The economic landscape has changed over the last 10 years in Albania, but the pension system has not been adapted to the social and economic environment.<\/p>\n
An aging population together with increasing informal employment naturally requires additional resources for income security than the current pension system can provide.<\/p>\n
Despite the favorable trend in increasing budget receipts from insurance contributions, pension benefits have fallen to sufficiency and this decline is expected to continue.<\/p>\n
Also, coverage at both the top and bottom of the income distribution is expected to decline, as is coverage of old-age benefits.<\/p>\n
We think that the contributory pension system can maintain its design, but in the way it has been operating for more than three decades it will have to adjust its parameters and permanently rely on budget transfers to cover its deficits.<\/p>\n
Based on the performance of the current system, we think that the formula used to increase wages should be optimally adapted to the rule of indexation by inflation, but without forgetting that the increase should be adapted to benefits, with little effect on fiscal costs.<\/p>\n
The average salary increase is needed to respond not only to the price increase, but mostly to serve as an additional element for pension indexation. That way, benefits would more closely reflect average career earnings and pensions would retain their purchasing power in retirement.<\/p>\n
Middle and higher income workers will need additional sources of income to achieve adequate retirement benefits.<\/p>\n
In the meantime, the fact of the voluntary pension plan and the pension plans of private funds should be mentioned for a harmonization of the schemes by synchronizing the resources with the fiscal benefits.<\/p>\n
Given the tax structure in place, tax benefits are unlikely to create sufficient incentives to expand their coverage. Measures such as recognition of expenses for contribution payments and other offers from the new income tax law need more flexibility and should be harmonized with the current labor market situation. This means providing a clear and well-regulated default option for contributors, so that they can significantly increase participation in voluntary pension plans and private funds at little additional cost to the state budget.<\/p>\n
For many years now, the social pension has been in operation, which, although insufficient, has managed to partially reduce the risk of poverty in old age.<\/p>\n
The current farmers’ pension operates in practice as a quasi-social pension as contributions cover only 30 percent of the cost of benefits and almost all beneficiaries receive the minimum benefit.<\/p>\n
This is a sub-optimal design and coverage has decreased over time. An alternative to introducing subsidy schemes for rural areas would be to narrow the gap between urban and rural pensions and is a direct measure that affects the reduction of high levels of poverty. In these cases, the local government should address, through budget transfers, the coverage of all basic services at no cost to pensioners, as well as the differentiation depending on the area from the city center.<\/p>\n
This benefit could also replace the current farmers’ pension, providing a better instrument to prevent old-age poverty in rural areas. Furthermore, this would be a more redistributive use of public resources than general budget transfers used to cover deficits in the contributory pension scheme.<\/p>\n
At the moment, when a closed cooperation model is being worked on by public finance experts and the World Bank, we suggest from the outside that a strong package of policy measures can fiscally stabilize and improve the equity of the pension system.<\/p>\n
For example, we suggest that aligning single PAYG for the entire period of service with the second pillar participant pension market model would significantly improve pension finances. Removing the restrictive accumulation cap for voluntary second pillar participants immediately raises their new replacement rates and minimizes the current inequality of the multi-pillar system.<\/p>\n
However, in the short term, hasty and immediate application would generate additional costs.<\/p>\n
Long-term pension adequacy is needed to meet the challenge of general socio-economic and demographic trends, including intensified immigration, low employment rates and significant informal employment. In this regard, an improvement of the adequacy of pensions in the future (among others) should be sought through:<\/p>\n
– improving access to the contributory pension scheme, to include workers with seasonal income (self-employed, temporary workers, etc.);<\/p>\n
– intensification of financial incentives for workers in informal employment for their withdrawal into the mandatory pension system, i.e. flexibility of payment of contributions, etc.;<\/p>\n
– the pension system must undergo a structural reform to synchronize with the long-term fiscal consolidation objectives to halve the initial deficit.<\/p>\n
Many other elements apply in this direction of improving the scheme.<\/p>\n
Ultimately, the reform of the pension scheme must find an acceptable equation, where on the one hand is the provision of adequate and affordable pensions and on the other hand a burden of labor taxes so that individuals have an incentive to contributed.<\/p>\n
To solve this equation, objectives must be built that cope with its variables, which are: the aging of the population that is affected by immigration and the moderate increase in life expectancy, incentive policy for the formalization of the market and the increase of voluntary contributions and the increase of the confidence of market to government measures and policies by reforming the existing social contract and transferring the model of electoral propaganda to propaganda for the awareness of individuals and businesses about the usefulness and necessary participation in public and private schemes.<\/p>\n