The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

University: Fan.S.Noli
Faculty of Economics
Department: Finance-Accounting

Project
Topic:“The actual status and the development's
prospects of social and voluntary insurance in
Albania”.
The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

Contents

1 Introduction ......................................................................................................................1

2 The evolution of the pension system in Albania.............................................................2

2.1 The composition of the Albanian Social Insurance System

2.2 The social security budget scheme.

2.2.1 Income.

2.2.2 Expenditures.

2.3 The private pension market in Albania

2.3.1 The necessity of the private pension system in Albania.

2.3.2 What are the voluntary private pensions?

3 The problems of the pension system in Albania.............................................................4

3.1 The problems of pension markets.

3.2 How does the current scheme function?

4 The necessary reforms which can grant a solution to these problems.........................5

4.1 The necessary reforms to achieve the sustainability of the pension system.

4.1.1 The first Scenario

4.1.2 The second Scenario

4.2 Improving current system’s parameters

4.3 Reforming Private Schemes.

4.4 The new era of pensions.

5 Conclusions........................................................................................................................8

6 Bibliography......................................................................................................................9
The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

1.Introduction
Social insurance has a protective character. It protects all economically active
citizens, as well as in the following cases:

 Inability to work as a result of the retirement age,

 Impossibility to work as a result of the biological, accidental precocious
diseases, which are associated with life-long disability.
 Inability to provide income previously earned, as a result of maternity,
temporary disability at work.
 Inability to provide income as a cause of loss of the family holder.

The purpose of this study is to present the economic and historical Albania’s
phases on the pension scheme. In the first part of this project I have labored the
evolution of our country's pension system, including its development, divison
and all of the changes it has gone through the years. The second part labors the
problems of the pension system, the functioning of the actual plan and the
demographic processes that have affected them. In the third part I have labored
the necessary reforms which can grant a solution to these problems, the
objectives that have to be followed, the schemes and improvement of actual
parameters. In the end, based on the reforms realized on the Albania's pension
system this project will provide some conclusions and recommendations.

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The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

2.The evolution of the pension system in Albania

2.1The composition of the Albanian Social Insurance System.
The Social Insurance System in Albania consists of:

 Compulsory insurance
 Voluntary insurance
 Supplementary Insurance
 Special State Pensions.
 Compulsory insurance: relies on the principle "(pay as you go)". The contributing
principle, the principle of the individual's self-responsibility for the future risks in the
social sphere, the principle of the generations agreement are based on this system.
 Volunteer Insurance: protects some categories of persons who are outside the terms of
the mandatory scheme
 Supplementary Insurance: These supplementary pensions benefit those who carry out
constitutional functions and a part of the public administration.
 Special State Pensions: These pensions are provided for specific socially-owned
individuals and categories, in special cases and for special reasons as provided by law.

2.2 The social security Budget Scheme.

2.2.1 Income.

The social insurance fund's income is comprised of:

a) Contributions of insured persons and their employers, self-employed in agriculture and

voluntary insurance.

b) Contributions from the state budget to persons who can not pay contributions.

c) State budget subsidies to support additional expenditures.

d) Payment for additional activities, determined by the Council of Ministers.

e) State budget subsidies, approved by the People's Assembly.

f) Income from social security fund investments.

g) Other income, including fines, income from administrative social security activities, gifts,
inheritance, etc.

2.2.2 Expenditures.

The social security fund's expenses include:

a) Payment of benefits for insurance, allowances and pensions.

b) administrative costs

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The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

When social security costs are not covered by projected income, the difference is covered by
the state budget.

For administrative expenses in the social security budget, up to 5% of total expenditure is

planned.

2.3 The private pension market in Albania.

At present, there are three private pension funds in Albania, but although this market has
grown at double digits in recent years, it remains modest compared to other countries in the
region and the European Union. There are several reasons:

-The key are the costs. To pay the employer a contribution on the account of the private
pension fund, means that they will spend more..

-Let's say an insufficient confidence in the private pension administration system in general.

To promote the private pension interest, the government has decided to recognize it as
deductible expenses from taxes, contributions that companies and individuals pour into
private pensions to a certain extent.

-Our country has a two-column system.

In the non-banking financial market operate three private pension companies;

 Private Pension Fund "SIGAL"

 Raiffeisen PENSIONS
 SICRED PENSIONS

2.3.1 The necessity of the private pension system in Albania.

The development of the private pension system in Albania is a necessity related to three key
issues that require solutions.

• The demotivation of the new generation to participate in PAYG social insurance schemes.

• Disruption of private pension schemes in Albania has significantly reduced the degree of
substitution.

• Problems of informality's unemployment have significantly reduced the proportion of the

population in the last 15 years, which creates a major social concern for the future.

2.3.2 What are the voluntary private pensions?

For each one of us, the pension is considered as a reward that we benefit after many years of
work, which is the right of any person who has reached a certain age and has worked and
contributed for 35 years. Many retirees discuss about the money that they have poured over
the years and none are satisfied with what they earn as retirees. This is the "Pay As You Go"

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The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

scheme offered by State Social Insurance, where the reward depends not on the contribution
it pays but on the economic power of the state

Private Pensions are a new option that is being successfully applied all over the world, even
in Kosovo and Macedonia. Even in Albania, starting from 2006, there is the possibility for
every person to resolve the future by planning a voluntary retirement scheme early. This
scheme is provided by the Pension Fund "Raiffeisen Invest sh.a., which manages the
Raiffeisen Voluntary Pension Fund, Sigal Life Uniqa Group Austria sh.a., which administers
the Sigal Voluntary Pension Fund and SICRED sh.a. , which administers the SICRED
Voluntary Pension Fund ".

Private pension systems provide solutions to many problems:

 Solve the controversy of generations, making the new generation more interested to
be assured.
 Eliminate the problems of distorting the labor market, both in the case of "black" and
"gray" evasion.
 Provide benefits with more favorable age terms at work.
 Offer higher benefits than solidarity schemes.
 There is a very favorable transparency and fiscal system, where the contributions that
are paid and the profit realized by their investment, such as the one that pays the
employer and the employee, is not taxed.

These are also the reasons that private pensions are currently developing at high rates all over
the world.

Private Pensions in Albania are a viable step with benefits coming to the next
generations. "If you do nothing today, the future will be much more difficult."

3. The problems of the pension system in Albania

3.1 The problems of pension markets.

The pension market is an important component of pension systems but suffers from problems
of information asymmetry.

 The insurance of citizens in old age is a problem for every society. In the conditions
when birth rates are falling and life expectancy is lengthening, the elderly population
is growing at high rates. Consequently, the system is experiencing more and more
financial problems. This situation has raised the need to reform the pension system.
 Significant drop in benefits which comes from some restrictions that are made to the
maximum pension.

At present, the pension system offers low benefits, with relatively high contributions. But
let's take a look at the time. While in 2005, the pension system in Albania was balanced
(revenues were covered), starting from 2006, the deficit of the scheme came increasing and
by the end of 2013, the state budget amounted to 42% of total expenditures.

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The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

I think these have been the reasons:

 Demographic processes, where the number of retired persons after this year increased
and the number of entrances to the system, ie contributors, was 2-3 times lower.
Under these conditions, spending has increased annually by 7-8%, while income is 2-
3%.
 Secondly, the not very good policies pursued during the last 10 years, such as: drastic
reduction of social security contribution to 40%, from 42.5% to 24.5
 Third, increasing the salary ratio
 Fourth, failure to operate for a 15-year period of private pension funds.

3.2 How does the current scheme function?

In addition to the full old-age pension, which is provided after retirement age and at least 35
years of insurance, the law recognizes at least two other types of pension.

1-Partial old-age pension: According to the law, partial retirement pension benefits all those
who have reached retirement age by obtaining full pension but can not receive it due to
insufficient work years.

2- Reduced old-age pension: This pension can be earned by completing certain specific
conditions provided by law and guidance. The basic condition is that the citizen has
completed at least 35 years of work. Age when the right to benefit is born is 62 for men and
57 for women.

4.The necessary reforms which can grant a solution to

these problems.
4.1 The necessary reforms to achieve the sustainability of the pension
system.
Pension systems must be sustainable in the long run and also be reliable for future
generations, fulfilling their main function to provide sufficient income for the elderly, the
disabled and the survivors.

Two scenarios for the reform of the pension system are previously evidenced.

4.1.1 The first Scenario

Consolidation of the current state public scheme, through parametric reforms, such as:

– The gradual improvement of the pension ratio by better linking the contributions
paid with the benefits received.
– Improving the way of calculating pensions by better linking the contributions they
have poured, removing restrictions, etc.
– Review of the pension scheme in the village, gradually reducing budget subsidies.
– Review of legislation on supplementary schemes of state officials.

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The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

4.1.2 The second Scenario

It is to be seen the possibility of establishing a "universal" pension system in Albania that

presupposes a three-tiered system developed in several countries such as New Zealand,
Australia, etc., but also in Kosovo:

– The first scheme: social pension, which approaches all persons who have reached a
certain age, regardless of employment. This scheme is funded by general taxes.
– The second scheme: pension from the state scheme "PYG" on the basis of the
contributions made by everyone. This scheme is financed by contributions (labor
tax) at 21.6%.
– Third Scheme: private pensions required for the new generation and volunteer for all
those who want a higher retirement at old age.

4.2 Improving the current system’s parameters

This reform strengthens the contributory principle of the current system and reduces the high
degree of redistribution that characterizes it, giving individuals more pressure to be part of
the social security system and to contribute more by declaring the real wage.

The realization of this reform requires taking the following measures:

• To change the formula for calculating the pension:

P = PS + Sh

• Precise rules for indexing the retirement provision, foreseeing only indexation with
inflation.

• Removal of the maximum retirement ceiling.

• Increase the years of contribution to social security from 35 to 40 years by 2025.

• Gradually increase the retirement age for women two months a year to reach 63 in 2032.

• Removing privileges for recognition of insurance periods without paying contributions to

women, such as recognition of years of study as secured years. P = PS + Sh

• Improve the method of calculating pensions for mothers with many children.

• Increasing the contribution rate for rural areas by equating farmers' contributions with those
of urban areas.

• Establishing discouraging elements for early retirement and encouraging late retirement.

•Current pensioners will continue to benefit from the pension as in the past, and the
retirement pension will increase annually as the law provides, in line with inflation.

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The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

4.3 Reforming the private schemes.

These schemes have the following advantages:

1. They resolve the controversy of generations, making the new generation more
interested in contributing.
2. They solve the problems of distorting the labor market, as it is very well connected
with the contribution to the benefit.
3. Offer benefits with more favorable age and seniority at work.
4. Offer higher benefits than solidarity schemes.

Under these conditions, in our study the only objective of the pension system reform is the
financial sustainability of the pension system.

4.4 The new era of pensions.

From January 1, the way of retirement has changed completely.

 Social pension, 65 thousand lek for those who do not complete the conditions.
 Gradually increases the age for women and men.
 The maximum pension limit is removed and contributions are deducted by calculating
only one category of minimum wage
 The basic pension will be replaced by the social pension.

The reform aims to eliminate the gap between rural and urban pensions and does not offer
special privileges to farmers, but includes them in the country's only scheme.

By 2032, the retirement age for men will increase by one month per year and for women two
months a year, reaching 67 for both sexes in 2056. The Social Insurance Institution explains
this decision also imposed by internationals with increased life expectancy. This
phenomenon, evidenced in many European countries and in the world, is also encountered in
Albania.

As a result of many factors, life expectancy is growing at an average rate of over one month
per year. In this growth, life expectancy in women is higher than the life expectancy of men.
Currently, in Albania, the average retirement age for both sexes is 21.4 years, 19.2 years for
men and 24.2 years for women. So, the time of enjoyment of the pension for women is 5
years higher than men.

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The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

5.Conclusions
In conclusion, to all what is said above, we would say that PAYG system which is currently
the ruling system in regard to social security in Albania, does no longer work efficiently. The
expectations and objectives of the actual system do threat the future of the Albanian citizens.
Same fate expects the deficit caused by the actual system where the contributions do not
cover the present expenses and do not secure sufficient funds for future benefiters.
Demographic movements, informality and other elements have pushed the government to
undertake many reforms and interventions. One of them is scheme of multi columns, which
includes the third column of private pensions. We strongly recommend this system to be part
of the Albanian social security system doe its major benefits. It facilitates the control over the
funds; it secures the future pensioners and rewards the actual contributors with the adequate
pensions in the future. Another positivity about this scheme is that it sooths the deficit of the
budget. Nevertheless, a lot of carefulness must be shown, as its implementation has to come
natural and gradual. Otherwise, it will cause many major problems. Administrative and
financial interventions are necessary.

I also recommend some intervention in order to improve the situation as below:

- Making this scheme compulsory and diving the contribution 50/50 between the employer
and the employee.

- Removing the taxation on these type of pensions.

- Removing taxation on the contribution of the unemployed people, emigrants who have
already been paying taxes in the origin country or to them who pay for the third party.

- Promoting the idea of special pensions related to the professions through collective
contracts.

-The creation of pension funds and their investment opportunities in the capital market is still
an important moment for the economic development of the country.

-The need for a rapid pension reform has gone to the stage that there is no return. Increasing
retirement age, and why not raising contributions has become a necessity.

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The actual status and the development's prospects of social and voluntary insurance in Albania Korce 2018

6.Bibliography
1)Office of the Social Insurance Institute.

2)http://www.issh.gov.al/al/njoftime/LIGJ_104_2014_Sig_Shoq_RSH.pdf.

3)World Bank 1998, “Albania: Beyond the Crisis. A strategy for Recovery and Growth”.

4)http://raiffeisen-invest.al/web/guest/pension-system.

5)Bundo.Sh, (2010),Finance,albPAPER.