under a mechanism which is being sold as a reform. “Considering the average wages in Albania, there will be no average monthly pensions higher than 20,000 lek (Euro 140),” Shehu told reporters.
Deficit widening
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 social pension will be awarded only after lack of alternative income has been proved, similar to the current criteria of benefiting social assistance,” Social Welfare Minister Veliaj has earlier said.
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).
