Chapter 5
In: Social Security in the Balkans – Volume 2
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Abstract
The pension system in Montenegro, although multi-pillar by law, is largely based on a mandatory public pay-as-you-go system that is operated by Montenegro’s public pension fund and is subsidized by the Government. Since the two reforms in 2003 and 2010, the financial sustainability of the pension fund has been improved, but it still has not achieved its full capacity. Despite growing employment and efforts to reduce the informal economy, the ratio of workers to retirees has only moderately decreased since 2006 due to the aging population. This chapter aims to present recent developments in the Montenegrin pension system and to analyze the sustainability of the system in the future, bearing in mind the continued aging of the population, the mounting public debt and the high fiscal burdens that discourage investment. The framework of the study is based on two key characteristics of the Montenegrin pension system: the unsatisfactory ratio of workers to retirees and the insufficient pension funds and disability insurance. The study employs quantitative methods, and population projections were created by applying the cohort component method. The pension fund’s forecasted expenditures and revenues were estimated by applying the arithmetic approach. Two forecasting scenarios, the aging population and wage growth are presented. The results show that the financial sustainability of the pension system in its current form may be improved by 2056, but it cannot be achieved in full. Although two comprehensive reform packages were implemented to increase the retirement age, introduce a points system in pension calculation, and change the pension adjustment formula, further reforms are recommended. To provide a pension system that is more sustainable from both a fiscal and a social perspective, further reforms may be directed at prolonging labour market participation by strengthening the early retirement policy and revising the early retirement scheme.