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OPINIONApril 25, 2024

Interview with World Bank Country Manager Emanuel Salinas on Pension Reform in Albania

This interview was originally published in Albanian in the print edition of Monitor magazine on April 22, 2024.

Monitor: The Ministry of Finance has announced that in cooperation with the World Bank they are working on the revision of the laws that regulate the public pension scheme. At what stage is this process?

Emanuel Salinas (ES): The World Bank is working closely with the Social Insurance Institute (SII) and line ministries to inform the policy recommendation being discussed by the Albanian Government. The value adds we bring to the discussion is the use of our actuarial-based model to carry out long-run financial projections of the pension scheme and the international experience on pensions, having worked with countries globally that face or have dealt with similar challenges. The long-term projections by the Bank are being carried out in close collaboration with SII to enable a shared technical understanding of the current challenges and long-term outlook of the system in terms of coverage, adequacy, fairness across groups, and sustainability. Our Public Finance Review report, with recommendations for pension reform besides other topics, will be released by end 2024, following multiple rounds o f consultation with the Government.

Monitor: What are the World Bank’s suggestions on where to intervene?

ES: Our analysis suggests that the low coverage of the current labor force, the prevalence of individuals contributing at the minimum wage level, and the fairness of the overall system are areas to improve to ensure the system's long-term financial and social sustainability. Pension policy must grapple between providing adequate pensions, doing so affordably, and in a manner that individuals have an incentive to contribute. Striking this balance gets harder when dealing with population aging, outmigration, self-employment/informal employment prevalence, and limited awareness of how pensions are calculated. Our recommendations include policy options to help strike and improve this balance. We also suggest using a mix of social protection instruments to meet the needs of poverty protection, longevity insurance, and savings. Using only the contributory pension scheme to meet these diverse needs risks distorting the system, costs more, and can be less efficient.

Monitor: What is the purpose of proposed changes?

ES:The pension deficits of the compulsory scheme, i.e., excluding supplementary benefits, have reduced in recent years and could continue to improve in the short run because of wage increases that, in turn, raise contribution revenues. However, aging and a continued decline in coverage could put pressure, even on a sustainable system, in the medium to long run. We are therefore adopting four criteria(s) to evaluate the proposed changes:

  1. Whether the changes incentivize individuals to contribute or contribute regularly.
  2. The impact on the state budget to finance the changes, e.g., higher pension adequacy.
  3. Whether the reform improves fairness within and across generations, and 
  4. How feasible is it to implement the changes?

Adopting these criteria(s) enables us to present to the Government options that balance coverage, adequacy, fairness, and sustainability of the system and can be implemented in a realistic time frame.

Monitor: Have the demographic projections changed since the last pension reform of 2014, and what should be changed in relation to the current scheme?

ES: The UN produces long-term demographic projections, and the trend globally, also valid for Albania, is that people live longer lives and have fewer children. In 2022, for example, 19% of Albania’s population was above the retirement age. This share is expected to reach 24% by 2035 and 33% by 2070, even after accounting for the increase in retirement age legislated under the 2014 pension reforms). The UN updates its projections every three years, so these numbers could change over time. In light of these changes, there are three areas Albania should focus on – supporting longer careers so individuals can contribute to the pension system for longer, investing in affordable health and long-term care for older adults, and ensuring income security for older adults through poverty protection for all and retaining fairness in contributory scheme by retaining a strong link between benefit s and contributions.

Monitor: In your opinion, should these changes include formulas for index calculation, etc?

ES: Pension indexation is often related to inflation or economy-wide wage growth or a hybrid of the two, the most generous being indexing pensions to the average wage growth in the economy. Increasing the generosity of pension indexation will increase expenditures overnight as it would apply to the stock of all pensioners. Any increase, therefore, needs to be considered in light of fiscal affordability and the efficiency of using tax revenues. The second thing to note is that indexation only affects the value of pensions during retirement but doesn’t address the challenge of low pension benefits because people contribute for fewer years and at lower wages. As per the 2022 data, close to 36% of those who contributed to the system did so at the minimum wage of 32,000 ALB. Suppose a sizeable number of individuals (which includes self-employed and rural workers) continue to pay contributio ns on a low basis. In that case, their benefits will also be low, given how pension benefits are calculated. So, in short, changing indexation is a short-term fix but doesn’t address the structural challenges. There are also some risks of making indexation changes in an ad-hoc manner or for some groups of the population only as, over time, it could lead to a compression of the pension profile, reduce the predictability of benefits, and create an unintended incentive for more individuals to contribute at minimum wage level if higher pension increases are scheduled to be given to them.

Monitor: How can the pensioners be better protected from the reduction of benefits, since in 2023 approximately 55% of pensions were partial and year after year the criteria for full pension are becoming unattainable by people who retire?

ES: The inability of individuals to attain full pensions is at the heart of the adequacy issue which is being manifested in the system. Understanding the reasons why this is happening in the Albanian context, is important. Our global experience suggests that there might be two reasons for this- (i) labor market challenges where older adults are unable to work longer in formal sector jobs, or (ii) individuals not contributing for longer periods because they don’t see the benefit of doing so or due to lack awareness on how higher years of contribution lead to higher benefits. Certain groups of workers like women and migrants also tend to have gaps in their contribution history because of the time taken to care of children/elderly or because of gaps in employments. This would suggest a need to: (i) improve pension education; (ii) ensure that the system design rewards every contribution ma de by the individual; (iii) focus on upskilling and reskilling of older workers, improve the job matching and reduce the employer bias for hiring older workers. 

Monitor: In your opinion, should social protection for pensioners be strengthened in order to avoid poverty of this group of population?

ES: Albania’s statistical organization INSTAT publishes data on poverty rates by age every year. The 2022 data suggests that the elderly (65+) had less than half of the poverty rates (13.9%) of children (ages 0-17) in Albania (27.4%). Averages do mask the variability around the numbers, that could vary based, for example, on where the elderly resides (urban/rural), and on whether they live alone or as co-residents in a bigger household. But what the data since 2019 unequivocally tells us is that the poverty rates for older adults in Albania is less than that of both children and the working age individuals. Therefore, the use of tax revenues to provide additional pensions should be viewed in the context of overall spending efficiency. We believe that strengthening social protection using a mix of social assistance, insurance and labor market programs is essential to protect Albanians across all ages and ensure that the dignity and well-being of current and future older adults remains protected.


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