Pension System Reform in Albania: Steps toward a more secure future

The current two-pillar system is an outdated model.

Pension System Reform in Albania: Steps toward a more secure future. the current two-pillar system is an outdated modelThe first pillar, which constitutes the core of the public pension system, is based on the principle of distribution (“pay-as-you-go”). This model operates on an unwritten social contract where the active working generation contributes to finance the pensions of the retired generation. This type of intergenerational solidarity worked when there was a healthy demographic structure, with more contributors than beneficiaries.

The second pillar, which is voluntary and capitalized, was introduced into the system after 2000 as a means of creating additional retirement savings opportunities through private funds. However, this pillar has not received the necessary political, economic, or cultural support to be consolidated. It has remained peripheral and with negligible impact on ensuring the sustainability of the system.

Three factors that make this model unsuitable today are:

Population aging. Albania is one of the countries with the fastest aging rate in the region. Declining birth rates and massive youth emigration have led to an inverted ratio between contributors and beneficiaries. In the 1990s, this ratio was 4:1; today it is less than 1.3:1 and continuously decreasing.

Emigration and informality. Qualified young people who could potentially be long-term contributors are leaving the country, while a large portion of the economy remains informal. This creates a deep shortfall in scheme revenues and increases the need for subsidies from the state budget.

The ineffective voluntariness of the second pillar. In a low-income economy with weak trust in financial institutions, many individuals are neither capable nor motivated to invest in a private pension scheme. This makes the second pillar not a real support for the future.

In the face of these developments, a restructuring of the pension system is essential according to the three-pillar model, which has been successfully adopted by OECD countries and some regional countries:

First pillar – Basic public scheme (pay-as-you-go)
It remains a mechanism of solidarity and basic support for old age, but must be reformed in its calculation and indexation method to increase fairness and reduce pressure on the budget.

Second pillar – Mandatory private savings scheme (capitalized)
This component should become partially mandatory for young people entering the labor market. Individual contributions will be invested in supervised markets and create individual capital for old age. The state may offer fiscal incentives for this participation.

Third pillar – Voluntary individual savings scheme (supplementary)
Open to all individuals who wish to preserve and increase their retirement savings, serving as a complementary mechanism to maintain living standards after retirement.

Why is the three-pillar model more appropriate for Albania today?

First, it diversifies income sources in old age, avoiding excessive reliance on the state budget;
Second, it responds to labor market realities and demographic dynamics, distributing risks between individuals and the state;
Third, it promotes formalization and personal responsibility through financial education and long-term saving motivation;
And fourth, it stimulates the development of financial markets and trust in pension fund supervisory institutions.

Thus, at a time when social policy in Albania must go beyond short-term compensations, pension system reform requires clear political commitment, national compromise, and ongoing technical support. Transitioning from a fragile two-pillar system to a balanced and sustainable three-pillar system is not only necessary but also achievable—provided it is seen as an investment in the future rather than a political cost.

What threatens the current pension scheme the most?

The current pension scheme in Albania is under all-around pressure. Population aging is an irreversible demographic reality that places pressure on the public budget.

In these circumstances, population aging is a challenge that cannot be mitigated with ordinary fiscal measures. Albania is experiencing a continuous shrinking of the active population and an increase in the number of elderly, which translates into an automatic increase in the number of beneficiaries and a decrease in contributors. With an average ratio of less than 1.3 contributors per pensioner, the current scheme is increasingly unsustainable over time. This implies that each year more budgetary transfers will be needed to cover the scheme’s deficit, increasing pressure on public finances.

The lack of contributions is a direct result of two phenomena:

The informal economy, which covers a large part of the labor market, reduces the scheme’s contributing base.

Emigration, particularly of youth and professionals, is leading to a “demographic drain” of the pension fund, stripping the country of its long-term contributing potential.

This makes it clear that the problem is not the lack of resources, but the lack of connection between the workforce and the public scheme. In the absence of reforms that formalize employment and create incentives for participation in the scheme, even economic growth will not translate into improved pension system sustainability.

Meanwhile, where the economy and demography offer measurable challenges, politics often chooses not to act, making institutional inaction a greater threat than the objective factors themselves.

This manifests in several ways:

Reforms are halted or delayed due to short-term political costs;

Compensatory measures, such as raising minimum pensions, are used for electoral purposes without addressing the structural root of the problem;

Lack of a long-term national strategy for pension system reform, with cross-party consensus and institutional continuity.

This causes the current scheme to operate in a dead-end path, where more budgetary resources are required every year, while contributors decline and beneficiaries increase.

Any effective solution for the pension system must begin with recognizing its crisis as a political and institutional crisis, before treating it merely as a technical issue. Effective policies require:

Bold decision-making, which may be unpopular in the short term, such as mandating participation in the second pillar or changing the pension calculation formula;

Creating a transitional fund to cover the gap between the old and the new scheme;

Financial education of the new generation and increasing trust in retirement savings schemes;

Drafting a National Pension Pact to guarantee the continuity of reforms beyond electoral cycles.

In today’s Albanian reality, the average pension is no longer a means of security for old age, but has become a minimal form of survival assistance. With a monthly amount averaging between 19,000 and 21,000 ALL, the pension is far from any concept of a decent living standard, especially under conditions of high inflation, rising energy, food, and medicine costs—goods that constitute the largest part of elderly expenses.

In current conditions, for most pensioners, the pension does not even cover the minimum cost of a monthly food basket, let alone rent, healthcare, or dependency support. According to some independent assessments, a minimum dignified living in Albania requires at least 35,000 – 40,000 ALL per month, indicating a deep gap between actual incomes and basic needs. This gap not only exposes pensioners to poverty, but risks pushing them toward dependence on family support or informality, undermining the state’s role as a guarantor of dignity in old age.

One of the fundamental problems of the current approach is that the pension is seen merely as a reward for past contributions in the labor market, without considering the social and health realities that characterize old age. This limiting logic turns the pension into a technical payment and not a social solidarity instrument.

Instead, modern social policymaking must redefine the purpose of the pension: not only as a derivative of past contribution, but as a guarantee for a dignified life in old age. This paradigm shift is essential, especially in a country like Albania, where social support structures are weak and the state’s role in social protection is vital for vulnerable segments of the population.

The fact that a large number of pensioners must work after retirement age, often in casual, strenuous, and unsuitable jobs, is a strong indicator of the failure of social protection policies. Moreover, the dependence of many elderly on the help of emigrant children or other informal support forms shows that the state is failing to fulfill its core mission: to provide social security for its citizens in old age.

In a reality where population aging is an inevitable trend and the current pension system is financially fragile, revisiting the function and level of the pension should be a political and institutional priority.

The current pension scheme in Albania faces a structural crisis that cannot be resolved with isolated measures, but requires a conceptual and operational reformatting of the entire social insurance system. The problems do not arise solely from the lack of financial resources, but from an outdated architecture that does not reflect the country’s economic, social, and technological realities.

The critical flaws of the existing scheme can be summarized as:

Lack of financial sustainability
The public scheme operates on the “pay-as-you-go” principle, where current employees’ contributions finance today’s pensions. With population aging and a shrinking contributor base, this relationship has become unsustainable. The increase in beneficiaries relative to contributors has caused a structural deficit in the scheme, requiring increasingly more subsidies from the state budget.

Insufficient formalization of the labor market

Most employment in Albania takes place in informal or semi-formal sectors, where workers are either undeclared or declared with fictitious minimum wages. This directly undermines the financing of the pension scheme and significantly reduces the real benefits of future retirees.

Low inclusion of the self-employed and seasonal workers

These groups, which are increasing especially in agriculture, small trade, and services, face bureaucratic barriers, lack of information, and absence of incentives to contribute. They often remain outside the scheme or pay the minimum solely to fulfill the years of insurance, which creates inequality in benefits.

A system that does not motivate real income declaration

The current scheme penalizes those who declare higher incomes, as increased contributions do not translate into proportionate benefits. This design leads to the avoidance of real income declaration and encourages intentional informality.

The private scheme is fragmented and lacks public trust

Although a second voluntary and capitalized pillar exists, it is weak, concentrated among high-income individuals, and has no interaction with the public scheme. Moreover, the absence of a reliable regulatory and professional management framework makes private pension funds unattractive to the general public.

To address these challenges, a multidimensional approach is needed, involving fiscal, technological, managerial, and public communication reforms, mainly focused on:

• Linking labor and pension policies must be essential. Reducing labor costs for youth, subsidies for employers formalizing jobs, and vocational training connected to high-potential sectors are tools that directly impact the growth of the contributing base.
• Private contributions in a second or third pillar can increase through tax exemptions for individuals and businesses contributing to pension funds. Another option is to require new labor market entrants to make partial contributions to individualized, securely and transparently managed funds.
• Establishing a clear regulatory architecture for managing private funds, with regular public reporting, supervision by independent institutions, and possibly, integration with the European financial system, is key to building trust. Moreover, merging existing funds into larger structures would ensure greater efficiency and stability.
• Building a unique digital platform for social security, which interacts with the tax and employment systems, would enable continuous tracking of contributions, payment automation, and full transparency for every individual. This technology would serve as a tool to reduce informality and increase participation.

Albania can no longer afford a pension system that functions as an extension of 1990s realities, unsupported by current population, market, and fiscal dynamics. Restructuring the scheme is a political, economic, and ethical necessity.

The 2014 pension reform, which aimed to reorient the public scheme toward a more contributory and intergenerationally fair model, has now entered its second decade of implementation. While it was a step toward modernization, time and circumstances have changed. Albania today faces a new demographic, economic, and technological context, requiring a second cycle of deeper, more integrated, and long-term sustainability-oriented reforms.

This need is supported by institutional and private sector analyses, as well as the lived experiences of citizens, showing that the reform’s impact has been limited and more theoretical than practical. Some promoted mechanisms, such as tighter links between contribution and benefit, have been only partially implemented, and this fragmented application has preserved the fragile nature of the system.

At this point, the country no longer has the luxury of cosmetic corrections. What is required is a paradigm shift, a partial reformatting in form, but a deep change in structure and purpose. Instead of maintaining an unsuitable status quo, politics must demonstrate vision to build a fairer, more sustainable, and more appropriate system for the country’s economic and demographic reality.

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This transformation can be built on three critical directions:

1. Rethinking the contribution model for the self-employed

The self-employed constitute a significant portion of the workforce in Albania—especially in agriculture, trade, and small services—but their engagement in the pension scheme is extremely low. This situation stems from:

• Lack of understanding of long-term benefits;
• The perceived unfair financial burden;
• A uniform contribution structure that doesn’t reflect actual income flexibility.

Based on our past analyses, this requires:

• Transitioning to a flexible contribution model for the self-employed, with progressive rates linked to real income (e.g., via self-declaration certified by the tax system);
• Enabling seasonal or partial contributions to reflect the non-linear income nature in the informal sector;
• Automated inclusion through digital platforms for business or freelance registration.

2. Gradual transition of the younger generation toward a capitalized scheme

Young people entering the labor market today face a system that offers no real guarantee for retirement due to:

• The “pay-as-you-go” structure relying on future contributor numbers;
• Mismatch between contributions and future benefits;
• The demographic crisis, which will make the current system even less sustainable in the next 20–30 years.

This approach requires:

• Developing a mandatory third pillar with partial capitalization, where a percentage of contributions go to individual, investable accounts under a state-supervised scheme;
• Support through fiscal incentives for youth who choose to contribute more, with tax exemptions or partial contribution subsidies in early years;
• Cooperation with the banking system to develop new personalized pension products aligned with individual risk profiles and life cycles.

3. Strengthening the role of the Social Insurance Institute (ISSH) as a modern administrative institution

The ISSH has operated for many years as a fund distributor, following the traditional logic of budgetary administration, rather than as a genuine social and financial fund manager.

To fulfill this institutional purpose, the following are necessary:

• Transitioning to a model where ISSH holds real competences for asset management, financial analysis, and long-term scenario development;
• Establishing an analytical unit within ISSH to create personalized policies for different contributor groups and generate reform scenarios;
• Gradually opening up to partnerships with other public and private institutions to improve administrative efficiency and public transparency.

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Politics must no longer fear structural decisions. On the contrary, this is the opportunity to build a pension system that does not belong only to the past, but speaks the language of the future.

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Improving and stabilizing the pension scheme in Albania requires well-thought-out, bold, and multidimensional intervention. This reform should not be a mere fiscal adjustment to cover budget gaps, but a social and political project that places at its core the dignity of old age, intergenerational solidarity, and long-term system sustainability.

These are, in my assessment, the priority steps to build a sustainable pension system:

Linking reform with emigration and diaspora policies Thousands of Albanian citizens contribute to pension schemes abroad. If the new reform manages to build inter-state agreements for the transfer of contributions or voluntary inclusion of the diaspora in a new capitalized pillar, it would create a new sustainable source of contributions, expanding the system’s financial base.

Drafting a national sustainable pension strategy A long-term strategy is needed, based on realistic demographic, labor market, and fiscal capacity projections. This strategy should be the guiding document for all decision-making, not dependent on ad hoc interventions or election cycles.

Establishing a semi-mandatory second private pillar Currently, we have a two-pillar system where the second is voluntary and fragmented. We propose a capitalized second pillar with mandatory participation for the new generation entering the labor market. This would diversify sources, reduce pressure on the public budget, and foster long-term savings culture.

Developing a fiscal incentive package and additional insurance for the self-employed The self-employed and seasonal workers remain outside the scheme or contribute partially due to an unrealistic and punitive contribution model. A package of fiscal incentives, combined with complementary insurance products, is needed to integrate these individuals into the system and avoid penalizing them in old age.

Reforming the pension calculation method The current formula standardizes inequality: individuals with short or fragmented contribution careers are unfairly penalized. A model more sensitive to the reality of the Albanian labor market is needed, integrating flexibility and career interruptions without jeopardizing the right to a dignified minimum pension.

Ensuring gender equality in pension benefits Women are more often in informal jobs, with lower incomes and career breaks due to caregiving. This reality is not addressed by the current scheme. The reform must correct the gender gap in benefits by recognizing care periods as contributory periods, as applied in countries with more advanced practices.

Linking reform with emigration and diaspora policies

Thousands of Albanian citizens contribute to pension schemes abroad. If the new reform manages to build inter-state agreements for the transfer of contributions or voluntary inclusion of the diaspora in a new capitalized pillar, it would create a new sustainable source of contributions, expanding the system’s financial base.

Digitalization of Contribution Traceability and Inclusion

Technology should serve to enable the real-time tracking of contribution histories, in order to reduce errors, omissions, and informality. A transparent and digital system, open to self-monitoring by citizens, will increase public trust and individual accountability.

The reform of the pension system is no longer a political choice — it is a historical necessity and a national priority. It can no longer be postponed, nor replaced by social measures or temporary aid. Political courage is required to confront reality, to avoid decision-making driven by polls, and to build an honest and sustainable policy for old age.