The sustainability of the pension system in Albania remains one of the government's primary challenges. Over the past 30 years, the system has faced significant strains from factors such as economic informality, population aging, and high emigration rates. Despite reforms aimed at enhancing financial stability, the pension scheme continues to grapple with long-term pressures. To address these issues, Albanian authorities are currently collaborating with the World Bank, seeking effective solutions, VOA reports.
 |
Historical Reforms and Current Financial Status
A decade ago, Albania introduced several key reforms to its pension system, including raising the retirement age and establishing a fair ratio between contributions and pension amounts. These measures, along with other steps, have led to notable financial stability. Today, the pension scheme's deficit is 0.85% of GDP, down from 2% ten years ago. This indicates a decrease in the state budget funds required to supplement pension resources. However, officials remain concerned about ongoing demographic shifts, such as high emigration, declining birth rates, and increased life expectancy, all contributing to an aging population.
The World Bank projects that by 2035, the percentage of the population at retirement age will rise to 24%, up from 19% in 2019. Currently, 705,000 citizens receive pensions, with a beneficiary-to-contributor ratio of 1.17 to 1. This ratio is precarious for a sustainable pension system. Pensioners report that their pensions are insufficient to cover living expenses, emphasizing the high cost of living and the difficulties they face.
Pension Amount and Economic Informality
One of the key challenges for authorities is ensuring that pension amounts are adequate to sustain a decent living standard. While the government has continuously indexed pensions, they remain low relative to living costs. Astrit Hado, Director of the Social Insurance Institute (ISSH), explained to Voice of America that the reasons for low pensions are rooted in years of economic informality, undeclared labor, and underreporting of wages. According to INSTAT, approximately 40% of Albania's 1.3 million employed individuals do not contribute to the pension scheme.
"Pensions are low due to short contribution periods, low wages on which contributions were based, early retirements, and extended pension receipt periods. Those who are 75-80 years old today retired at 45-50, having paid contributions for 25 years but have received pensions for 30 years. Pensions are not money factories. Citizens must understand that pensions are based on merit, not need. The amount you receive depends on what you contributed," Hado stated.
The Role of the Private Sector and Alternative Schemes
The private sector is the largest contributor to the pension fund, with construction and services industries playing significant roles. Agriculture, which employs nearly half of the labor force, contributes minimally due to its irregular functioning. Government policies to raise wages have increased contributions to social insurance funds, but economic experts stress the need for a high-productivity economy with higher wages. Economist Selami Xhepa suggests alternative schemes, including private pension funds and tax-advantaged pension accounts guaranteed by the state.
"An alternative scheme, besides strengthening private pension funds, could involve tax-privileged and state-protected pension accounts. Citizens could set aside 2,000 euros annually in untaxed deposits, resulting in 80,000 dollars over 40 years for a more comfortable retirement," Xhepa argued.
Addressing Demographic and Employment Trends
Recent years have highlighted a worrying trend: a full pension requires 38 years of work, with a minimum pension available after 15 years. However, the number of new pensioners with fewer work years has increased. The average work years for the approximately 40,000 annual new pensioners have decreased from 32 years two decades ago to 27.5 years today. The number of pensioners with only 15 years of work has also risen, leading to low pensions and more financial difficulties.
"In the 1990s, when the communist system collapsed until the economy began formalizing in the 2000s, there was high unemployment, black-market labor, and massive emigration. Today, those born in 1962 are retiring with only 15 years of work. We must remember the emigrants who worked abroad and did not contribute here. People need to realize that planning for a pension begins long before reaching retirement age," Hado emphasized.
Looking Forward: Ensuring Sustainability and Adequacy
The ISSH acknowledges that the pension-to-average-wage ratio is declining. The average pension is 32% of the average wage, whereas in developed countries, it is about 60% of net wages. The World Bank underscores the need for incentives to increase public awareness about social contributions and is working with the government to address these recommendations.
The Albanian pension system continues to suffer from the socio-economic instabilities of the past three decades. Ensuring its sustainability and adequacy for future generations requires comprehensive policy adjustments, public awareness, and collaboration between national authorities and international organizations.