The pension system is one of the most pressing issues in Albania, and it appears, from media attention and protests that this is a central concern for both the government and the general public. According to some media reports, the government, in collaboration with the World Bank, is drafting a new pension system. Beyond a few interviews with the former head of the World Bank in Albania and some government officials, details are scarce, so the proposal is far from ready for an in-depth discussion. However, it is necessary to have a clearer understanding of the current pension system in Albania to identify its weaknesses and explore opportunities for potential improvements. What follows is an expansion of some ideas I discussed on A2 CNN, that, due to time constraints, I couldn’t elaborate on further.
The main objectives of pension systems are twofold: First, when someone retires, even if they haven’t had the ability to save, we as a society want to make sure that they won’t fall into extreme poverty, by guaranteeing a minimum amount of pensions. Therefore, the first goal of pensions is to prevent poverty in old age. Second, when someone retires, it is natural for their income to decrease because they are no longer employed. To avoid a drastic decline in income, pensions aim to replace previous earnings, ensuring that, for instance, someone does not have to live on only 20% of their pre-retirement income[1]. The question at this point is how successful the Albanian pension system has been in fulfilling these two goals. To assess this, we can use a statistic published by the Social Insurance Institute (ISSH), known as the replacement rate[2].
As a percentage, pensions replace about 35% of pre-retirement income and around 33% of the average salary (or about 50% of the minimum wage). Viewing this through the lens of the two main goals of pension systems outlined above, the current system fails to meet either of its objectives. This is because when someone retires, they lose about 65% of their income and receive, on average, one-third of the average salary. For comparison, in OECD countries, this loss is around 40%. The question that arises is: why is the pension system, in its current form, unable to fulfill its role?
The pension system in Albania today is based on a structure that uses current taxes to pay for current pensions, known as a Pay-as-You-Go. The idea behind the system is that when you are of working age, you pay taxes to support the pensions of the elderly, with the promise that when you retire, the next generation will do the same for you through taxes. This type of system depends heavily on the taxable base, consisting of the wages of contributors and their numbers, as this base determines the available budget for pensions.
To give a simple example, let’s say we have two workers, each earning 10 lekë annually. Each pays 20% of their annual income for current pensions, i.e., 2 lekë, which goes to the pensioners. Let’s say that after 40 years, when these two people retire, the working age population has increased to 10, and wages have doubled to 20 lekë annually. In this case, each worker pays 4 lekë (20%), and the total budget is 40 lekë. Divided between the two retirees, each receives 20 lekë. So, in this simplified scenario, pensioners contributed 2 lekë and, after 40 years, received 20. If the population only doubles, from 2 to 4, in 40 years each receives only 8. In summary, income growth and population growth are essential for the sustainability of the pension system[3].
What is happening in Albania? It seems there has been a drastic demographic change in the country. If we look at the population pyramid published by INSTAT, this demographic change becomes even more alarming.
The 2011 census numbers are in gray. For each age group, the chart displays the population, divided into males and females. This type of chart is called a pyramid because, ideally, it should have a broad base (indicating many young people), and the numbers should gradually decrease as the age bracket increases. If you closely examine the 2023 census, it no longer resembles a pyramid. Compared to 2011, the age groups from 15–45 have significantly declined, which is precisely the most productive segment of society—the workers who pay the taxes that fund the pension system. This issue was already evident in 2011, because the base (ages 0–10) was missing even then. Thus, demographically, the aging population in Albania was entirely predictable.
The population pyramid gives a quick idea of the challenges facing Albania’s pension system. How do we compare to our neighbors? The following chart shows the percentage of individuals aged 65+ compared to those aged 15–64 in Albania and the Balkans, according to Our World in Data:
According to the data, Albania and Kosovo have the lowest percentage in the Balkans. Kosovo is one of the few places that remains relatively young. As a short-term solution, since Kosovo has high youth unemployment, the Albanian government should facilitate the employment of young Kosovars in Albania—this is the most logical and straightforward solution. Although Albania’s crisis is less severe, ISSH statistics clearly show the current problems of the current system. ISSH publishes a statistic called the dependency ratio, which measures the number of pensioners as a share of contributors or the total contributions as a percentage of pensions. Charts below:
As per this measure, the system is clearly in deficit. For every 100 contributors, there are 82 pensioners. According to some recent indications, this number may have risen to 117 pensioners per contributor. The budget cannot meet the demands and has been in deficit for many years. On average, the budget covers about 67% of pensions, with the remainder coming from the general state budget. Albania spends about 7.5% of its GDP on pensions, which is around the OECD average.
Another major issue is informality; about 40% of employees do not contribute to the system. The higher the informality, the higher the needed taxes since the taxable base (the number of workers) shrinks. Currently, tax rates are 21.6%, paid by both employees and employers. Informality itself has two main sources. The first issue is that people find it difficult to think about the long term, especially when young, and do not save enough in their early years. This is a human behavior problem and is observed worldwide. Second, there is the issue of incentives; when young people see the current pensions provided, they have no incentives to contribute to the system because pensions are not worth it. If they can save on their own, it may seem more reasonable to do so. Thus, most people do not save enough, but even those who want to save may not find it optimal to do so through the current pension system. In a way, all pension systems are mandatory savings schemes designed to overcome the first problem. The state forces you to save through taxes. What happens to those taxes afterward depends on the system chosen by the state. In some systems, like Albania’s, taxes are used to pay current pensions. In other systems, taxes are invested in the market, and when someone retires, the funds are transferred. Systems vary, and many face similar issues as the Albanian one, due to demographic problems. A large part of the Western world is rethinking its pension systems, leaning more towards private systems because demographic and economic growth cannot fulfill obligations. One potential solution until now has been immigration, but the political situation suggests that this may no longer be politically acceptable. However, Western European countries continue to import human resources from the Western Balkans. As per recent news, Germany doubled the number of work visas issued to citizens of the region to 50,000. These individuals will likely be professionals with relatively high wages. It seems the competition for human resources will be even fiercer than the competition for mineral ones. Albania seems unprepared for this coming tug of war.
The biggest problem is the rate of growth of the funds. In the current system, growth depends heavily on the growth of the taxable base, i.e., wages multiplied by the number of workers. Wage growth roughly follows economic growth, and Albania’s economic growth has been around 3.4% over the past five years. This seems significant, but considering, for example, that the U.S. has grown by 2.5% annually, it’s insufficient, because poor countries need to grow faster than rich ones. Given a declining population, wages would need to grow even faster to compensate for demographic loss. This seems unlikely in the near future. Finally, to evaluate pension performance and fund growth, a comparative benchmark is necessary. For example, if funds grow by 2% annually, they should be compared with the market return rate. Over the past 20 years, the stock market has yielded around 10–11% annually. If fund growth cannot match this rate of private savings, it becomes unjustifiable. For instance, someone who invests 100 lekë annually and earns a constant 2% per year would have around 6,000 lekë after 40 years. In contrast, earning 10% per year would result in about 44,000 lekë, roughly seven times more. The difference is enormous, and the role of the pension system is to ensure the maximum possible growth to fund livable pensions. Since savings are mandatory, the return rate should be at least equivalent (in risk weighted terms) to that of the market; otherwise, the pension system fails to achieve its purpose[4]. In the current situation, the anemic growth of the taxable base suggests that, in the near future, the system will continue to consume an increasingly larger share of the state budget at the expense of other priorities like infrastructure, education, and healthcare. The solutions, like the problem itself, need to be drastic.
[1] Economists refer to this as consumption smoothing.
[2] The figures are for urban pensions, but rural pensions display a similar trend.
[3] This is a simplified example, but it captures well the idea the concept of the need for growth.
[4] For those with free time I have included a simple model of PAG systems.
© 2025 Elton Dusha. Të gjitha të drejtat janë të autorit.
