Why the pension system was reformed?

The pension system was reformed in order to assure long-term financial and social stability of the current and future generations of pensioners.

In the Republic of Macedonia, as well as in other European countries, there is a general trend of aging of the population. This leads to increased number of elderly people in the total population, i.e. to the change in the ratio pensioners –employees / insured persons. It is expected that in the future the number of pensioners will be equal to the number of insured persons, which shall cause difficulties in paying pension benefits from the pay-as-you-go-system where current employees pay for the current pensioners. This will cause a long-term insolvency of the system.

In the past decade, almost every country in Europe changed its national pension system in order to provide higher stability in the future. The demographic changes are the main reason for pension reforms. In all European countries the average life expectancy is increasing, which leads to more years in retirement. At the same time, the average size of the families is decreasing because couples decide to have fewer children. These two trends simultaneously lead to increased number of elderly people in respect to the working population in the Republic of Macedonia the ratio of over 60 to 18 to 59 years of age is expected to increase from 24% (current level) to 34% by 2020, 42% by 2030 and 55% by 2050:
aging of population

These deep demographic changes increase the pressure over the Macedonian pension system, which, until 2006 was only pay-as-you-go financed. Pay-as-you-go means that the contributions collected from the current employees are used for the pensions of the current pensioners. This type of financing is very sensitive to pensioners - contributors ratio. It is foreseen that on a long run this ratio will increase from the current 60% to 100%.

number of contributors

Having in mind that the pensioners-contributors ratio is gradually increasing with the demographic changes, not implementing the pension reforms would have lead to increasing the current contribution of 18% of the gross wage (equal to 35% of the net wage) to approximately 40% of the gross wage (equal to 70% of the net wage). The increased contribution rate would lead to decreased net wages, decreased economic growth potential of the country and increased unemployment rate.

The reform of the pension system includes increasing of the retirement age, change in the pension indexation rate and introduction of mandatory and voluntary fully funded pension insurance (multi-pillar system), which will alleviate the influence of the demographic factors.