Albanian Pension System

1. REPUBLIC OF ALBANIA MINISTRY OF LABOR, SOCIAL AFFAIRS AND EQUAL OPPORTUNITIES Albanian Pension System REGIONAL SEMINAR ON PENSION ZAGREB, 9-10 MARCH, 2009

2. 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)

3. 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

4. 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

5. Compulsory Social Insurance ContributionsBenefits Sickness Sickness Maternity Maternity Pensions Pensions Employment injuries Employment injuries Unemployment

6. 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 )

7. 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

8. Financing of SII Budget

9. 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

10. SII administers

11. 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

12. Contribution Rate by Participants • on 01.09.2006 social insurance contribution rate of employer was decreased 31% in comparison with previous period

13. 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

14. 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

15. 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: Basicpension + 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

16. 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

17. 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

18. 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: Basicpension + 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

19. 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

20. 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)

21. 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

22. 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

23. 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%)

24. Indicators of Compulsory Scheme

25. Indicators of Compulsory Scheme Dependency Rate (beneficiaries/contributors)

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

27. Indicators of Compulsory Scheme Coverage Rate (contributors/labor force)

28. 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

29. 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 balancworsening compared to without reformed PAYGO.

30. 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 don’t 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.