Albanian Pension System

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Albanian Pension System
REPUBLIC OF ALBANIA MINISTRY OF LABOR,
SOCIAL AFFAIRS AND EQUAL OPPORTUNITIES
REGIONAL SEMINAR ON PENSION ZAGREB, 9-10
MARCH, 2009
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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
Act no. 7703, date 11.05.1993 On Social
Insurance in Albania Republic (amended)

• Compulsory Scheme
• Voluntary Scheme
• Supplementary Scheme
• Special State Pensions

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Compulsory Social Insurance
protects

• 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

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Compulsory Social Insurance

• Contributions
  Benefits
• Sickness
  Sickness
• Maternity
  Maternity
• Pensions
  Pensions
• Employment 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
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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

6 members from Government
Administrative Council
3 members from employers
3 members from Trade Unions
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SII administers
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Contribution Rate
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

• 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

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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
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 13 to
  15
• 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
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Indicators of Compulsory Scheme Dependency Rate
(beneficiaries/contributors)
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Indicators of Compulsory Scheme Replacement Rate
(pension/net wage)
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Indicators of Compulsory Scheme Coverage Rate
(contributors/labor force)
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Problems Identified

• 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

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Projection of reformed system

• Forecast 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 the
• employees with minimum wage, so is decided a
  minimum
• amount 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 system

• This 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
• Second pillar is complete. First pillar dont
  continuous to function over the last generation
  and all contribution paid in second pillar.
• Secon pillar is partial and first pillar also
  continuous to function.
• Contributions of pensions devided for first
  and second pillar.