## _cr16123 — Preface and Executive Summary (Mission report)

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### Mission, scope, and approach
- Mission composition: Csaba Feher (head), La-Bhus Fah Jirasavetakul (Expenditure Policy Division, Fiscal Affairs Department), and Alain Jousten (expert).
- Visit dates: January 19 to February 2, 2016.
- Purpose: assess sustainability of the public pension system; discuss recent and proposed changes to veterans’ benefits; review effectiveness of social assistance; limited review of administrative procedures in delivery of social cash transfers.
- Principal interlocutors: Minister of Finance Avdullah Hoti and Minister of Labor and Social Welfare Arban Abrashi.
- Review coverage: age and disability pensions (Section II), special benefits (Section III), social assistance (Section IV); five technical appendices including regulatory comparisons and quantification of fiscal impacts (Appendix V).

### Macroeconomic and social context — key facts
- Poverty: nearly 30 percent of the population living on less than the national poverty line of EUR 1.72 a day.
- Economic growth: averaging at 3.6 percent between 2008 and 2015.
- Labor market: unemployment and inactivity rates close to 30 and 60 percent, respectively; youth unemployment particularly high.
- Role of remittances and diaspora visits: crucial in household support; complicate targeting and revenue structure.

### High-level diagnosis of social cash transfers
- Kosovo’s social transfer programs are narrower in scope than similar programs in other European emerging economies.
- Post-independence pension architecture:
  - Budget-financed basic pension: uniform (“flat”) benefit to every Kosovar citizen older than 65 years.
  - Individual account defined contribution pension scheme: Kosovo Pension Savings Trust (KPST).
- Disability benefits: available only to people with a 100 percent disability.
- Omitted risks/benefits: loss of breadwinner, childcare, unemployment and work injury.
- Social assistance: very strict eligibility criteria and low benefits.
- Wage taxes relatively low; earnings-related contributions limited to KPST.

### Core reform objectives (Executive Summary)
- Encourage employment.
- Adequately protect the poor.
- Ensure fiscal sustainability.
- Enable fast and effective administration.

### Main shortcomings identified
- Disproportionate share of social transfers absorbed by war-related and other special benefits payable to working age people.
- Social assistance coverage and benefit levels inadequate: only one-third of the bottom quintile receive any cash benefits; benefit levels insufficient for basic needs for most family types.
- Weak controls over benefit claims by citizens residing abroad.
- Inconsistent and sometimes contradictory regulations.
- Lack of overarching social policy vision; differential treatment of similar risks.
- Social protection favors permanent benefits over temporary ones, discouraging employment.
- Eligibility rules that discourage labor supply and increase benefit-dependence.
- Parallel and overlapping coverage for certain risks (especially longevity), and gradual expansion of noncontributory earnings-related pensions generating unfunded liabilities.

### Principal reform directions (summary)
- War veterans’ pensions: revise eligibility period, introduce a nominal ceiling on total benefits, and cap monthly withdrawals to ensure longer withdrawal eligibility.
- Basic disability and special pensions: limit eligibility to resident citizens and introduce strict residency controls.
- Earnings-related occupational pensions (KSF, police): make contributory; finance benefits through contributions; assess benefits on career average earnings.
- Family pensions: replace permanent benefits for working age survivors with temporary ones (limit receipt to no more than 2 years for adults); harmonize at EUR 75; permit work with a tapered claw-back.
- Disability criteria: uniform disability assessment, introduce partial disability benefits starting from 70 percent, apply new criteria retroactively where eligibility includes any level of disability.
- Social assistance: remove beneficiary categorization; revise poverty thresholds in line with international practice; improve controls over private transfers to recipient families’ members.
- Tax treatment: subject all benefits to personal income tax and health insurance contribution.
- Policymaking environment: require long-term fiscal impact analyses and funding assurances for proposed legislation affecting pension outlays.

---

### Age and disability pensions — overview and fiscal dimensions
- Pension programs range from funded defined contribution (KPST) to universal, flat, noncontributory provisions.
- Analysis focuses on schemes under the Law on Pensions Financed by the State (“2014 law”).
- Age and disability pensions: largest social cash benefit programs with outlays of 3.6 percent of GDP—more than two thirds of all social protection spending.
- Recent expenditure drivers (2011–2014):
  - Steep increases in real value of monthly benefit amounts (relative increases strongest for basic pensions).
  - Substantial increase in number of basic and contributory pension beneficiaries of approximately 25 percent during 2011–2015.
  - Numbers of disabled stagnated over same period.

- Basic pension specifics:
  - Benefit: EUR 75 per month.
  - Beneficiaries: 132,000 people.
  - Current cost: about 2.1 percent of GDP per year.
  - Eligibility conditional on age (65+) and residence; periodic personal presentation every 6 months required to continue receipt (suspension/termination rules apply).

- Contributory pension (pre-1999 entitlements):
  - Until 2015 flat benefit EUR 140; increased to EUR 158 in January 2016 due to 25 years’ recognition.
  - Eligibility: citizens above age 65 with at least 15 years of contributions prior to 1999.
  - 2014 law grants extra 25 years notional earnings history producing a 0.5 percent benefit increase per service year (effectively a 12.5 percent increase from EUR 140 to EUR 158).

- KPST (Kosovo Pension Savings Trust):
  - Mandatory defined contribution, contributions minimum 5 percent each for employees and employers; maximum voluntary 15 percent each; self-employment combined rate applies.
  - Average account balances at retirement approximately EUR 4000.
  - Withdrawals cannot be less than EUR 150 per month; typical payout period 2.5 to 3.5 years depending on net returns.
  - Regular old-age benefit payouts start at age 65; early withdrawals possible in case of 100 percent disability as recognized under public pension scheme.

### Exact fiscal impacts and estimates recorded
- Increase from EUR 140 to EUR 158 in January 2016 generated additional expenditures of approximately EUR 8.7 million in 2016 (0.2 percent of GDP) attributable to the 25 years’ recognition measure.
- Illustrative full year fiscal cost of education link of contributory pension (simulation base: total contributory pension beneficiaries 40,365):
  - Total annual incremental cost (EUR): 7,367,532
  - Breakdown by education level (excerpt):
    - Secondary: Number of beneficiaries 14,128; Monthly benefit (EUR) 174; Annual incremental cost (EUR) 2,712,576
    - Post-secondary: Number of beneficiaries 2,826; Monthly benefit (EUR) 205; Annual incremental cost (EUR) 1,593,864
    - College/University: Number of beneficiaries 3,229; Monthly benefit (EUR) 237; Annual incremental cost (EUR) 3,061,092

### Coverage, residency discrepancies, and gender implications
- Number of beneficiaries older than 65 exceeds official population figures by at least 20 percent in every age bracket.
- Possible explanations: double claiming (authorities say technically not possible), unreliable census statistics, nondeclaration of deaths, flawed concept of residency for eligibility.
- Gender distribution:
  - Female pensioners 65+: approximately 95 percent claim the basic pension.
  - Male pensioners 65+: approximately 56 percent claim the basic pension and 44 percent claim the higher contributory pension.
- Policy implication: reforms of the basic pension will have a larger impact on women than men; rising female contributory participation among younger cohorts may affect future fiscal trajectories.

### Labor market interactions and partial disability gap
- Trepca and family pensions paid to individuals below 65 resemble selective and permanent unemployment benefits, potentially discouraging employment.
- Recommendation: allow work with a benefit claw-back mechanism and implement active labor market policies.
- Disability pensions limited to 100 percent disability leave partially disabled uncovered; recommendation to introduce partial disability coverage (eligibility for cash benefits established at no lower than 70 percent) with differentiated benefit levels (e.g., between 0.7 and 1 times the basic pension).

---

### Special benefits — scale, problems, and policy recommendations
- Special/merit-based and occupational benefits constitute a large and growing share of social transfers.
- 2015 figures:
  - Merit-based (war-related) and occupational benefits: 15 percent of total social protection expenditures.
  - Merit-based and occupational benefits: approximately 40 percent of outlays benefitting working age recipients.
  - From 2016 on, merit-based benefits will grow to approximately 55 percent as a share of payments to working age people.
- Five largest 2015 expenditure items: KLA war invalids, martyrs’ families, families of civilian victims, former Trepca workers, and war veterans.
- War veterans’ pension:
  - Expected to cover approximately 18,000 people with an additional 12,000 who may potentially become beneficiaries later.
  - Benefit level explicitly linked to statutory minimum wage, currently at EUR 170.
  - From 2016 expected annualized cost approximately EUR 36 million in its first year of operation; total cost expected to reach approximately EUR 35 million in 2016—40 percent more than originally predicted.
  - Theoretically possible upper limit of expenditures in excess of EUR 60 million (1.2 percent of GDP).

- Martyrs and civilian victims survivors:
  - Martyrs’ families: benefits between EUR 448 and 672 per month; currently less than 2,000 families receive this benefit.
  - Civilian victims’ families: benefits between EUR 169 and 253 in 2015; 4,700 families receive this benefit.
  - Both groups may draw other nonpension benefits and are allowed to have labor income; benefits continue after retirement in addition to basic and contributory pensions.

- KLA war invalids:
  - Eligibility conditioned on disability in excess of 20 percent; lowest pension EUR 225 per month (three times the normal disability pension).
  - Majority in lowest disability categories; less than 4,000 KLA war invalids in total.
- Civilian war invalids’ eligibility starts at 40 percent disability; benefits still more than twice normal disability pensions for full disability.

### Key issues with special benefits
- Concentration and inequity:
  - In 2015, war-related recipients were 6.6 percent of total cash transfer recipient population while expenditures were 18 percent.
  - War-related and occupational benefits use more permissive disability criteria and give substantially higher benefits than standard disability benefits (e.g., war invalidity benefits 3–6 times standard disability pension; civilian war invalids 1.6–2 times).
- Governance and consistency problems: differing assessment frequencies (regular re-certification for standard disabled; once-only assessments for many war-invalid beneficiaries).
- Family pensions for war-related beneficiaries are more generous and life-long, discouraging employment and creating inequities.

### Recommendations on special benefits
- War veterans:
  - Limit total benefit receipt at EUR 4,000, payable in instalments not exceeding EUR 120 per month, over a period and frequency chosen by beneficiary.
  - Permit applying remaining eligibility balance as collateral for micro and small enterprise financing.
  - Reduce expenditures while ensuring greater individual choice.
- Earnings-related pensions (KSF, police):
  - Discontinue direct budget financing of earnings-related pension schemes; conduct actuarial assessment to establish long-term equilibrium contribution rates.
  - Make KSF contributory with equal employee and employer shares.
  - Revise benefit formulas: shift from final salary to career average, replace rank-indexation with price indexation.
  - Apply same principles to planned police pension expansions.

---

### Social assistance — coverage, design, and reform scenarios
- Social assistance (“Asistenca Sociale”): budget-financed guaranteed minimum income program implemented in 2000; only cash program aimed at poverty reduction for working-age population.
- 2015 coverage and benefit levels:
  - Around 26,000 families (or 107,000 individuals) benefited in 2015.
  - Average beneficiary family size: around four people.
  - Average benefit amount: about EUR 81.2 per month per family.
  - By end-2015, spending on social assistance was about 8 percent of total social protection spending.

- MGSR (Monthly Gross Standard Rate):
  - Varies with family size, ranging from EUR 50 to EUR 150 per month.
  - Adjusted only in 2003, 2009 (+EUR 5), and 2015 (+25 percent).
- Child allowance: EUR 5 per month per child under 18.
- Average monthly social assistance:
  - EUR 66.1 in 2010.
  - EUR 81.2 in 2015.
- Per person/day for four-member family:
  - EUR 0.54 per family member per day in 2010.
  - EUR 0.67 per family member per day in 2015.

### Targeting performance and gaps
- Between 2010 and 2015:
  - Number of beneficiary families decreased by around 10,000 households.
  - Social assistance spending fell from 11.3 to 8.3 percent of total social protection spending.
  - Share of total social protection spending fell from 17 percent in 2010 to 8 percent in 2015.
- Targeting:
  - 54 percent of total spending went to bottom quintiles (regional averages: Eastern Europe and Central Asia 36 percent; Balkans 39 percent).
  - Leakage to top quintile: around 3 percent.
  - Coverage: less than one-third of the poor (below EUR 1.72/day) received benefits — 10 percentage points lower than regional average.
  - Average per capita benefit received by bottom quintile: around EUR 0.55 per day.

### Administrative, eligibility, and verification issues
- Two beneficiary categories (Category 1 and Category 2) and categorical pre-filters exclude many poor families.
- Asset test (no motor vehicle ownership, land > 0.5 hectares) can disqualify productive poor; verification difficult.
- MLSW lacks technical means to accurately measure applicants’ monetary income; reliance on remittances and informal transfers complicates assessment.
- CSWs have considerable discretion; municipal-central institutional fragmentation undermines uniform rule application.
- Inconsistencies in treatment of pensioners in household income calculations: some pensions omitted from assessed income (basic pensioners), others included (contributory, war-invalidity), generating inequities.

### Social assistance reform scenarios and estimated fiscal impacts (Appendix II & V)
- Scenario 1: Raise Category 2 age limit of youngest child and/or increase number of unemployed family members eligible.
  - Estimated full-year fiscal impact (policy simulation): additional expenditures of 0.04 percent of GDP (see assumptions).
- Scenario 2: Include pension and pensioners into family’s assessed income and family size.
  - Estimated full-year fiscal impact (savings): 0.1 percent of GDP (upper-bound savings caveats noted).
- Scenario 3: Make social assistance completely income-tested and adjust benefit level to an adult equivalence scale.
  - Estimated full-year fiscal impact: additional expenditures of 0.5–1.3 percent of GDP (sensitivity to choice of equivalence scale and HBS limitations).
- Other Appendix V estimates (selected):
  - Link receipt of noncontributory pensions to continuous residency: 0.1–0.5 percent of GDP (full-year).
  - Make KSF and other general revenue financed earnings-related pensions contributory: 0.1–0.3 percent of GDP.
  - Make benefits income-tax liable: 0.1 percent of GDP.
  - Make benefits health-insurance liable: 0.1 percent of GDP.
  - Harmonize family benefits and limit to basic pension for working-age recipients (2-year payment): 0.2–0.4 percent of GDP.
  - Reduce cost of war veterans’ pensions through limiting total benefit receipt (monthly cap EUR 120): 0.2 percent of GDP (lower bound).

### Recommended social assistance policy and institutional changes
- Eligibility reforms:
  - Discontinue Category 1/2 pre-filtering or raise Category 2 youngest child age limit to 18.
  - Rely on asset tests only when income information unavailable.
  - Permit more than one able-bodied family member to register as unemployed.
  - Remove employment restrictions from eligibility criteria; permit beneficiaries to work with a claw-back mechanism.
- Data and administration:
  - Consolidate government-administered cash transfers into a single database.
  - Establish automated data exchange with tax authority and financial service providers executing transfers.
- Benefit adequacy and indexation:
  - Gradually adjust MGSR to reflect basic living costs; increase MGSR for single-member family at least to level of extreme (food) poverty line.
  - Define MGSR using standard equivalence scales in line with international practice.
- Income treatment:
  - Incorporate all income into the income test, including all types of pension and include family members aged 65+ in assessed income.
- Legal and fiscal governance:
  - Harmonize legal/regulatory framework for all pension schemes.
  - Require legislation materially impacting state-financed pension schemes to be accompanied by 25-year fiscal impact analyses, and supplement annual budget with long-term projections.
  - Consider mandatory offsetting: require measures that increase net social welfare outlays to be accompanied by revenue measures to offset increases.

---

### Indexation, taxation, residency, and governance recommendations
- Indexation:
  - Make price indexation of benefits universal and automatic.
  - Remove cabinet discretion on extent of indexation; establish clear rules for temporary suspension.
- Tax and health insurance treatment:
  - Subject all pension benefits to personal income tax and health insurance contribution.
  - Discontinue categorical tax exemption of pension benefits.
  - Compensate individuals receiving benefits not exceeding EUR 75 for personal health insurance contributions.
- Residency and entitlement controls:
  - Tighten residency requirements to distinguish residency-based social assistance from contributor-based social insurance.
  - Strengthen residency verification to prevent effective nonresident benefit receipt (suspension/retroactive payment rules currently allow effective return visits once every 9 months).
- Governance and ex ante evaluation:
  - Remove discretionary annual decisions on key pension parameters.
  - Introduce ex ante framework for medium- and long-run cost/benefit estimation to reduce discretionary partial implementation of laws.

---

### Disability assessment and re-certification recommendations (paragraphs and C. Recommendations)
- Establish uniform disability definitions, scales, procedures and eligibility criteria.
- Re-define eligibility on remaining capacity to perform any type of work; make partial disability universally applicable with eligibility starting at 70 percent.
- Differentiate disability pension levels conditional on disability level (e.g., between 0.7 and 1 times the basic pension).
- Re-certify all disability-based beneficiaries under new uniform criteria; establish notification, re-certification and appeals procedures.
- Contract independent medical experts to supervise medical commissions and appeals.
- Require periodic personal presentation for noncontributory pension recipients:
  - Ages 18–65: present once every two months.
  - Ages over 65: present once every three months.
  - Limit retroactive collection of benefits to one month; implement home visits for fully disabled or hospitalized recipients.

---

*Source: IMF mission report (Preface, Executive Summary, Sections II–IV, Appendices I–V of content unit _cr16123).*

### Preface ................................................................................................................

### _cr16123 - Preface

### Mission and context
- Mission composition: Csaba Feher (head), La-Bhus Fah Jirasavetakul (Expenditure Policy Division, Fiscal Affairs Department), and Alain Jousten (expert).
- Visit dates: January 19 to February 2, 2016.
- Purpose: assess sustainability of the public pension system; discuss recent and proposed changes to veterans’ benefits; review effectiveness of social assistance; limited review of administrative procedures in delivery of social cash transfers.
- Principal interlocutors: Minister of Finance Avdullah Hoti and Minister of Labor and Social Welfare Arban Abrashi.
- Additional participants and stakeholders met: Richard Beasley (BPB Bank), Gjylfidane Kadrijaj (Central Bank of Kosovo), Adrian Zalli (Kosovo Pension Savings Trust), Muhamet Gjocaj, Mentor Morina, Izedin Bytyqi, Drin Haraqia, Selatin Kllokoqi, Sami Saliu, Leunora Zylfijaj, Izet Shala, Skender Asllani, Shqipe Krasniqi, Minire Begaj, Hajrije Pajaziti, Fehmi Ibrahimi, Gani Smakaj (Ministry of Labor and Social Welfare), Naim Shala (Ministry of Interior), Bashkim Bellaqa (Kosovo Agency of Statistics), Lulzim Ejupi (Civil Registration Agency), Faton Klinaku (War Veterans’ Association).
- Acknowledgements: cooperation of MLSW experts; support from Mr. Ruud Vermeulen, Resident Representative of the IMF for Kosovo, and resident representative office staff; administrative assistance from Liza Prado, Adam Boyd, and Ana Popovich.

### High-level scope and approach
- Review covers age and disability pensions (Section II), special benefits (Section III), and social assistance (Section IV), with policy recommendations for each.
- Five technical appendices: regulatory comparisons across old age and disability schemes; comments on policy documents and draft laws; quantification of fiscal impact of selected measures (Appendix V).

### Key factual points from the Preface and Executive Summary
- Kosovo’s social transfer programs are narrower in scope than similar programs in other European emerging economies.
- Post-independence pension architecture: a budget-financed basic pension scheme paying a uniform (“flat”) benefit to every Kosovar citizen older than 65 years and an individual account defined contribution pension scheme (Kosovo Pension Savings Trust, KPST).
- Disability benefits available only to people with a 100 percent disability.
- Omitted risks/benefits: loss of breadwinner, childcare, unemployment and work injury.
- Social assistance characterized by very strict eligibility criteria and low benefits.
- Wage taxes remain relatively low; earnings-related contributions limited to KPST.
- Poverty: nearly 30 percent of the population living on less than the national poverty line of EUR 1.72 a day.
- Economic growth: averaging at 3.6 percent between 2008 and 2015.
- Labor market indicators: unemployment and inactivity rates close to 30 and 60 percent, respectively; youth unemployment particularly high.
- Remittances and diaspora visits play a crucial role in household support and complicate targeting and revenue structure.

### Main shortcomings of social cash transfers (as identified)
- Expenditures on war-related and other special benefits payable to working age people take up an incommensurate portion of social transfers.
- Coverage of the social assistance scheme and level of benefits are inadequate: only one-third of the bottom quintile receive any cash benefits; benefit levels insufficient for basic needs for most family types.
- No efficient controls over benefit claims by Kosovar citizens residing abroad.
- Regulations are often inconsistent and present contradictory provisions.
- Lack of overarching social policy vision leads to different treatment of similar risks across schemes.
- Social protection favors permanent benefits over temporary ones, discouraging employment.
- Eligibility rules discourage labor supply and increase benefit-dependence.
- Certain risks remain uncovered while other risks—especially longevity—are addressed by multiple schemes with parallel benefit access.
- Gradual expansion of noncontributory earnings-related pensions generates unfunded pension liabilities, implies perverse redistribution, and may pave the way for an overhaul of the current pension system.

### Core reform objectives (from Executive Summary)
- Encourage employment.
- Adequately protect the poor.
- Ensure fiscal sustainability.
- Enable fast and effective administration.

### Principal recommendations (summary)
- War veterans’ pensions: revise eligibility period, introduce a nominal ceiling on total benefits, and cap monthly withdrawals to ensure longer withdrawal eligibility.
- Basic disability and special pensions: limit eligibility to resident citizens and introduce strict residency controls.
- Earnings-related occupational pensions: revise rules for the KSF and police schemes; finance benefits through contributions and assess benefits on the basis of career average earnings; apply similar changes to draft laws and regulations for future police officers’ pension scheme.
- Family pensions: replace permanent benefits for working age survivors with temporary ones (limit receipt to no more than 2 years for adults); harmonize regulation of all family pensions at the level of the basic pension (currently EUR 75); permit work with a tapered claw-back mechanism.
- Disability criteria: apply uniform disability assessment methods and eligibility benchmarks; introduce partial disability benefits starting from 70 percent; apply new disability criteria retroactively where eligibility includes any level of disability.
- Social assistance: remove potential beneficiaries’ categorization; revise poverty thresholds in line with international practice; improve controls over private transfers to recipient families’ members.
- Tax treatment of benefits: subject all benefits to personal income tax and health insurance contribution.
- Policymaking environment: revise laws governing the legislative process to categorically disallow submission of bills without long-term fiscal impact analyses and accompanying legislation ensuring funding for marginal budgetary outlays.

### Introduction and policy framing
- The social cash transfer system diverged from the earlier fiscally sustainable and conceptually homogenous structure of the early 2000s, with proliferation of budget-financed cash transfer programs post-2008.
- War-related schemes generally pay higher benefits on less stringent criteria than programs aimed at the destitute (social assistance or standard disability pensions).
- Earnings-related pension schemes being (re)introduced are often noncontributory and create unfunded liabilities based on pre-1999 entitlements or new entitlements without offsetting assets or revenues.
- The report's objective: provide reform options to reduce level and growth of special benefits and, using fiscal space created, improve coverage and adequacy of social assistance.

### Age and disability pensions — overview (Section II highlights)
- Pension landscape: numerous programs from funded defined contribution pensions (KPST) to universal, flat, noncontributory provisions.
- Analysis focuses on schemes governed by the Law on Pensions Financed by the State (“2014 law”), excluding other “pensions” for special groups (these are covered in the special benefits section).
- Age and disability pensions: largest social cash benefit programs with outlays of 3.6 percent of GDP—more than two thirds of all social protection spending.
- Recent drivers of pension expenditure increases (2011–2014): steep increases in real value of monthly benefit amounts (relative increases strongest for basic pensions) and a substantial increase in number of basic and contributory pension beneficiaries of approximately 25 percent during 2011–2015; numbers of disabled stagnated over same period.
- The 2014 law establishes mutual exclusivity across its pensions and extends one-beneficiary—one benefit rule to MLSW-administered cash transfers; however, emergence of budget-financed occupational pension and cash benefit schemes (e.g., KPC, KSF, Police) erodes exclusivity effectiveness.
- Basic pension specifics: general-revenue financed universal flat benefit, covering all citizens aged 65 and over without other pension income; administered by MLSW; providing benefits to 132,000 people at EUR 75 per month with a current cost of about

*Source: IMF mission report (Preface and Executive Summary sections of content unit _cr16123).*

### 2.1 percent of GDP per year. In addition to age, pension receipt is also conditional on residence

### _cr16123 - 2.1 percent of GDP per year. In addition to age, pension receipt is also conditional on residence

### Overview of pension schemes and administration
- Basic pension: uniform monthly benefit historically EUR 75; eligibility conditional on residence and drawing no other budget-financed pension administered by MLSW. To ensure continued benefit receipt, individuals have to present themselves every 6 months in person in an office designated by the ministry. Otherwise benefit payments are suspended for up to 6 months; if the individual re-presents during suspension, payouts are reactivated and suspended payments are retroactively paid out for up to 3 months; in case of a no-show during suspension, benefit entitlements are terminated, requiring re-application.
- Contributory pension: budget-financed defined benefit scheme for citizens above age 65 with at least 15 years of contributions prior to 1999 into the social security scheme of Yugoslavia. Until 2015 eligible individuals were entitled to a flat benefit of EUR 140, with same residence and administrative procedures as for the basic pension.
- Disability pensions: uniform monthly benefit EUR 75, available for fully disabled resident citizens aged between 18 and 65; no benefits for partially disabled (disability level below 100 percent). Severity determined by Medical Commission of MLSW with recurrent re-assessment after 1, 3 or 5 years.
- Work disability pensions (separate system introduced by 2014 law): monthly benefit set equal to the basic pension (EUR 75); not yet implemented in practice. Covers those younger than 65 who received a similar benefit prior to 1999 and employees whose onset of a work-related disability occurs after this date. Specialized public institutions of labor medicine (Ministry of Health) verify insurable events prior to Medical Commission review.
- Family pensions: available to surviving spouses and dependent children based on social insurance entitlements accrued prior to 1999; benefit for surviving spouses is the same as the basic pension, with a 20 percent increase for each dependent child (below 18, or 26 in case of continued studies). Benefit receipt while in employment—including self-employment—is prohibited.
- Trepca early retirement pension: monthly benefit currently set at 105 EUR; eligibility: resident citizens aged at least 50 but no more than 65, recognized work history of at least 10 years in mining sector, absence of any form of employment or self-employment income, and work-related disability of at least 50 percent. Individuals rolled over into regular age pension schemes upon reaching age 65.
- Kosovo Pensions Savings Trust (KPST): mandatory publicly managed defined contribution scheme. Contributions levied on all employment and self-employment income at a (tax-deductible) rate of minimum 5 percent each for employees and employers. The maximum contribution rate can voluntarily is of 15 percent each. In case of self-employment, the combined rate applies. Average account balances at retirement are approximately EUR 4000. Withdrawals cannot be less than EUR 150 per month; KPST balances can provide an income stream for a period of 2.5 to 3.5 years on average, depending on net returns during payout phase. Regular old-age benefit payouts start at age 65; early withdrawals possible in case of 100 percent disability recognized under public pension scheme. Two payout mechanisms envisaged: annuitization and phased withdrawals (in practice all payouts take the form of phased withdrawals given small balances).

### 2014 law changes, eligibility recognition, and benefit adjustments
- The 2014 law recognizes various noncontributory periods in establishing eligibility for contributory pensions, including years of work in parallel (informal) health, education or “other” sectors in Kosovo between 1989 and 1999.
- The law grants all individuals who can prove 15 years of qualifying affiliation an extra 25 years of notional earnings history, rewarded with a 0.5 percent benefit increase per service year added. This transforms—at least conceptually—a flat benefit into one based on length of service history.
- As a result of the additional 25 years’ recognition, benefits increased by 12.5 percent in January 2016, from EUR 140 to EUR 158.
- The 2014 law also introduced benefit differentiation according to pensioners’ level of education, with four levels of education differentiated and benefits for people with education not exceeding primary schooling to remain unchanged. Multipliers to be applied were not yet determined; a static simulation based on observed beneficiaries in December 2015 estimates a potential recurring fiscal cost of EUR 7,367,532 (EUR 7.4 million, 0.1 percent of GDP) under hypothetical multipliers (see Table figures below).
- All pension benefits should be adjusted annually for prices, but the law allows government flexibility reflecting fiscal space. In practice no automatic indexation has taken place; ad hoc adjustments have occurred with only a loose connection to current or cumulative inflation.

### Fiscal impacts, estimates, and exact figures
- Increase from EUR 140 to EUR 158 in January 2016 generated additional expenditures of approximately EUR 8.7 million in 2016 (0.2 percent of GDP) attributable to the 25 years’ recognition measure.
- Illustrative full year fiscal cost of education link of contributory pension (simulation based on number of contributory pension beneficiaries in December 2015; assumed distribution of educational attainment from authorities; applied adjustment factors are hypothetical; the increase from 140 to 158 EUR is considered fully implemented):
  - Total number of contributory pension beneficiaries (simulation base): 40,365
  - Breakdown by education level:
    - No formal education: Share 50 (Percent of beneficiaries); Number of beneficiaries 20,182; Multiplicative adjustment factor 1; Monthly benefit (EUR) 158; Annual incremental cost (EUR) 0
    - Secondary: Share 35; Number of beneficiaries 14,128; Multiplicative adjustment factor 1.1; Monthly benefit (EUR) 174; Annual incremental cost (EUR) 2,712,576
    - Post-secondary: Share 7; Number of beneficiaries 2,826; Multiplicative adjustment factor 1.3; Monthly benefit (EUR) 205; Annual incremental cost (EUR) 1,593,864
    - College/University: Share 8; Number of beneficiaries 3,229; Multiplicative adjustment factor 1.5; Monthly benefit (EUR) 237; Annual incremental cost (EUR) 3,061,092
    - Total annual incremental cost (EUR): 7,367,532

### Coverage, demographic discrepancies, and residency concerns
- The number of beneficiaries older than 65 exceeds official population figures by at least 20 percent in every age bracket.
- Four main possible explanations for discrepancy:
  - Double claiming of basic and contributory benefits (authorities say technically not possible given administrative procedures).
  - Unreliable population statistics from the census (only one census so far with incomplete territorial coverage).
  - Imperfect recording of deaths due to nondeclaration (can explain level but not change over time).
  - Flawed concept of residency for benefit eligibility and for the census; many beneficiaries qualifying as residents might not be habitual residents as captured by the census.
- The discrepancy between beneficiaries and population older than 65 is increasing, particularly driven by the number of basic pension beneficiaries.

### Gender distribution and implications
- Female pensioners above 65: approximately 95 percent claim the basic pension.
- Male pensioners above 65: approximately 56 percent claim the basic pension and 44 percent claim the higher contributory pension.
- The wedge between beneficiary population and overall population 65+ is stronger for men than for women, suggesting nonresidency plays a larger role for men (historically more mobile).
- There is a noticeable increase in the share of female contributory pension recipients among younger cohorts.
- Policy consequences:
  - Fiscal: the trend may drive growth of pension expenditures beyond cohort size.
  - Welfare: reforms of the basic pension will have a larger impact on women than on men.

### Labor market interactions and distributional issues
- Trepca and family pensions paid to individuals below age 65 resemble selective and permanent unemployment benefits, potentially discouraging employment and encouraging exiting the labor market to claim benefits.
- Recommendation: allow beneficiaries to generate labor income with a benefit claw-back mechanism to partially address disincentives, and implement active labor market policies to encourage re-entry into employment.
- Family pensions design creates inequities and inefficiencies: selective granting to some categories (e.g., families of war-related pensioners, contributors to the old Yugoslav system) is hard to rationalize given general budget financing. Lifelong benefits to spouses rather than transitional assistance can discourage employment.
- Conditions for permanent disability and work-related disability pensions are strict (only 100 percent disabled qualify), leaving partially disabled individuals uncovered. Expansion to include partial disability coverage could be warranted, with safeguards to minimize work disincentives and ensure continued labor force attachment.

*Source: MLSW and IMF staff analysis as presented in the provided content.*

### 23.      The lack of a consistent and labor-market oriented approach for evaluating

### _cr16123 - 23.      The lack of a consistent and labor-market oriented approach for evaluating

### Problems in disability evaluation and program fragmentation
- All relevant disability thresholds are expressed in terms of percentages, but there is no common set of medical criteria used.
- The remaining ability to work is not consistently taken into account.
- Evaluation and decision powers are dispersed unsystematically between general practitioners, specialists, and ministerial medical commissions, leading to inefficiencies and likely inequities in procedures and outcomes.
- The same reasoning applies to spouses, children and parents of KSF, KPC and members of the police force—given their even larger generosity.

### Recommendations on disability, eligibility, and benefit administration (C. Recommendations)
- Restrict payment of noncontributory age and survivor benefits to resident citizens.
- Require all recipients of noncontributory age and survivor pensions between the ages of 18 and 65 to present themselves at designated government agencies once every two months.
- Require recipients of age and disability pensions over age 65 to present themselves once every three months.
- Limit retroactive collection of benefits to one month.
- In case of fully disabled or hospitalized recipients, introduce visits by CWS officers or other government agencies.

- Limit multiple benefit claims:
  - Clarify ambiguous regulations and make all pension benefits financed by general government mutually exclusive.

- Establish uniform disability definitions, scales, procedures and eligibility criteria:
  - Legislate a uniformly applicable list of medical conditions and the rules determining the manner in which multiple conditions are compounded.
  - Re-define eligibility for disability-related benefits on remaining capacity to perform any type of work.
  - Legislate a new set of eligibility levels: make the notion of partial disability universally applicable with eligibility for cash benefits established at no lower than 70 percent.
  - Introduce differentiated disability pension benefits, with benefit levels conditional on disability levels, ranging, for instance, between 0.7 and 1 times the basic pension—possibly complemented by ad hoc social assistance benefits.

- Initiate the re-certification of all recipients of benefits conditional on disability:
  - Re-certify all recipients according to the new, uniform criteria, including the application of the common criteria for a partial disability.
  - Establish procedures for notification, re-certification and appeals.
  - Contract independent medical experts to be employed in the process of ad-hoc supervision of medical commissions and appeals.

- Time-limit and harmonize family benefits:
  - In case of working age survivors, limit eligibility to noncontributory family benefits to two years, regardless of the nature of the deceased main beneficiary’s noncontributory pension.
  - Harmonize benefit levels at EUR 75 per month, with a grandfathering period of one year for survivors currently receiving a higher benefit.

### Special benefits — overview and key findings (III. SPECIAL BENEFITS, A. Overview)
- A broad range of cash benefits is available to special groups (participation in the independence struggle, political persecution, war).
- The majority of these benefits is paid to people younger than the retirement age; most continue to be paid after recipients reach age 65.
- Regulations provide survivor benefits to spouses, children, and parents.

- 2015 expenditure and coverage highlights:
  - Merit-based (war-related) and occupational benefits represent 15 percent of total social protection expenditures.
  - Merit-based and occupational benefits represent approximately 40 percent of outlays benefitting working age recipients.
  - From 2016 on, merit-based benefits will grow to approximately 55 percent as a share of payments to working age people.
  - The five largest expenditure items in 2015: benefits payable to Kosovo Liberation Army (KLA) war invalids, martyrs’ families, families of civilian victims of the war, former workers of the Trepca complex and war veterans.
  - From 2016 on, the single largest item will be war veterans’ pension, expected to cost on an annualized basis approximately EUR 36 million in its first year of operation.

- War veterans’ pension specifics:
  - Expected to cover approximately 18,000 people with an additional 12,000 who may potentially become beneficiaries at a later time.
  - In order to be eligible, applicants’ former KLA affiliations must be certified by a special commission; they cannot be employed or self-employed and must be younger than the normal retirement age of 65.
  - Currently, 13,000 cases have been completed with benefits awarded and another 5,000 applicants are awaiting final settlement.
  - A further 12,000 people have been issued documents proving former affiliation to KLA who may later meet remaining eligibility conditions.
  - The benefit level is explicitly linked to the statutory minimum wage, currently at EUR 170.
  - War veterans’ survivors are eligible for a family pension at 70 percent of the deceased person’s pension, payable until the family member’s retirement (spouses) or the 18th or 26th birthday for children (depending on full-time schooling).

- Martyrs and civilian victims survivors:
  - Families of martyrs receive benefits of between EUR 448 and 672 per month (approximately 6-to-9 times the basic pension); currently less than 2,000 families receive this benefit.
  - Families of civilian victims receive benefits between EUR 169 and 253 in 2015; 4,700 families receive this benefit.
  - Both groups may draw other nonpension benefits in addition to war-related family benefits and are allowed to have labor income; benefits continue after retirement in addition to basic and contributory pensions.

- War invalids:
  - KLA war invalids’ pension eligibility conditioned on disability in excess of 20 percent; lowest KLA war invalids’ pension is EUR 225 per month (three times the normal disability pension).
  - Majority of KLA war invalid beneficiaries are in the lowest disability categories; less than 4,000 KLA war invalids in total.
  - Civilian war invalids’ eligibility starts at 40 percent disability; benefits are lower than KLA war invalids but still more than twice normal disability pensions for full disability.

- Other schemes and benefits:
  - A new scheme for victims of sexual abuse legislated in 2014 is not operational yet (eligibility commission not established and benefit levels not defined).
  - KPC and KSF pension schemes are noncontributory, earnings-related final salary arrangements; KPC will wind down, KSF will remain open.
  - KPC specifics: service of at least 5 years, reach age 45; full KPC pensions available from age 50 at 70 percent of last salary; early retirement at age 45 at 50 percent; approximately 900 KPC pension recipients, with 55 percent younger than 65 and 10 percent receiving a family benefit.
  - KSF specifics: full pensions payable from age 50 or 55 (officers) with at least 20 years of service; benefits set at 60 percent of final salaries (service-time criteria and explicit cap result in pensions no lower or higher than 60 percent); former KPC members continuing in KSF can retire at any age after 3 years in KSF with transitional rates (40 percent below age thresholds, increasing to 60 percent at age thresholds).
  - Quasi-cash, in-kind and administrative benefits include utility subsidies, reduced health care and education co-payments, free or subsidized access to medical appliances, duty and tax easements when importing vehicles, preferential treatment of family members’ university applications, etc. With the exception of electricity subsidies, costs of these programs are not reported separately and are not considered in establishing eligibility for cash transfers.

### Issues with special benefits (B. Issues)
- The system of numerous war-related benefits is fiscally costly and inequitable:
  - In 2015, recipients of war-related benefits were 6.6 percent of the total cash transfer recipient population while expenditures on war-related benefits were 18 percent.
  - Eligibility criteria are unrelated to economic need or effort to find employment; family coverage expands timeframe and public expenditures.
  - Given poor coverage and inadequate benefit levels of the social assistance scheme, it is crucial to reform these schemes and apply fiscal space thus created towards people living in extreme poverty.

- War veterans’ pension fiscal risk:
  - Total cost expected to reach approximately EUR 35 million in 2016—40 percent more than originally predicted.
  - The theoretically possible upper limit of expenditures is in excess of EUR 60 million (1.2 percent of GDP).
  - Some substitution across new and existing benefits may lower realized expenditures, but this effect is unknown and should not justify conservative expenditure policies.
  - Schemes need substantial redesign to curtail fiscal costs.

- Comparability and consistency problems:
  - War and civilian war invalidity benefits use more permissive disability criteria and provide benefits substantially higher than standard disability benefits:
    - War invalidity benefits based on invalidity levels between 20 and 100 percent range between 3 and 6 times the benefit available to fully disabled people outside these schemes.
    - Civilian war invalids’ benefits range between 1.6 and 2 times standard disability benefits.
  - Fully disabled persons receiving EUR 75 per month are required to submit to regular re-certification, while war invalidity pensioners with significantly lower invalidity levels were only assessed once at application.
  - No assurance that current war-invalid beneficiaries would meet eligibility conditions if measured against the same scales as standard disability pensioners.

- Family pensions inequity:
  - Family pensions available only to survivors of war-related beneficiaries, at levels more generous than those under the new family pension scheme.
  - Eligibility is life-long for spouses and up to age 26 for children; benefits range between EUR 96 per month (civilian war invalids’ survivors) to EUR 672 (missing KLA members’ and martyrs’ survivors).
  - War-related family pensions discourage employment and introduce inequities into the social safety net.

### Recommendations on special benefits (III. C. Recommendations)
- Reduce expenditures of war veterans’ benefits, while ensuring greater individual choice:
  - Limit total benefit receipt at EUR 4,000, payable in instalments not exceeding EUR 120 per month, over a period and frequency of the beneficiary’s choice.
  - Permit applying remaining eligibility balance as collateral for establishing micro and small enterprises.

- Discontinue direct budget financing of earnings-related pension schemes and introduce parametric adjustments:
  - Conduct an actuarial assessment to establish the long-term equilibrium contribution rates required for financing earnings-related benefits accruing under the KSF pension scheme.
  - Make KSF pension contributory, equally sharing the contribution burden between employees and employers.
  - Revise the KSF pension scheme’s benefit formula and expand the pension calculation base from the last salary to a full career average.
  - Replace rank-indexation of benefits with price indexation.
  - Observe the same provisions when establishing other earnings-related schemes, including the planned substantial expansion of the police pension scheme.

### Social assistance overview (IV. SOCIAL ASSISTANCE, A. Overview)
- The social assistance scheme (“Asistenca Sociale”) is the only cash social protection program designed specifically for poverty reduction among the working age population.
- It is a budget-financed guaranteed minimum income program implemented in 2000.
- Coverage and benefits in 2015:
  - Around 26,000 families (or 107,000 individuals) benefited from the social assistance scheme in 2015.
  - The average size of beneficiary families was around four people per family.
  - The average benefit amount was about EUR 81.2 per month per family.

*Source: _cr16123 - 23.      The lack of a consistent and labor-market oriented approach for evaluating*

### 48.      Social assistance is the second largest program in terms of the number of

### _cr16123 - 48.      Social assistance is the second largest program in terms of the number of

### Overview and scale
- Social assistance is the second largest program by number of beneficiaries among programs funded by the Ministry of Labor and Social Welfare’s (MLSW) budget.
- Social assistance beneficiaries accounted for around 43 percent of the total number of beneficiaries; this beneficiary share remained rather constant over the last decade.
- The budget share of social assistance is small and has declined over time.
- By end-2015, spending on social assistance was about 8 percent of total social protection spending.

### Administration and delivery
- The social assistance scheme is administered by municipal Centers for Social Work (CSW).
- Since decentralization in 2009, CSWs are the responsibility of municipalities; municipal division: Municipal Department of Health and Social Welfare.
- CSWs handle applications, verification, and validation; financing, payment decisions, and actual transfers remain centralized primarily under the MLSW.
- Payment and residency enforcement:
  - Applications valid for at least six months and not more than one year (Category 1: one year; Category 2: six months).
  - Monthly transfers are made by MLSW to special bank accounts opened for beneficiaries. If a transfer is not collected within two months, the benefit is withdrawn.
  - MLSW can conduct ad-hoc inspections and cross-check reported income using tax administration offices and the KPST.

### Eligibility, targeting, and verification
- Targeting uses categorical eligibility criteria and means testing.
- Two beneficiary categories:
  - Category 1: families with all members dependent and hence not capable of working (includes groups defined in footnote 18).
  - Category 2: families with only one member capable of working, who is registered as unemployed at the Employment Office and actively seeking work, and with at least one child under the age of five or an orphan under the age of 15. An additional family member registered as unemployed will cause ineligibility.
- Asset test: no ownership of motor vehicles (with exemptions) or land larger than 0.5 hectares.
- Documentation and verification include proofs of identity, marital status, unemployment certificate, certificate of disability, land cadaster, school certificates, tax registration and insurance documents, interviews, and home/neighborhood visits.
- MLSW makes final eligibility decisions after CSW submission and checks with tax and other databases.

### Benefit design and levels
- Benefit determined by difference between assessed family income and Monthly Gross Standard Rate (MGSR).
- MGSR:
  - Varies with family size, ranging from EUR 50 to EUR 150 per month.
  - Adjusted only three times since 2000: 2003, 2009 (additional EUR 5), and 2015 (additional 25 percent).
- Child allowance: EUR 5 per month for each child under the age of 18.
- Average monthly social assistance:
  - EUR 66.1 in 2010.
  - EUR 81.2 per family in 2015.
- Per person/day for a four-member family (average beneficiary family size):
  - EUR 0.54 per family member per day in 2010.
  - EUR 0.67 per family member per day in 2015 (an increase of 13 cents per day over five years).
- Equivalence scale and adequacy:
  - For a four-member family at the 2011 extreme (national) poverty line, required monthly amount: about EUR 147.5 to EUR 172.4.
  - A four-member family's MGSR plus child allowances ranges only from EUR 81.3 (family with no children) to EUR 96.3 (family with three children).
  - Incremental MGSR increases: 37.5 percent for the second household member, and 12.5 percent of the single person rate thereafter until the fifteenth member.

### Trends in coverage and spending
- Between 2010 and 2015:
  - Number of beneficiary families decreased by around 10,000 households.
  - Spending on the social assistance scheme declined from 11.3 to 8.3 percent of total social protection spending.
  - As a share of total social protection spending, social assistance fell from 17 percent in 2010 to 8 percent in 2015.
- Targeting performance and gaps (2011 data and regional comparisons):
  - 54 percent of total spending on social assistance went to the population in the bottom quintiles (regional averages: Eastern Europe and Central Asia 36 percent; Balkans 39 percent).
  - Leakage to the top quintile: around 3 percent.
  - Coverage: less than one-third of the poor population (living with less than the national poverty line of EUR 1.72 a day) received benefits — 10 percentage points lower than the regional average.
  - Average per capita benefit received by the bottom quintile: around EUR 0.55 per day.

### Identified issues
- Coverage is poor despite relatively good targeting efficiency.
- Eligibility filters rely on inefficient proxies of poverty and exclude many poor families:
  - Age limit for youngest child in Category 2 (ineligibility when youngest child reaches five) is questioned.
  - Requirement of a sole able-bodied unemployed person may create work disincentives and distort labor market behavior.
  - Ownership of productive assets or land > 0.5 hectares disqualifies families regardless of productive capacity; verification is difficult.
- MLSW lacks technical means to measure applicants’ monetary income; assessed income often from remittances, rent, other benefits and pensions, which are hard to track without well-linked databases.
- CSWs exercise substantial discretion and rely heavily on family/neighborhood visits and observable durable goods; discretion may lead to incorrect exclusions, fraud, and favoritism.
- Inconsistencies in treatment of pensioners and pension types in income and household definitions:
  - Household definition for eligibility includes all family members living together and sharing living costs.
  - Household definition for calculating assessed income and benefit level omits basic pensioners and permanently disabled persons, while pensions from other schemes (e.g., war-invalidity pension) are included.
  - Contributory pension: included in household definition; only the difference between contributory and basic pension is regarded as assessed income.
- Institutional fragmentation undermines uniform application of rules:
  - CSWs under municipalities screen applications; MLSW conducts additional checks and can overrule CSW screening.
  - Appointment process inconsistency: CSW director appointed by municipality; head of social assistance unit appointed jointly by municipality and MLSW and cannot be removed without Ministry consent.
- Adjustments of benefits have been nonsystematic despite legal guidance to index MGSR to consumer price index (pre-2012) and to price of food basket (post-2012).

### Recommendations (policy and institutional)
- Revise eligibility criteria for social assistance:
  - Discontinue pre-filtering applicants on the basis of Categories 1 and 2; alternatively increase the age limit of the youngest child for Category 2 to 18 years.
  - Rely on asset and implied asset tests only when it is not possible to obtain accurate information on income.
  - Permit more than one Category 2 able-bodied family member to register as unemployed.
  - Remove all employment restrictions from the list of eligibility criteria.
- Establish a consolidated database of budget-financed cash transfers:
  - Consolidate into a single database government-administered benefits and recipient beneficiaries.
  - Establish an automated data exchange platform between the benefit database and the tax authority.
  - Establish regular data exchange between the benefit database and financial service providers licensed to execute money transfers benefitting natural persons.
- Gradually adjust social assistance benefits to reflect basic living costs and use standard equivalence scale:
  - Increase the MGSR for a single-member family at least to the level of the extreme (food) poverty line.
  - Define the MGSR for families using equivalence scales in line with international practice.
- Incorporate all income into the income test when establishing eligibility and benefit level:
  - Include all types of pension received by family members.
  - Include family members aged 65 years and above, regardless of the type of benefit received, in the family’s assessed income.
- Establish a consistent legal and regulatory framework encompassing all pension schemes:
  - Harmonize definitions and criteria, and resolve conceptual and practical inconsistencies.
- Assess welfare and fiscal consequences of policy choices:
  - Revise laws and procedural rules so adopted legislation materially impacting state financed pension schemes is accompanied by fiscal impact analyses covering at least 25 years, presenting both cash and accrual indicators.
  - Supplement the annual budget bill with long-term projections concerning the financial position of all state financed pension schemes, including an explanation of assumptions, main drivers of change and the factors behind the changes since the previous projection.
  - Consider introducing a rule of mandatory offsetting: require that when parliament votes a change to the law that implies an increase in net fiscal outlays on social welfare programs, it must be accompanied by other measures generating the revenues necessary to offset the net increase in expenditures.

*Source: _cr16123 - 48.      Social assistance is the second largest program in terms of the number of (IMF staff summary).*

### 69.      Indexation of benefits should be automatized.

### _cr16123 - 69.      Indexation of benefits should be automatized.

### Recommendation: Automatize indexation of benefits (paragraphs 69–71)
- Make price indexation of benefits universal and automatic.
- Remove provisions granting cabinet discretion over the extent of benefit indexation.
- Establish clear rules for cases when indexation of benefits can, temporarily, be suspended.
- Subject all pension benefits to personal income tax and to health insurance contribution.
  - Discontinue the categorical tax exemption of pension benefits.
  - Compensate individuals receiving benefits not exceeding EUR 75 for the personal (employee) health insurance contributions.
- Allow people benefiting from social benefits to work.
  - Consider permitting employment while in receipt of social welfare payments (pensions or social assistance).
  - Introduce a claw-back mechanism with a relatively steep tapering factor.

### Other issues and governance concerns (paragraphs 72–75)
- Residency and entitlement weaknesses:
  - Residency requirements rely on local civil registration documents issued to all citizens of Kosovo, irrespective of effective place of residence.
  - Temporary benefit suspension for 6 months combined with retroactive payouts (of 6 months until December 2015, now 3 months) creates a situation where citizens can effectively return to Kosovo only once every 9 months (in the past 12 months) without forfeiting benefits.
  - The role of residency and citizenship in benefit entitlements warrants further study; need clearer distinction between social insurance (contributor-based) and social assistance (residence-based).
- Discretionary government powers raise public governance questions:
  - Key pension parameters (eligibility conditions, rules of indexation, changes in retirement) should not be annually decided in a discretionary way by government.
  - Loose criteria for the government to withhold cost of living adjustments (absence of budgetary options) are endogenous and problematic.
- Lack of ex ante framework:
  - No framework exists to estimate and report medium and long-run costs and benefits of policy choices.
  - Ex ante evaluations can quantify short, medium and long-term budgetary impact and reduce need for discretionary partial implementation of laws.
- Tax treatment issues:
  - All social transfers are income tax exempt, introducing undue differentiation across income sources.
  - Nontaxation of public pensions raises efficiency and equity concerns.
  - Net income from contributory pensions is not too dissimilar from the net income of a minimum wage of 170 EUR gross (before income tax, health and KPST contribution).
  - Equal tax treatment of pensions and work income improves vertical and horizontal equity by using total income as indicator of ability to pay.

### Appendix I — Basic features of age and disability benefits (selected entries)
- Basic pension
  - Eligibility: All
  - Age: 65-
  - Earnings tested: No
  - Public pension tested: Yes
  - Type/Amount (EUR/month): Flat (75)
- Contributory pension
  - Beneficiaries based on law from before 1999*
  - Age: 65-
  - Earnings tested: No
  - Public pension tested: Yes
  - Type/Amount (EUR/month): Education-linked (158-240)**
- Disability pension
  - Eligibility: 100 % disabled
  - Age: <65
  - Earnings tested: Yes (Categorical)
  - Public pension tested: Yes
  - Type/Amount (EUR/month): Flat (75)
- Work disability pension
  - Eligibility: Work accident or professional disease
  - Age: <65
  - Earnings tested: Yes*** (Categorical)
  - Public pension tested: Yes
  - Type/Amount (EUR/month): Flat (75)
- Family pension (Spouse, children or parents)
  - Beneficiaries based on law from before 1999* or family of work disabled
  - Spouse <65
  - Earnings tested: Yes (Categorical)
  - Public pension tested: Yes
  - Type/Amount (EUR/month): Flat (75 +20% per eligible child)
- Trepca early pension
  - Eligibility: Involuntary unemployed > 50% disabled
  - Age: 50-64
  - Earnings tested: Yes (Categorical)
  - Public pension tested: Yes
  - Type/Amount (EUR/month): Flat (105)
- Kosovo Pension Savings Trusts
  - Eligibility: All
  - Age: 65-
  - Earnings tested: No
  - Public pension tested: No
  - Type/Amount: Phased withdrawal (at least 150) or annuity

Notes preserved from source:
- *Effectively this corresponds to a minimum eligible career before 1999 of 15 years.
- **The benefit range for education is not yet determined—the numbers indicate the targeted range as indicated by the authorities.
- ***For newly recognized cases after 1999—unspecified for others.

### Appendix II — Analysis of three social assistance reform scenarios (methodology and key considerations)
- Data source and sample:
  - Based on Household Budget Survey (HBS) 2014 and MLSW administrative statistics.
  - HBS interviews about 200 households per month, resulting in about 2,400 households (0.7 percent of the total households in Kosovo) for the entire annual data.
  - Stratified two-stage sampling design with Census 2011 as first-stage frame; sample stratified by region and urban-rural.
- General HBS limitations:
  - HBS does not identify actual beneficiaries; it identifies households likely passing eligibility criteria prior to asset and income tests.
  - Weight variable is taken into account throughout analyses.
- Scenario 1: Raise Category 2's age limit of the youngest child and/or Category 2's number of unemployed family members.
  - Method:
    - Identify potential Category 2 families using HBS household/individual characteristics.
    - Estimate additional families that would pass Category 2 eligibility if criteria change.
    - Apply percentage change from HBS to actual number of Category 2 families from administrative statistics.
    - Assume additional families have, on average, income and assets similar to current beneficiaries.
    - Additional cost = estimated number of additional eligible families × average social assistance benefits currently paid to Category 2 households.
  - Benefit calculation also uses family size and an additional child allowance of EUR 5 per child where applicable.
  - Observations:
    - Average family size marginally larger for Category 2 families with more than one unemployed person.
    - Average family size remains rather unchanged for youngest child aged between six and eight years, and declines slightly for youngest child aged 18 years.
    - Implication: lifting age limit may slightly overestimate costs (when changed significantly); allowing more unemployed members could underestimate costs.
- Scenario 2: Include pension and pensioners into a family’s assessed income and family size respectively.
  - Method:
    - Add family members aged 65 and above to family size used to calculate family-specific MGSR.
    - Exclude eligible families from social assistance if their pension income exceeds the MGSR.
    - Apply percentage changes from HBS to actual number of Category 1 and Category 2 families.
    - Additional savings = estimated number of deductible families × their respective average social assistance benefits.
  - Observations:
    - Among families identified as potentially Category 1 or 2, numbers of eligible family members and children are smaller for those that would be excluded if old-aged members were included (Table AII/3).
    - Deductible families likely receive smaller-than-average social assistance benefits; therefore estimated savings may be overestimated and reflect upper-bound savings.
  - Example HBS-derived family statistics (as presented):
    - Family size (Excl. pensioners / Current): 2.2 2.7 3.5 4.1
    - Children (Excl. pensioners / Current): 2.1 2.5 2.3 2.9
- Scenario 3: Make the social assistance scheme completely income-tested and adjust benefit level to an adult equivalence scale.
  - Method:
    - Define eligible family: any family with formal income (including pension) below the current MGSR.
    - Total social assistance spending = sum of (MGSR − formal income) for all households below MGSR.
    - Use alternative MGSR structures: current MGSR structure; application of an equivalence scale to current single-person MGSR; application of an equivalence scale to level of 2011 extreme (food) poverty line.
    - Equivalence scales analyzed: adjusted adult equivalence scale; Eurostat (OECD-modified) scale; square-root scale.
    - Different scales yield largely different impacts on total spending.
- Sources of estimation uncertainty:
  - Representativeness of HBS sample and accuracy of self-reported income.
  - Under-representation of the poor could underestimate reform costs (or overestimate savings), and vice versa.
  - Discrepancies between HBS self-reported income and MLSW/CSW observed family income.
  - Fiscal impact estimates do not account for behavioral responses, particularly labor market participation.

### Appendix III — Comments on the draft MLSW pension concept note
- The draft concept paper is an important stock-taking and identification of problems and policy options; it focuses on pension policy (social assistance outside scope).
- It identifies three policy alternatives and prefers selective regulatory change plus implementation measures (preferred option) over status quo and full legal recast.
- Critique of sidelining fundamental legal/regulatory reform:
  - Linking legal reform to creation of a new Agency for the Management of Pensions with extensive branch network is costly and counter to tendencies to centralize and automate services.
  - Current legal/regulatory framework generates conceptual inconsistencies, legal incompatibilities, and regulatory vacuum; a new comprehensive public pension law might be easier than incremental fixes.
  - Example inconsistency: depending on choice of veteran versus contributory benefits, family member eligibility differs greatly and is hard to justify.
- Preferred reform pathway emphasized in the draft:
  - Tightening residence requirements to convert program into a social pension accessible only to people effectively living in the country (vs. current civil residence criterion).
  - Means-testing of basic pension benefits by subjecting beneficiaries to income-testing, including all public or private pension incomes (including KPST second pillar benefits) and other taxable income (employment and self-employment).
- Notes on income testing:
  - Tighter targeting on effective residence is standard.
  - Public pension-testing (rather than general income or means-testing) may be preferable: it would not discourage employment/self-employment of people aged 65+, and would preserve incentives to formalize and save for retirement for lower income workers.
- The draft’s quoted fiscal saving figure of EUR 8–10 million is noted as not implausible given contextual information.

### Appendix IV — Comments on the draft law on police officers’ pension scheme (beginning)
- The draft police pension law fragments the pension system by creating a special scheme for Kosovo police officers and police-inspectorate staff with police powers, further segmenting the population into preferential regimes and the general scheme.
- Consequences:
  - Discrimination in benefit eligibility and levels may prompt other special interest groups to seek their own special regimes.
  - The proposed system is a defined benefit noncontributory pension scheme providing old-age, disability and family benefits (spouses, children, parents and factual co-habitants) and early retirement benefits.
  - Neither participants nor the police entity face the economic/financial consequences of decisions; fiscal burden falls on current and future taxpayers, implying perverse redistribution between scheme members and people outside the scheme.
- Career and benefit design concerns:
  - Career requirements are loose.
  - Regular retirement benefits are based on an excessively generous formula.
  - A full career consists of 30 pensionable years of service, with effective years of service translating at a factor of 4/3 (a full career is thus achieved after ...).

*Source: _cr16123 - 69.      Indexation of benefits should be automatized.*

### 22.5 years of work. The normal retirement age is set at 55, with a possibility for

### _cr16123 - 22.5 years of work. The normal retirement age is set at 55, with a possibility for

### Pension design and replacement rates
- Normal retirement age: 55, with a possibility for higher-ranking officers to retire up to 3 years later.
- Pension calculation basis: final salary basis using the last month of gross earnings (not full career averages).
- Regular retirement benefits:
  - Base: 50 percent of the gross wage.
  - Accrual: increase of 2 percentage points per year of service.
  - Maximum: 70 percent.
  - Note: "The maximum de facto always prevails given career requirements."

### Early retirement rules and actuarial concerns
- Early retirement eligibility:
  - Age: as early as 50.
  - Reduced career requirement: 15 years of pensionable service (11.25 effective years).
- Early retirement benefit formula:
  - Formal level: 40 percent of the gross wage.
  - Accrual: increased by 1 percentage point per year of experience.
  - Maximum before age 55: 55 percent; no maximum applies thereafter.
- Example from source:
  - "Someone retiring after 22.5 years of work at 50 rather than 55 will get 5 years of benefits (at 55 percent), with no implication on post-age 55 pensions (at 70 percent)."
- Assessment: Early retirement benefits are described as "particularly unsound from an actuarial point of view."

### Disability, family, and survivor benefits (proposed)
- Disability benefits (proposed):
  - Two pensions would be available in case of disability:
    - A (work) disability pension of between 20 and 100 percent of the last wage.
    - An extra specific pension of 20 percent of wages paid by the police force (resembles current regime administered by the Kosovo police force).
- Survivor benefits (proposed):
  - Available irrespective of the age of the surviving spouse/parent.
  - Amount: 70 percent of the police officer’s pension.
  - Supplement: 10 percentage points for each dependent child.
  - Overall maximum: 100 percent.
- Policy implication: Proposed disability and family benefits "further expand the currently prevailing preferential treatment of the police."

### Fiscal costs, uptake, and long-term risks
- Short-run fiscal costs:
  - "Budgetary costs are substantial in the short run."
  - Family benefits are incompatible with other pensions financed by the state; old-age and disability pensions are compatible, leading to a presumption of large uptake among the relatively young population of pensioners.
  - All envisaged benefits would be extended to all current police force pensioners—leading to an increase in fiscal costs.
- Long-term fiscal risks:
  - Scheme proposes pay-scale indexing, "de facto linking pensions in payment to wage increases of active officers/employees in the same rank as the retiree."
  - Concern: "As wages generally grow faster than prices, such indexation mechanisms generally have large medium to long term implications—rendering the generous initial replacement rates even more problematic."

### Appendix V — Fiscal impact estimates and limitations (selected measures and assumptions)
- Link receipt of noncontributory pensions to continuous residency.
  - Estimated full-year fiscal impact: 0.1–0.5 percent of GDP
  - Key assumptions and uncertainties:
    - Assumes entire difference between demographically relevant population and beneficiaries is explained by nonresident pensioners.
    - Population statistics based on 2011 census data which was relatively unreliable due to lack of comprehensive geographic locators.
    - Unavailability of information on share, distribution by age, benefit or gender of recipients residing abroad.
- Limit benefit withdrawals to one noncontributory pension.
  - Estimated full-year fiscal impact: negligible
  - Assumptions and uncertainties:
    - "One person—one benefit" rule mostly in place; proposed measure aims at limiting KSF, war invalidity and civil war invalidity pensions to be drawn in parallel with other pension benefits.
    - No information available about multiple benefit claims.
- Make KSF and other general revenue financed earnings-related pensions contributory.
  - Estimated full-year fiscal impact: 0.1–0.3 percent of GDP
  - Assumptions and uncertainties:
    - Employee and employer contributions assumed equally shared.
    - Higher end refers to period when system matures.
    - Employee contributions assumed to remain uncompensated.
    - Revenues assumed based on current benefit expenditures.
    - No information on age distribution of active KSF members, expected growth of the force, rank structure, or wage scale.
- Introduce partial disability benefit, starting at 70 percent and apply the new rules to all existing beneficiaries whose eligibility is fully or partially based on medical condition.
  - Estimated full-year fiscal impact: not available
  - Assumptions and uncertainties:
    - Data on beneficiary distribution by level of disability and age is unavailable.
    - Differences in original invalidity assessment are unobservable.
    - No codified disability assessment schedule.
    - No surveys available concerning health status of people with disability levels between 70 and 100 percent who currently receive no disability pension.
- Make benefits income-tax liable.
  - Estimated full-year fiscal impact: 0.1 percent of GDP
  - Assumptions and uncertainties:
    - Assumed pensioners have no other income and all beneficiaries receive the average benefit of the relevant scheme and type of pension.
    - No information on distribution of beneficiaries’ total income.
- Make benefits health-insurance liable.
  - Estimated full-year fiscal impact: 0.1 percent of GDP
  - Assumptions and uncertainties:
    - Assumed pensioners have no other income and all beneficiaries receive the average benefit of the relevant scheme and type of pension.
    - No information on distribution of beneficiaries’ total income.
    - Assumed government would fully compensate all individuals benefiting from the lowest benefits of 75 EUR (basic age pensioners, disabled, etc.) so as to leave their net income unaffected.
    - Only personal contributions of 3.5 percent taken into account; "employer" contribution considered fiscally neutral.
- Harmonize family benefits across schemes and limit benefits at the level of the basic pension.
  - Estimated full-year fiscal impact: 0.2–0.4 percent of GDP
  - Assumptions and uncertainties:
    - Assumed family pensions to working age recipients would be paid for a period of two years, at the level of the basic pension.
    - New general family pension and survivors of war veterans not considered as detailed regulations or statistics on these groups are not yet available.
    - Structure of survivors’ families is unknown.
    - Distribution of current family benefits by recipients’ age, total benefit and gender is unavailable.
- Reduce the cost of war veterans’ pensions, through limiting total benefit receipt.
  - Estimated full-year fiscal impact: 0.2 percent of GDP
  - Assumptions and uncertainties:
    - Total number of beneficiaries assumed to stay at 18,000, implying the 12,000 people issued with a certificate of KLA-affiliation will not become eligible later.
    - Estimate is a lower bound, assuming monthly benefit withdrawals limited at EUR 120 and none of the recipients will postpone drawing benefits.
- Raise Category 2's age limit of the youngest child and/or Category 2's number of unemployed family members.
  - Estimated full-year fiscal impact: additional expenditures of 0.04 percent of GDP
  - Assumptions and uncertainties:
    - All family members who appear unemployed in the HBS assumed to register and look for work through the employment office.
    - Additional eligible families assumed not to be systematically different from those currently receiving social assistance benefits.
    - No labor market behavioral response taken into account.
- Include all old-aged members and their pension in the income test.
  - Estimated full-year fiscal impact: 0.1 percent of GDP
  - Assumptions and uncertainties:
    - No information available about (average) amount of social assistance benefits received by families with pensioners.
    - Families with and without pensioners assumed not to be systematically different.
    - Estimate should reflect upper bound savings—as families with pensioners tend to be smaller than those without pensioners, and thus receive less social assistance benefits than the average household.
- Make the social assistance scheme become completely income-tested, and adjust the benefit level of social assistance to a standard equivalence scale.
  - Estimated full-year fiscal impact: additional expenditures of 0.5–1.3 percent of GDP
  - Assumptions and uncertainties:
    - Under-representation of poor families in the HBS could underestimate fiscal cost.
    - Self-reported income information from the HBS is probably biased and unequal to family income information observed by the MLSW and CSWs.
    - No labor market behavioral response taken into account.

*Source: _cr16123 (extracted content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16123.pdf_