Albania’s Pensions a ‘Time Bomb Waiting to Explode’

First published in BalkanInsight on 28 May 2008

With too few contributors, too many beneficiaries and rampant fraud, the system is close to collapse. But no government seems ready to oversee the painful reforms required.

By Gjergj Erebara

“When I retired in 1995, I learned that the government had decided to pay the same pension sum to everyone, whatever people had contributed to the scheme,” recalls Shpresa Daja, a former manager for almost 40 years in a state-owned factory.

“So for the next eight years I had to get by with a pension of 60 euros per month,” Daja said, adding that despite contributing to the system all her life, she still had to rely for help on her son to cover her basic expenses.

According to Omer Stringa, Dean of the Economics Faculty in the University of Tirana, Daja belongs to the “unfortunate generation,” a euphemism associated with people who retired in the mid-Nineties.

When Albania’s state-owned pension fund collapsed under inflationary pressure following the demise of the communist regime, the value of many people’s savings dwindled to next-to-nothing.

Although pensions have been raised in recent years by some 40 per cent, or even doubled, economists warn that the system is still risking collapse.

While the government attempts to suppress illegal labour and convince employers to contribute more to pensions, experts warn that the strategies are not yielding enough to save the system.

The basic problem is that the Albanian pension system has some 400,000 contributors and 530,000 beneficiaries.

Almost 40 per cent of its expenditure has to be covered by the state budget. Furthermore, in the next few years, the number of beneficiaries is expected to increase sharply.

“Our pension scheme could theoretically work with a ratio of four contributors for every one beneficiary,” Stringa said.

“But once the ratio descends to three contributors for every one beneficiary, the system is considered in danger.”

“If there are less than two contributors per beneficiary, the system can be considered bankrupt.”

The ratio is currently 0.8 contributors per beneficiary and it is deteriorating fast.

The cost of this imbalance between contributors and beneficiaries is rising. The pension system is now running at a deficit of 310 million euro a year, roughly 10 per cent of the state budget for this year. Moreover the deficit has tripled year on year since 2001.

However, pensioners are an important voting bloc and, instead of making savings, governments remain tempted to raise pensions in order to win votes, especially in election years.

As a result, the government’s drive to increase revenue has concentrated less on saving the pension system from bankruptcy and more on taxing – more heavily – the same number of Albanians who have jobs.

In 2007, it introduced a much-criticized system of “referral wages”, which obliged employees to pay more to the government, even though experts warned that such system could recreate the basic systemic problems that had pushed the communist economic system into bankruptcy.

Under the new system, a “legal minimum wage” was assigned to almost every profession in the private sector. Taxes and social insurances needed be paid on the basis of the referral wage.

“When I learned the news, I was convinced that the government had ordered my boss to increase my wages,” said Altin, a waiter in Tirana café. “But later, I learned that my boss merely had to pay more to the state and that my wage was the same,” he added.

When Albanians retire, whatever the amount of their social security contributions, they still receive a similar pension, meanwhile.

Those working in the private sector inevitably try to conceal the real amount of their wages in their latter years in work in order to evade paying higher social insurance contributions.

When the government begun to wrestle with this problem back in 2006, they discovered bank managers who were declaring the same monthly income as factory workers.

The government’s new scheme to increase contributions has come under fire also from international financial institutions that monitor Albania’s economy.

“The solution [to the pension crisis] consists in convincing people that paying contributions will yield them benefits,” an IMF representative said.

The government has defended its moves. However, in recent months, officials have begun discussing a new law to partly privatize the pension scheme, and to increase the ratio between contributions and benefits by creating individual accounts for contributors.

Still, many experts that fear the government lacks the necessary will to see the problem through and take the requisite tough measures.

Adding to the problem is also the widespread scale of fraud. “There are tens of thousands of non-existent contributors [to the pension system] and there are many beneficiaries that do not fulfill the minimal conditions to receive a pension,” a source inside the social insurance system told Balkan Insight.

“We are sitting on a social time bomb that could explode at any moment, and the government that will have to deal with it will be very unlucky,” she said.

Social insurance fraud is common in Albania and is often linked to large former state-owned enterprises that have milked the system by falsifying the records on the number of year’s former employees contributed to the system.

“The government has to accept for the second time in a generation that it has failed to guarantee the value of contributors’ deposits,” the same source said.

“It should pay social assistance to those who have not contributed [to their pensions] for the last 20 years and offer a real value to those who have contributed.

“Any other scheme will only delay a real solution to the problem,” she concluded.

Gjergj Erebara is a journalist for the Albanian daily newspaper SHqip. Balkan Insight is the online publication of the Balkan Investigative Reporting Network. This article was made possible through the support of the National Endowment for Democracy.

You may also like...