The biggest "victims" of inflation/ The pension is reduced to 25% of the average monthly salary

2023-11-11 08:52:00, Ekonomi CNA

The biggest "victims" of inflation/ The pension is reduced to 25% of

Illustrative photo

Retirees' financial conditions were further worsened this year by the aggressiveness of the wage-inflation spiral. In 2018, the average pension was 31% of the average gross salary, while in the first 6 months of 2023, this ratio reached 25%. The percentage of people who do not meet the criteria for full payment is increasing rapidly from year to year. In June 2023, part-paid pensioners accounted for 50% of total old-age pensions, up from 45% in 2021. While the new pensions that were linked in 2023 were 11% lower than the average pension. Old age pensions are 50% lower than the regional average. Proposals on how pensioners' income can be improved in the short and long term.

Wages and prices have entered an upward spiral in the last year, negatively affecting the most vulnerable strata of society, pensioners.

The private and public sectors gave positive signals for salary increases, while on the other hand, inflation is becoming stable, especially for the food basket, which owns the monthly expenses of pensioners.

The gap between the average pension and the average wage, known as the replacement rate, is getting worse year on year. In 2018, the average pension was 31% of the average gross salary, while in the first 6 months of 2023, this ratio reached 25%. In January-June 2023, the average gross salary reached 67,805 ALL, while the average pension, 17,306 ALL.

In the first half of 2023, wages increased by over 9% compared to the end of 2022, while pensions remained unchanged. On the other hand, food prices increased by over 10%, twice the rate of inflation in the first half of the year.

In the shadow of the steep price curve, new pensions year after year are turning out to be lower than the average pension, as people reaching the age of majority do not meet the criteria for full payments. The new pensions that were connected this year averaged 15,325 ALL, which is 11% lower than the average pension.

The biggest "victims" of inflation/ The pension is reduced to 25% of

Now the new pensions are represented by people who have worked mostly after the 1990s and most of them have not paid insurance. Most of those who retired this year received partial payments. Official data show that in the first half of the current year, 491,504 people received old-age pensions, of which about 50% received incomplete payments.

The percentage of people who do not meet the criteria for full payment is increasing rapidly from year to year. Official data from the Institute of Social Insurance show that in 2022 partial payment pensioners make up 48% of the total number of people who benefit from an old-age pension, up from 45% in 2021.

Starting from October of this year, the indexation of pensions with about 8.6% comes into effect. The average pension will increase to 18,794 ALL per month from the current 17,306 ALL. The General Director of the Social Security Institute, Astrit Hado, says that the increase is based on an inflation index that targets only pensioners and not the official inflation indicator.

Mr. Hado said that, based on a government decision from 2017, INSTAT measures the inflation of pensioners for 12 main groups of monthly expenses, which have different weights in relation to the average inflation measured at the national level. In the period June 2022 - June 2023, the average inflation of pensioners was 8.6%, while the official indicator was 6.9%.

Pensioner inflation was suggested by the Social Security Institute, as the spending structure of the over-65 basket is different than in the general population, Mr. Hado.

The family budget survey shows that of the total monthly expenses, 41.3% goes to food in 2021, while for the retired age, the weight of food is 59% of the monthly expenses.

Mr. Hado asserts that other mechanisms must be put in motion to maintain stability in pension payments. Reform in the second pillar of pensions, such as the reduction of informality in the labor market and incentives for increasing the number of births.

Other experts suggest some measures, which can somewhat protect pensioners. Selami Xhepa, doctor of economic sciences, advised indexation with bandages according to the income level of pensioners.

"I think that in the current pension scheme, annual indexations should be made, according to the pension band, using a higher indexation coefficient for below-average pensions and a lower one for high pensions. For example, pensions that are below 44% of the average salary (the current rate of pension replacement), to be indexed with a coefficient twice higher than the average indexation coefficient.

The fiscal expert, Eduart Gjokutaj, says that the government can introduce a professional scheme, where all the self-employed are default members, unless they withdraw. To encourage the take-up of private pensions, the government can remove the income tax paid on contributions to private pension funds.

The biggest "victims" of inflation/ The pension is reduced to 25% of

On the one hand, the fight against informality and on the other hand, fiscal facilities with taxes and other financial incentives (subsidies, relevant contributions) are an important part of the policy mix for the development of professional and personal pensions, he added.

Albania, pensions 50% lower than the regional average

Governments all over the world, especially after the pandemic and the war in Ukraine, are strengthening measures to protect the vulnerable layers of society. Pensions and incentives to them have been in focus. The region's countries, Serbia, North Macedonia, Bosnia-Herzegovina and Montenegro, significantly increased pensioner benefits last year.

In Serbia, the average pension is currently around 318 euros, after a two-round increase in November 2022 and January 2023 with a total of 20%. Also, the government of Serbia has approved the pensioner's card, which is valid for discounted payments in a series of services.

In Montenegro, according to official data, the average pension reached 361 euros in 2023, increasing by about 60 euros in the space of one year.

Official data also shows that the average pension in Bosnia and Herzegovina reached 275 euros in 2023. Pensions in Bosnia increased twice in the first half of 2023 by about 16%, once in January and then in April. A further increase of 5% will come into effect for low pensions in November 2023.

Pensions in Bosnia have increased by about 30% compared to the end of 2021. In one year, Bosnia has applied five indexations, according to the announcement of the Government of the Federation of Bosnia and Herzegovina.

The biggest "victims" of inflation/ The pension is reduced to 25% of

In North Macedonia, pensions increased by an average of 9% this year. According to official data, the average pension reached about 311 euros this year.

In North Macedonia, according to the latest data of the Pension and Invalid Insurance Fund, about 333,000 pensioners are registered, of which about 90,000 people receive the lowest pension of 200 euros.

In Albania, the average pension reached 17,300 ALL in the first 6 months of 2023, or 164 euros. Comparative data shows that the average pension in Albania this year is 48% lower than in Serbia, 47% lower than in North Macedonia, 54% lower than in Montenegro and 40% lower than in Bosnia and Herzegovina. The average pension in our country is about 50% lower than the regional average.

Inequality increases, the gap between salaries and pensions deepens

According to INSTAT's determinations, which are based on international methodology, a pensioner is considered poor if the monthly payment is less than half of the national average salary. This gap has deepened in recent years and has accelerated further this year.

In the first 6 months of 2023, the average pension was only 25.5% of the average gross monthly salary, from 31% in 2018.

In 2022, the average pension in the city was 44.4% of the average net salary and 35% of the gross salary. These ratios were respectively 52 and 41% in 2018.

The data show an increase in inequality between the layers of society, in this case pensioners and employed persons. The gap is likely to widen over the coming years as the market is signaling higher wage growth due to the new conditions created by the labor shortage. After an anemic decade, wages have started to move, albeit not at high rates.

At the end of June 2023, the average salary nationwide was 30% higher than before the pandemic, increasing from 52,380 ALL to 67,805 ALL. In the same period, the average pension from the level of 16,256 ALL in 2019, reached 17,306 ALL in the first 6 months of this year, with an expansion of only 6%

The difference between the pension and the average salary is even deeper for the countryside. In 2022, the average pension in the village was 10,349 ALL, according to official data from the Institute of Social Insurance. This amount was only 16.7% of the gross salary in the same period.

The difference between the average salary and the average pension is expected to deepen even more this year, as the government is increasing salaries for the public administration, with the aim of doubling them in the next two years, while only indexation is foreseen for pensions. For this year, an indexation is expected next month, with 8.6%.

The scars of transition are reducing retirement benefits

The number of pensioners, who do not complete their working years and do not manage to benefit from a full old-age pension, is growing rapidly.

Official data from the Institute of Social Insurance show that, in the first 6 months of 2023, pensioners with partial payment made up 50% of the total number of people receiving old-age pensions, from 45% in 2021.

The official data of the first 6 months of 2023 show that there were 491,504 old-age pension beneficiaries, of which 243,296 thousand received partial payments.

The new pensions that were connected this 6-month period averaged 15,325 ALL, which is 11% lower than the average pension. Living costs are rising rapidly year on year, as new pensions are resulting in cuts.

The total number of old-age pensions in 2022 marked an annual increase of 4.6%, but the number of partial pensions increased by 12%.

The social insurance scheme allows all persons, who have not completed the required years of work according to the law, to benefit from a partial old-age pension. This means that they will receive the pension for as many years of work as they have invested in the scheme, but not less than 15 years in total.

Persons who have insurance periods are entitled to a partial old-age pension when they reach the age of 65 for men and 60 for women. According to the Social Security Law, they must have no less than 15 years of insurance period and no more than 35 years of insurance period and have retired from economic activity.

On the one hand, the increase in the number of pensioners with partial payment has relieved the public pension scheme from the increase in expenses, but on the other hand, a great social problem is being created with the financial sustainability of the third age.

Transition problems and high informality in the labor market are causing new pensions to come out in lower values, year after year.

Experts explain that a large number of pensioners who newly enter the scheme have worked in the dark and do not meet the conditions for a full pension. This trend is also shown by the average age of working years for newly retired retirees.

Experts claim that the new pensions have begun to reflect the problem of transition, especially undeclared work. People who have paid insurance regularly and meet the criteria will have a higher income than with the old law that was applied before 2014.

But, people who have not paid contributions, it seems, will suffer the consequences during retirement, since payments with the new pension reform, which started to be implemented after 2014, are made on the basis of contributions.

The amount of pensions in our country is below the relative poverty line, with 6.7 USD per day, about 201 USD per month. In 2022, the median urban pension was USD 180 per month, or 90% of the poverty line, while the median rural pension was USD 105 per month, or 52% of the poverty line.

Solutions for getting out of the situation

The financial situation of retirees requires short-term solutions, related to improving the payments of current retirees, and long-term solutions, which create opportunities for sustainable solutions, for those who work, but also retire after 20 years.

For short-term solutions, Selami Xhepa advises indexation with bandages for pensioners.

For example, pensions that are below 44% of the average salary (the current rate of pension replacement), to be indexed with a coefficient twice higher than the average indexation coefficient; pensions between 44% and 55% should be indexed with a coefficient equal to the average indexation coefficient, those in the 55-75% range should be indexed with a slightly lower coefficient and those with pensions above 75% of the average salary , may not be indexed for a period of time until the high disparities between pensioner groups are alleviated, suggested Xhepa.

In Albania, pension payments are dominated by the public scheme as there are still a limited number of people who contribute to private pension schemes in order to receive higher payments in old age, as is currently the case in developed countries.

The International Labor Organization, ILO, in a special study for Albania, has examined several options that could bring income to pensioners. The ILO suggests the fight against informality, especially in the self-employment sector.

The data show that informal employment in non-agricultural activity is 29.4%, according to INSTAT. According to gender, the percentage is higher for men compared to women, respectively 34.7% and 21.5%. The data show that only 60% of the employed Albanian population is covered by social security.

The ILO calculates that potentially, full social security coverage (including health insurance) would generate an additional 5.8% of GDP, an amount of approximately 1 billion euros. If informality in employment is reduced by 50%, then around 500 million euros would be added to insurance income.

Expert Gjokutaj sees the diversification of pension benefits as important, encouraging private pensions in addition to professional pensions, especially for the self-employed and freelancers. Efforts to increase the contributions of the latter, in accordance with their income, did not find favor a few years ago.

According to him, the government could introduce a professional scheme where all the self-employed are default members, unless they opt out. To encourage the take-up of private pensions, the government can remove the income tax paid on contributions to private pension funds.

Experts claim that the time has come for the Second Column of pensions. Elvis Ponari, executive director of the administrative company "Sigal Life Uniqa Group Austria", told "Monitor" earlier that if a Second Column were to be established, people would become more aware of the benefits of private pensions.

According to him, this would facilitate the Third Column, which aims to further increase the benefits.

The Second Column is capital-funded employment pension insurance, where each insured person in the compulsory state insurance scheme (First Column) pays part of the individual contributions to a private pension fund.

In this way, upon meeting the conditions for pension benefits, the income of insured persons consists of two sources: a pension from the compulsory state insurance scheme and a pension from the capital funded employment pension insurance scheme.

The number of individuals participating in private pension funds is growing steadily, but on a low basis and the penetration of these schemes remains very low.

The number of individuals contributing to a private pension remains at approximately 2.7% of the total number of employees in the country, which indicates a still very low level of coverage by private pension funds./ Monitor Magazine