Second and third pillar

The Pension system in the Republic of North Macedonia before the reform and reasons for its introduction

The Pension system in the Republic of North Macedonia has a long historical development. It has a long existence in these areas followed by continuous development and upgrading over time. Prior to the reform introduction, the pension system represented only the Pension and Disability Insurance Fund. It operates on the principle of generational solidarity and is financed on a current basis (PAYG), which means that the contributions of existing policyholders paid the current pensioners pensions, calculated on the basis of defined pensions.

The socio-economic changes of the past years (early 1990s) did not leave the pension system immune, which faced great difficulties in its normal functioning. Unfavorable developments in the economy since the beginning of the transition to a market economy have led to an increase in the number of companies operating with a loss, declaring work force redundancies and commencing numerous bankruptcy proceedings. These were the main reasons that influenced the decrease in the number of active insured persons on the one hand and the increase in the number of pensioners on the other hand which led to a decrease in the ratio between the insured persons and the pensioners.

Additionally, the demographic factor impact on the pension system was more pronounced. Namely, the analyses of the population structure change in the world for a long period of time showed a general trend of population aging. This demographic trend has not bypassed Macedonia either. This means that people live longer due to better living conditions and better health services, and at the same time the number of newborns is reduced, that is of young people. The population aging affects the number of retirees. The larger number of elderly people in the total population means an increased number of retirees, while the increased life expectancy causes longer pension use. On the other hand, unfavorable economic conditions, especially high unemployment, accompanied by a decrease in the fertility rate, affect the reduction of the number of insured people in the long run. For a current financing system (PAYG) the ratio between the insured people and the pensioners is very important, because the contributions from the existing insured people pay the pensions for the current pensioners.

The impact of all these factors on the long-term solvency of the PADIFNM Fund was great and the actuarial projections, made during the reform preparation, indicated that without reforms the system would function with a deficit that would increase rapidly and significantly in the long run.

In order to overcome or intercept these expected conditions, the need for a pension and disability insurance fund thorough reform in our country was imposed.

Therefore, the pension system thorough reform was designed and implemented, which established a three-pillar pension system in the Republic of North Macedonia, with a future pensions combined way of financing and demographic and economic risks diversification, in order to provide a secure pension for present and future generations of retirees and pension system long-term financial stability.

The new pension system introduction is expected to balance the revenues and expenditures of the PADIFNM Fund in the long run, because the fully funded pension insurance introduction reduces insurance liabilities based on generational solidarity.