1. Principles Governing Pension Reform in Kosovo
Kosovo’s new and modern pension system represents a break from the old Yugoslav socialist pension system. Principles guiding the development of the new pension system:
Coverage for the entire population. In Kosovo under the Yugoslav pension system, less than a half of the population above official pension age received pension benefits. Moreover, many Kosovars were prevented from participating in the system after 1989. The mix of pension schemes available under the new system is intended to provide coverage for the entire population.
Meets the needs of all population groups. Since 1998 until the introduction of the new system, the Kosovar elderly have not received pensions, and workers have not contributed to the pension system and to their future retirement. Architects of Kosovo’s new pension system have introduced a basic pension for those 65 and above, while also establishing contributory and voluntary pension schemes.
A sustainable system. A top priority in designing Kosovo’s modern pension system was creating a program that is sustainable in the long-term given changing demographics.
Equal access. All pensioners and workers should be allowed to participate in the new system on equal terms, regardless of their ethnicity.
Promotes economic development. To the extent feasible, the pension system should facilitate savings and investment of the population. Furthermore, the pension system should promote development of the labor market, suggesting that contribution rates be set at reasonable levels, and that pension programs offer participants a strong link between their contributions and future benefits so there are strong incentives to participate.
2. Types of pension systems
There are two major types of pension systems: transfer-based (PAYG) and funded systems.
PAYG system. A Pay-As-You-Go system is a state program that is funded by taxes or contributions collected from the population and transferred to certain groups in the population. Under this scheme, current workers support current pensioners. In Kosovo, the PAYG system has been eliminated. The general revenues of the Kosovo Budget will finance a new system of Basic Pensions. No new additional payroll taxes have been introduced to finance basic pension benefits; a policy priority has been to keep tax rates on wages low so that Kosovar labor is competitive and there is no strong incentive to hide in the shadow economy.
Funded Pension System. The word “funded” applies to any programs in which money is collected and set aside in accounts during present time periods, invested through capital markets, to provide income in future time periods. The major difference between a typical transfer-based system (PAYG) and a funded system is that the collected monies under the latter are saved and invested rather than spent. Under a funded pension system, contributions are transferred to individual accounts of the participants, invested in a financial portfolio, and are accumulated over the working life of a participant, earning investment return. Collected money is secured and completely separated from the State Budget. Such a system is more transparent to participants as it allows for clear definition of property rights on contributions and accumulations. When participants retire, their pension will depend on the contributions made to the accounts. In Kosovo, such a system will be represented by the Individual Savings Pension Accounts maintained by the Kosovo Pension Savings Trust (KPST).
3. The Regulation on Pensions in Kosovo
Kosovo’s Regulation on Pensions establishes a three-component structure which provides for:
• a universal basic old-age benefit for all Kosovars over 65, financed by the revenues of the Kosovo Consolidated Budget (also known as the 1st component);
• a new system of funded pensions financed by mandatory contributions of employers and employees for today’s workers (also known as the 2nd component) and;
• voluntary pension schemes, financed by the voluntary contributions of individuals and employers (also known as the 3rd component).
The new system is not meant to be a substitute for the old system but rather to establish a solid foundation for a comprehensive modern pension system in Kosovo. Moreover, it will provide a stable source of basic income for current retirees through its system of Basic Pensions, while allowing current workers an opportunity to save. Under the new scheme, the budget will take care of providing pensions for those who are already retired, while current employees will be able to save for their future.