Albania. Restructuring Public Expenditure to Sustain Growth. Public Expenditure and Institutional Review

Transcription

1 Albania Public Expenditure and Institutional Review Restructuring Public Expenditure to Sustain Growth Sector related presentations-social Protection Tirana March 15, 2007

2 Main messages 1. Total spending levels are appropriate 2. The pension system in its current form is not socially sustainable 3. A review of social assistance program design and targeting is warranted

3 Topics/Outline 1. Social protection spending and outcomes 2. Pensions 3. Social assistance programs 4. Facing the challenge: recommendations

4 1- Social Protection: Levels are appropriate At around 7 percent of GDP social protection spending levels are in line with Albania's demographic profile Spending on social assistance is similar to other EU countries Pension Spending in Countries Where Share of Elderly is Less Than 10 Percent (2002) % of Pop>65 Pension spending (% of GDP) Albania Kazakhstan Kyrgyz Tajikistan Turkey Turkmenistan Uzbekistan Ecuador Ghana Mongolia Morocco Peru Zimbabwe

5 1- Social Protection: impact on poverty Pension has the largest impact on poverty Poverty Levels With and Without Individual Social Protection Programs, 2005 Population, Overall Recipients Only Without With Without With All Programs 30% 19% 44% 24% Ndihme Ekonomike 20% 19% 50% 40% Urban Old Age Pension 24% 19% 39% 14% Rural Old Age Pension 22% 19% 39% 23% Other Pensions 20% 19% 41% 27% Unemployment Benefits 19% 19% 30% 25% Maternity Benefits 19% 19% 33% 23% Social Care 19% 19% 44% 22% Source: LSMS 2005.

6 2- Pensions: Overall revenues and expenditures Collections rates remain modest Heavy dependence on general revenues Web of cross-subsidies Deficit does not reflect the accumulated arrears. Government transfers for rural contributions is irregular.

7 2-Pensions: Key policy issues High contribution rates Low and compressed benefits disconnected from contributions Indexation is leading to an erosion of the replacement rate Too few contributors High Dependency ratio Contribution Rates for Pensions in Selected OECD Countries in Percent of Wages System Dependency (in percent) Armenia Belarus Macedonia Czech Poland Slovakia Romania Slovenia Estonia Croatia Kyrgyz Latvia Azerbaijan Georgia Kazakhstan Lithuania Ukraine Hungary Bulgaria Albania % of wage Portugal Netherlands Malta Albania before Italy Spain Albania today Austria Finland Germany Greece Sweden Japan Belgium France Luxem bourg United States Switzerland Iceland Canada

8 2-Pensions: Future outlook In the future, absence of reform will lead to: 45.0% Pensions Relative to Average Wage under Different Indexation Scenarios Erosion of benefits replacement rates will fall to 20 % in 35 years. Larger portion of elderly population uncovered While finances will be positive on paper, there is likely to be pressures to raise further the level of pensions fiscal problem % of Average Wage 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0%.0% Year Price Indexed Urban Price Indexed Rural Wage Indexed Urban Wage Indexed Rural

9 2-Pensions: Simulating recent changes Improving benefits levels or reducing contributions will, on their own, not resolve the dilemma. Recent changes could worsen the pension fund balance in the short and medium run Reducing contributions without changing the structure of benefits would worsen substantially SII s deficit without resolving the issue of incentives 2.5% Simulating the Effects of Announced Governmental Measures in 2006 (a) Current Balance Including 2006 Changes 45.0% (b) Replacement Rates Including 2006 Changes 2.0% 40.0% 35.0% 1.5% 30.0% % of GDP 1.0% 0.5% 25.0% 20.0% 15.0% 0.0% -0.5% -1.0% Price Indexed 2006 changes 10.0% 5.0%.0% Base Case 2006 changes

10 3-Social assistance programs 1. Ndihme Ekonomike (NE) Real Value of NE is declining NE Leakage to non poor is increasing Variations in the value of the benefits across regions 2. Disability expenditures Exceeded NE allocations by 2004 Not targeted to the poor and eligibility criteria are broad 3. Electricity Subsidy Few households have benefited from the subsidy Design issues: no sufficient incentive to attract participants, but this might change with the higher subsidy amount. Implementation challenges.

11 3- Social assistance programs: Ndihme Ekonomike and Disability benefits Real Expenditures on NE and Real Value of the Benefit Real Expenditures on Disability Benefits and Real Value of the Benefit Real Expenditures (Billion Lek) Real Value of Urban Benefit (Thousand Lek) Real Value of Rural Benefit (Thousand Lek Real Expenditures (Billion Lek) Real Value of Monthly Benefit (Thousand Lek)

12 3-Social assistance programs: Ndihme Ekonomike While coverage of NE has improved, the share of benefits going to the non- poor has increased over the last 3 years. Ndihme Ekonomike: Distribution, Coverage and Adequacy (percent of households) Ndihme Ekonomike Year Non-poor All poor Extreme poor Total Distribution (% of benefits) Coverage (% of poverty group) Adequacy (Benefit as % of HH consumption) Source: LSMS, 2002 and 2005.

13 4- Facing the challenge- Pensions: Three possible reform options 1. Fix the disincentives in the social insurance system: Eliminate the limits on the maximum pension, Convert the rural pension into a social assistance program Establish a basic minimum retirement income for all 2. Create a non-contributory old-age benefit for all individuals of a certain age 3. A final approach could be a combination of the first two. Fund a basic level of benefit to all citizens of a certain age Establish a voluntary scheme for individuals who want a higher level of benefits and are willing to pay for them.

14 4- Facing the challenge- Social assistance programs: Reviewing The Three programs Ndihme Ekonomike Develop a distribution formula for conditional grants based on objective and transparent indicators of local need. Develop measures to strengthen targeting, through introduction of a proxy means test. Capacity building for implementation, program planning and monitoring Evaluate the recently piloted Civil Works Program Disability Benefit: Careful evaluation of the eligibility criteria, disability qualifications and of the assessment system. Review whether a separate disability benefits system is justified and affordable. Electricity Scheme: a review of the program design and implementation is warranted. Expand public information activities. Improve targeting Benefit unification: making the electricity subsidy a cash supplement to NE