This interview was originally published in Albanian by Report TV on March 19, 2024. This is the full interview.
1. What is the World Bank's evaluation of the current pension program, which was approved in 2015?
The 2015 pension reform of Albania was a step in the right direction towards establishing a clearer link between contributions and benefits, while also improving sustainability of the overall system. The change in the defined benefit formula in 2015 meant that individuals who paid more and more frequently into the system will receive higher pension benefits. The gradual increase of the retirement age adopted in 2015 was also in line with recommended best practice, given the rising life expectancy in Albania.
We are now close to a decade since the last reform and meanwhile Albania has faced global, regional and country specific challenges which have had implications for the pension system. Continued outmigration, persistence of informal employment, rapid aging in the country, and changing labor markets put pressure on the coverage and sustainability of the pension system while fewer years of contribution and inflationary pressures are raising adequacy concerns for some groups of pensioners.
2. What are some of the problems that the World Bank has noticed with the current pension scheme?
From a preliminary analysis, we have identified three main challenges.
First, a relatively small base of contributors. As of 2022, most adults above the retirement age receive some pension from SII. Beneficiary coverage is therefore high in Albania but the same is not true about contributor coverage as only approx. 60 percent of the labor force currently contributes to the pension scheme. This can pose sustainability challenges for the scheme because contributions being collected are used to pay benefits to pensioners. As any deficits are financed by the Government so a rise in deficit means less revenue for other spending priorities of the government on human development. Increasing contributor coverage is important not only to ensure sufficient cash-flow in the short run but also so to ensure that young generations in Albania will receive adequate pensions in the future.
A second challenge is related to the adequacy of benefits and particularly so for new pensioners. The data has shown a consistent drop in years of service among new pensioners e.g., those who retired in 2012 had on average 33 years of contribution but new retirees in 2022 had only about 27 years of contribution, despite the increase in retirement age during this period. The lower years of contribution results in lower benefits among new pensioners. Similarly, as more and more individuals (notably self-employed) contribute at minimum wages the average pension benefits will also be lower. These are classic example of how changes in labor market or underreporting of wages can affect pension outcomes.
A third challenge which often gets under looked but is extremely important in ensuring integrity of the overall system is the fairness aspects. Social insurance schemes, by design, have some redistributive elements (e.g. minimum pensions) so that those most vulnerable are protected. Still systems need to strike a balance between redistribution objectives and retaining the incentive to contribute consistently and accurately. Going forward and building on the 2015 reforms, it will be helpful to focus on improving intra and inter-generational fairness and doing so without significantly worsening the sustainability of the system. Pension education and communication is another area to focus on so that individuals can estimate their benefits and understand that benefits will be higher if years of contribution and how much they contribute, are higher.
3. Currently, the World Bank is working with Albania on a new pension program; what are your key recommendations?3.
The World Bank is working with the Social Insurance Institute (SII) and Ministry of Finance to assess the coverage, adequacy, sustainability and fairness of the current pension schemes and provide policymakers with projections of alternative reform scenarios. We are adopting a multi-stakeholder approach to the discussion, including discussions with IMF. Our recommendations would soon be made available under an upcoming report that looks not only at pensions but also at other aspects of public finance.
4. Do your proposals include modifications to the number of years required to get a pension, an increase in the pension amount, or changes to reflect annual indexation?
The World Bank in its analysis is evaluating the current situation and a range of reform options, and combination of them, taking into account the impact on labor markets and affordability. Many of the perceived challenges of the pension system stem from the structure of labor markets in Albania and global trends – such as aging, growing prevalence of non-standard employment, and migration - which Albania is not immune to, so complementary initiatives will be needed to provide retirement security to all Albanians.
5. What benefits will citizens receive if your proposals are adopted and implemented as part of the new scheme?
The World Bank team will propose a set of options to the Government of Albania to consider based on the current evaluation, and to enhance the coverage, adequacy, sustainability and fairness of the pension system. The analysis takes into account emerging demographic and socio-economic challenges but also the opportunities facing Albania.
6. According to INSTAT, the average number of employees in Albania was approximately 1.3 million at the end of September 2023, with only 800,000 employees contributing in the pension scheme. What is your opinion on this situation?
As I discussed before, these numbers point to a key challenge of the pension system with around 40 percent of employed individuals who do not contribute to the system. The contributor data as of 2022 also suggests that coverage among the rural self-employed has gone down in recent years. There are multiple reasons that are likely contributing to this relatively low contributor coverage e.g. persistent informal employment and rise in others forms of non-standard employment; hesitance to contribute as a self-employed if individuals feel they are unlikely to meet the requisite 15 years to qualify for a pension. There are likely some self-employed (in rural or urban contexts) who have stable incomes but do not contribute because they do not see the benefit of contributing towards social security. . A detailed labor market analysis is needed to answer this relevant question but from the perspective of pensions, the low coverage poses a risk that some future older adults in Albania might not receive a pension from SII or receive low pensions.
7. How much do you believe informality harms the pension program and the economic status of pensioners?
In the context of the pension system, informality poses two key challenges. On the one hand, governments cannot depend on payroll revenues to sustain their pension schemes. In countries with high informality but high beneficiary coverage (like Albania), there is often pressure to raise contribution rates or limit benefit increases in order to keep up with rising pension costs. On the other hand, using payroll or formal employment as the criteria for receiving pensions would exclude a significant share of the population from the prospect of receiving a pension, with spending on social pension expected to increase as more people would qualify for it. At an individual level, those in the informal sector not contributing to the pension system will lack income security at retirement. The interlinkage of pensions to labor markets, fiscal constraints, gender outcomes etc. make it important to look at pension schemes (mandatory, voluntary, social pensions) as a whole and identify policy options that balance sustainability, adequacy, fairness and coverage objectives, using different instruments available to policymakers.
