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Albanian Pension System

REGIONAL SEMINAR ON PENSION ZAGREB, 9-10 MARCH, 2009

REPUBLIC OF ALBANIA

MINISTRY OF LABOR, SOCIAL AFFAIRS

AND EQUAL OPPORTUNITIES

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Establishment of New Legislation Indispensable

Developments and changes that occurred in the national economic and politic system starting 1991 had an impact upon social insurance system

Massive unemployment, early retirement, decrease of contributors number, increase of beneficiaries number, increase of dependency rate (beneficiary/contributor), decrease of replacement rate (pension/wage)

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Social Insurance System

Compulsory Scheme Voluntary Scheme Supplementary Scheme Special State Pensions

Act no. 7703, date 11.05.1993 “On Social Insurance in Albania Republic”

(amended)

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Compulsory Social Insurance Employed persons in respect of:

temporary incapacity to work due to sickness

maternity old-age, disability, surviver employment injury and occupational disease unemployment

Other economically active persons (employer and self-employed) in respect of: maternity old-age, disability, surviver

protects:

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Compulsory Social Insurance Contributions BenefitsSickness SicknessMaternity Maternity Pensions PensionsEmployment injuries Employment injuries Unemployment

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Main Principles of Social Insurance System Actual social insurance set up in 1993 The pension system is based on PAYGO

model. Based on contribution principle The system has solidarity elements such

us :- between generation

- inside on the same generation- between gender

The benefits defined by the law ( DB )

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Financing of Social Insurance Fund (SIF)

SIF is financed via 4 major income resources:

Contributions Transfers from State Budget Incomes from investment of reserve

fund as well as of funds temporarily available

Other incomes

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Financing of SII Budget

state financing

42%

direct

contributions

58%

financing for

special

programs

7%

financing for

supplementary

scheme

6%

subsidy

4%

state as

contributor

25%

direct

contributions

58%

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Social Insurance Institute (SII) Management

SIF management is performed by SII SII is managed by:

Administrative Council General Director of SII

Administrative Council

6 members from Government

3 members from employers

3 members from Trade Unions

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SII administers

administrative costs1.8%

exp for special government programs 13.2%

exp for supplementary

benefits4.4%

exp for short-term benefits1.8%

exp for pensions78.8%

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Contribution Rate

on 01.07.2002 contribution rate decreased 9.4% of total of previous period

on 01.09.2006 contribution rate decreased 23.4% of total of previous period

01.10.1993

01.03.1995

01.07.2002

01.09.2006

Sickness 1.5 1.5 0.8 0.8

Maternity 2.8 2.8 2.3 2.3

Pension 31.7 31.7 29.9 23.9

Empl. Injuries 0.5 0.5 0.5 0.5

Unemployment 6.0 6.0 5.0 2.0

Social 42.5 42.5 38.5 29.5

Health 3.4 3.4 3.4

TOTAL 42.5 45.9 41.9 32.9

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Contribution Rate by Participants

01.07.2002

01.09.2006

Social insurance 38.5 29.5

Employer 29.0 20.0

Employed 9.5 9.5

Health insurance 3.4 3.4

Employer 1.7 1.7

Employed 1.7 1.7

Self-employed 39.2 33.2

Social 32.2 26.2

Health 7.0 7.0 on 01.09.2006 social insurance contribution rate of employer was decreased 31% in comparison with previous period

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Pension Contribution Rate compared to other Countries under transition

0

5

10

15

20

25

30

35

Compared to other countries in transition, with the contribution rate of 23.9%, Albania is positioned in the middle as shown graphically

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Pensions Pensions represent a key element of

social protection; pensioners maintain about 17% of overall number of population

Scheme provides three types of pensions: old age pension disability pension survivors’ pension

Conditions for a pension to have reached retirement age as provided by

the law to have completed number of insurance years

required Pension calculation formula

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Old Age Pension Eligible for a full old age pension:

to have reached retirement age to have completed 35 years of insurance

Pension calculation formula:

Basic pension + Increment (increment is 1% for each year of insurance multiplying the

assessment base the insured person has completed through contributions)

Two upper limits of pension amount: 75% of the indexed average net wage of the best

three successive years in the ten last years of employment

double basic pension

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Partial Old Age Pension Minimum of insurance years to be entitled

to a pension is 15. An insured person with less than 35

insurance years and more than 15, shall be entitled to a partial old age pension when he/she reaches retirement age. This pension is calculated as part of full pension

Partial pension = Full pension * insurance years / 35

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Reduced Old Age Pension In the frame of the reform on retirement age increase and

to amortize its effects, the right for reduced pension prior to reaching legal retirement age was enforced; in this case, full pension is reduced by 0.6% for each month of retirement before the legal retirement age

Reduced old age pension retirement age not less than:

57 for women 62 for men

not less than 35 insurance years Reduced pension is part of full pension and remains as

such during the entire benefit period

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Disability Pension Eligible for a disability pension:

to have completed years of insurance required

(age – 20) / 2 to be incapable to work

Pension calculation formula:

Basic pension + Increment (increment is 1% for each year of insurance multiplying

assessment base the insured person has completed through contributions)

Two upper limits of pension amount: 80% of indexed average net wage of the last year of

employment double basic pension

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Survivors’ Pension Deceased person had fulfilled eligibility

conditions for an old age/disability pension Persons dependent upon him/her shall be

entitled to a survivors’ pension, which is part of the pension the deceased person would have been entitled to: 50% for widow/widower, provided he/she has a

child not older than 8 years of age or he/she is incapable to work or is 50/60 years of age

25% for an orphan, provided he/she is under 18 or 25 years of age, if following university studies

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Rural Pension Total of insurance years in ex-agricultural

cooperatives – pension according to article 96 of the act in force (rural pension)

More than ½ of insurance years when have been employed by the state – urban pension according to the act in force

In other cases: Basic rural pension + Increment

(increment is 1% for each year of insurance multiplying the assessment base the insured person has completed through contributions)

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Reasons for undertaking Parametric Reforms of 2002

Deficit of pension system was considered high, reaching 1% of GDP.

Worsening of contributors/beneficiaries ratio Approaching the Albanian legislation of

social insurance to the EU countries Contribution rate is higher than in other

countries; the high contribution rate – factor generating informal work

Unemployment issue and percentage of insured population in the last 10 years lead to decrease of the number of future pensioners, thus highlighting social protection of old-aged in the future as an issue in the long run

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Parametric Reforms of 2002 Gradual increase (six months per one

year until 2012) of retirement age to 65 for men and 60 for women

The right for entitlement to a reduced pension

Reduction by 4% of social insurance contribution rate

Increase of maximum contributory wage from 1:3 to 1:5

Transfer of contribution collection from SII to General Tax Department

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Reforms of years 2005 - 2006

Approach of Albanian Social Insurance Legislation to the standards of the European Code and ILO Convention on Social Insurance:

reduction of minimum insurance period required for entitlement to a partial old age pension from 20 to 15 years,

equal treatment of foreigners on the social insurance, extension of social insurance coverage, including persons

without citizenship The link between paid contributions and benefit

amount became stronger, this regarding calculation of assessment base for pension calculation or net wage indexation

Improvements were made to relevant legislation regarding some problems having emerged during practical work in the field and implementation of the law

Contribution rate was further reduced, but it kept being high (reduction by 9% from 38.5% to 29.5% - pension branch from 29.9% to 23.9%)

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Indicators of Compulsory Scheme

4.905.26 5.34 5.46 5.55 5.51

5.825.16

4.794.634.414.164.414.13

3.68

5.48

income/GDP expenditure/GDP

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Indicators of Compulsory Scheme Dependency Rate (beneficiaries/contributors)

0.96 1.031.12

1.421.39

1.22

1.05 1.061.16

0.95 0.950.90 0.90

0.85

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

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Indicators of Compulsory Scheme Replacement Rate (pension/net wage)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

urban rural

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Indicators of Compulsory Scheme

Coverage Rate (contributors/labor force)

0.64

0.570.550.560.53

0.430.46

0.390.320.27

0.27

0.340.350.34

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Low pensions, decrease of replacement rate System is not producing anything that would incite

and encourage people to join the scheme; maximum pension is twice minimum pension, while maximum wage is five times minimum wage

High evasion rate of contributors; low-leveled coverage rate

Those who are not paying contributions today, will not receive benefits tomorrow, thus maintaining a social burden for the future

Fiscal risk stemming from the increase of number of pensioners in the current period, whose majority are getting full pensions today

Deficit in the system, average being 0.8% e GDP Forecasts indicate that Albania will face an aging of

population in the long run, which would bring about changes in indicators of social insurance scheme

Problems Identified

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Projection of reformed systemForecast reform for actual pension system included: Amendment of pension formula. Recommendation of

World Bank for this element is: monthly P = 1.3 % for every year of insurance multiplying the assessment base .

This formula lower very much the replacement rate for theemployees with minimum wage, so is decided a minimumamount about 85 euro. Amendment of upper limits of pension amount. So the

maximum pension = 3 x minimum pension. This reformation result in:

- Improvement of replacement rate - But system financing balanc worsening compared to without reformed PAYGO.

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Indispensable of mix systemThis system intending existence of: Compulsory scheme ( PAY) Second pillar , compulsory and private Third pillar, on voluntary base The alternatives for mix system are diferents, but two are

important: 1. Second pillar is complete. First pillar don’t

continuous to function over the last generation and all contribution paid in second pillar.

2. Secon pillar is partial and first pillar also continuous to function.

Contributions of pensions devided for first and second pillar.