North Macedonia’s Pension System Under Pressure: Reforms Could Save €5.5 Billion by 2035

North Macedonia’s pension system is facing structural fiscal pressures that are already present rather than a matter for the distant future. The structural deficit of the Pension and Disability Insurance Fund—defined as pension expenditure, transition costs related to the second pillar and healthcare contributions, less the Fund’s own contribution revenues—reached MKD 54.4 billion, or 5.2% of GDP, in 2025. This means that around 41% of the Fund’s expenditure is covered by the state budget, compared with approximately 36% in 2023.

The deficit results from three forces that have been at work for more than two decades. First, the contribution rate was reduced from 21.2% to 18% in 2009–2010, although it was increased to 19.9% as of 1 July 2025, while pensions were repeatedly raised outside the statutory indexation formula. Second, demographic trends have become increasingly unfavourable: the fertility rate stands at 1.6, natural population growth has been negative since 2019, and since 2021 the number of people aged over 65 has exceeded the number of children. Third, labour-market weaknesses persist: informal employment has risen again to 13.5%, while women remain significantly less economically active than men.

Since 2023, pension expenditure has been growing considerably faster than contribution revenues—by 19% compared with 8.8% in 2025. This is not a demographic effect, but the result of pension indexation and across-the-board increases.

Without reform, the deficit will rise from 5.2% of GDP in 2025 to 6.3% by 2030, reaching a peak of approximately 6.6% in 2035–2037. The most critical period will be 2038–2048, when transition costs peak and the number of insured persons per pensioner falls below 1.3. In the long run, the deficit appears to decline—to 5.5% in 2050 and 2.7% in 2070—but this does not represent a genuine improvement. Pensions will increasingly lag behind wages, with the ratio of the average pension to the average net wage falling from 59% to 35% by 2050. In absolute terms, the deficit will continue to grow throughout the projection period, while by the mid-2040s there will be fewer insured persons than pensioners.

The study shows that no single measure is sufficient. With reform—namely, a combined package comprising a gradual increase in the contribution rate to 20%, inflation-only indexation, higher female labour-market participation and reduced informality—the deficit would fall to 4.2% of GDP by 2030, instead of rising to 6.3%, and to below 0.5% by 2050. A change in the retirement age as part of this package would have only a small additional effect of less than 0.2 percentage points of GDP. The trade-off is a lower replacement rate, measured as the ratio of pensions to net wages. If the current indexation formula is retained, however, the deficit will remain above 4% of GDP until 2040.

Short-term fiscal savings refer to the reduction in budget transfers to the Pension and Disability Insurance Fund during the first ten years of a potential reform, from 2026 to 2035, compared with the no-reform scenario. Under the combined reform package, these savings would amount to approximately MKD 337–341 billion—around €5.5 billion—or a cumulative total of approximately 30% of GDP. On an annual basis, this represents an average of around MKD 34 billion, or approximately €550 million, equivalent to about 3% of GDP. This is three to four times the savings generated by the most effective individual measure—inflation-only indexation—which would save approximately MKD 179 billion, or around €2.9 billion.

Nevertheless, the study highlights a fundamental dilemma between pension-system sustainability and pension adequacy. Under inflation-only indexation, the replacement rate would fall to approximately 22% by 2050, compared with 35% under the current formula, with both figures below the 40% threshold commonly used as a minimum benchmark. The study therefore recommends introducing a guaranteed minimum pension instead of ad hoc pension increases and replacing discretionary decisions with an indexation formula incorporating an automatic fiscal adjustment mechanism.

“Parametric reforms are necessary, but not sufficient—they buy time. The window for reform is closing around 2035, while the cost of delay does not rise linearly but accumulates over time,” Petreski emphasised.

The study was prepared using the PSSM-MK model and is based on official data from the Pension and Disability Insurance Fund of North Macedonia, the State Statistical Office, the Ministry of Finance and international databases.

Read our newest Macro-monitor 15(2)

📈 Economic activity accelerated, but the acceleration was largely driven by budget spending

🏗️ In the second quarter of 2026, GDP growth accelerated to 4.3%. This was the first quarter with growth above 4% since the post-pandemic quarters of 2021. During this quarter, growth was predominantly driven by construction (21.9%), which, on the expenditure side, was also reflected in the strong growth of gross investment (16.5%). Solid growth rates were also recorded by industry (3.9%) and trade (4.1%), while on the expenditure side, personal consumption grew by 3.3% and exports by 10.4%. This particularly solid growth momentum is associated with at least two critical trends. First, construction was mainly driven by growth in civil engineering (48.9%) and specialised construction works (61.5%), which can be attributed to the implementation of government capital investments at the national and local levels. This activity is crucial for growth but is accompanied by a high budget deficit (7.1% in the first half of the year). Second, the continued growth of personal consumption reflects rising incomes, including wages (nominal growth of 7.3%), household credit (12.1%), and the substantial increase in pensions over the past two years, which has placed pressure on the pension budget (in the first half of 2026, its execution exceeded the proportional level, reaching 55%). Therefore, GDP growth is, to a significant extent, although not entirely, induced by budget spending that prevents sufficient fiscal consolidation.

👷 Unemployment remained unchanged at 11.3% in the second quarter of 2026, accompanied by similar employment and unchanged labour force participation. Thus, the labour market remained in a state of intense lethargy, failing to respond to GDP growth. Informal employment increased further, from an already high 13.3% of total employment to 14.3%, and may represent an important – although not the only – indication that the particularly high level of the grey economy – likely especially in construction – is not declining.

💶 In the second quarter of 2026, inflation increased to 4.6% year-on-year (from 3.7%), although this was mainly due to low-base effects stemming from a previous period during which measures limiting margins and prices were in force. Nevertheless, the persistence of conflicts on European soil and in the Middle East, together with domestic pressures on the budget deficit, calls for particular vigilance regarding price dynamics on the part of monetary and fiscal policy.

📊 Economic growth is expected to continue throughout 2026, driven mainly by domestic factors. Finance Think’s projection for GDP growth in 2026 is 3.5%, while inflation is projected at 4.1%.

Participation in the WB Reform and Growth Monitor Workshop in Tirana

📍 From 1 to 3 July, we participated in the regional workshop for grant recipients under the WB Reform and Growth Monitor project, held in Tirana, Albania. The workshop brought together organisations from across the Western Balkans that will monitor reforms related to the Growth Plan and the European Union accession process.

This also marked the official launch of our new project, “Economic Reform Meter: Monitoring Economic Reforms for Convergence with the EU.”

Under the project, we will monitor the implementation of key economic reforms in North Macedonia, with a particular focus on commitments under the Reform Agenda.

The project is implemented within the regional WB Reform and Growth Monitor initiative, led by the TEN – Think for Europe Network and Transparency International Bosnia and Herzegovina, with support from the European Union (European Commission).

Institute for European Policy (EPI) / European Policy Institute – EPI

📍 Finance Think at the World Bank Fiscal Councils Peers Learning Event in Vienna

Finance Think is participating in the Fiscal Councils Peers Learning Event, organized by the World Bank and the European Union, bringing together fiscal councils to exchange experiences and good practices in independent fiscal oversight, 6-7 July 2026, in Vienna, Austria.
We are especially proud that the partnership between Finance Think and the Fiscal Council was highlighted during the event as a strategic collaboration that strengthens analytical capacity and supports evidence-based policymaking.
This recognition reaffirms the value of long-term cooperation between independent research institutions and public institutions in promoting stronger fiscal governance and better public policies.

Successful completion of the round table on green transtion and CBAM

At the roundtable “Enhancing Competitiveness: The Energy Transition, CBAM and the Future of Macedonian Industry,” Finance Think presented the study “Readiness for CBAM and the Green Industrial Transition in North Macedonia.”

🔗 https://shorturl.at/CWIXg

📊 The study shows that North Macedonia is at a critical juncture of energy and industrial transformation. In 2025, exports covered by CBAM reached around EUR 468 million, accounting for 7.7% of exports to the EU and 2.8% of GDP.

🤝 Representatives of public institutions, local government and the energy sector discussed how the energy transition can become a driver of competitiveness, investment and local development.

📌 The key message is clear: the energy transition is no longer only an environmental issue — it is a matter of economic competitiveness and the future development of Macedonian industry.

The full study is available at:
🔗 https://shorturl.at/CWIXg

#CBAM #EnergyTransition #GreenIndustry #Decarbonisation #NorthMacedonia #FinanceThink #GreenTransition #Competitiveness

Nearly half of government promises show progress, but sectoral gaps remain large

KOMPAS: Monitoring of Government Promises (2024-2028) : findings from the first two years

Skopje, 1 7 June 202 6

Finance Think, in partnership with the Macedonian Center for Civic Education, the Macedonian Medical Association – Association for Intersectoral Cooperation and the Youth Educational Forum, presents the upgraded KOMPAS monitoring framework for systematic monitoring of the implementation of government promises for the period 2024–2028 . This framework builds on the previous version that mapped economic progress in the period 2020–2024.

The “COMPASS” platform ( https://kompas.financethink.mk ) monitors the implementation of a total of 142 promises , divided into five priority areas : economy and social issues, education, health, youth and gender equality .

Overall progress: Almost half of government pledges show progress, but disparities between sectors remain large

After two years, KOMPAS registers a mixed, yet positive picture at the overall level. Almost half of the pledges (48%) show some progress – 25 have been fully implemented (18%, an improvement of 5 pp compared to the previous year), and 43 are on track to be fulfilled (30%). However, 55 pledges (39%) still show no progress, 9 (6%) are moving in the opposite direction, and for 10 (7%) there is still not enough public data to assess. (Chart 1)

Behind this average picture lie deep disparities between areas. Education is the undisputed leader – 32% fully met and 58% on track – with strong momentum supported by stable budgeting and a functional legal framework. At the opposite end, gender equality registers zero. fulfillment second consecutive year – not a single fulfilled promise, not a single one on the way to fulfillment. The socio-economic domain shows a divided picture: macroeconomic indicators are moving in a satisfactory direction, but socio-economic policies are systematically lagging behind. Health and youth policies are in the middle, with moderate progress accompanied by significant unfulfilled commitments.

Graph 1: Compliance by area

Socio-economic policies: Partial progress, but with potential risks

Of the 44 measurable promises, 36% have a positive trajectory – 11% fully fulfilled and 25% on track to be fulfilled, compared to 64% that are either stagnant or moving in the wrong direction. Behind this average picture lie two sub-areas with opposing dynamics.

Macroeconomic indicators overall provide a satisfactory picture – 8 out of 11 indicators are in a positive direction, GDP growth is stable, exports are recovering, unemployment is declining and the banking system is liquid. However, there are important exceptions here too. Inflation remains persistently high (4.1% in 2025 against the promised 2.5%), and the decline in foreign direct investment is a warning that without an updated strategy for attracting, competitiveness is slowly declining. There is mild consolidation in public finances, and public debt in 2025 is moving below the promised limit. However, the budget deficit remains above the promised values, and the crisis in the Middle East in 2026 has further increased fiscal risks. The increase in pensions is a fulfilled promise, but with fiscal implications that reinforce the need for a more substantial pension reform. The labor market and business environment are showing progress, but at a slow pace. The promise of 55,000 new jobs is at ~40% realization (22,064 newly created jobs), but the pace slowed in 2025 – ~9,000 against the required ~13,750 annually. At the same time, the shadow economy has grown, and despite the introduction of e-invoices, a systematic approach to formalization is lacking.

Socio-economic policies , however, drag the overall result down. Benefits for IT companies, freelancers and the innovative sector remain only on paper, and the promise of a special tax for multinationals has been quietly abandoned in favor of a global minimum tax – without public recognition. Even more worrying are the promises that directly affect living standards: social benefits for the most vulnerable categories are systematically lagging behind, capital investments have followed the same pattern for years – high projections, cuts, underperformance – and the agriculture budget has been declining for the third year in a row.

An additional challenge is compliance with the real needs of citizens. According to Finance’s “Quality of Life” survey, nursing homes are the most inaccessible public service according to citizens – with a deterioration compared to the previous year – and the promise to build them has no public indicators for implementation. Promises for capital investments and expansion of care capacities enjoy the highest support – over 70% – but are also among those with the lowest implementation. In contrast, the two fulfilled promises – the increase in pensions and the growth of salaries in public administration – have low or divided support among citizens. This points to the need for the Government to reassess its priorities: to revise the promises that citizens do not recognize as relevant, and to accelerate those that enjoy the highest public support.

Education: strong momentum, but higher education reform awaits

Education is the area with the strongest implementation – 12 fulfilled promises (32%) and 22 on track (58%) – and that is no coincidence. The three key conditions for success are present: a functional legal framework, clear and measurable indicators, and budget continuity across multiple annual cycles. The results are concrete and visible.

Dual education is perhaps the most successful story: the number of companies involved in practical training has grown from 560 in 2024 to 875 in 2026 , with the support of 7 regional centers. The inclusion of students with disabilities and vulnerable groups is receiving real budgetary support – funds have almost doubled (from 520 to 927 million denars), and the number of educational assistants has increased from 1,015 to 1,478. Infrastructure investments in schools and sports halls are recording a stable trend, and the reconstruction of student dormitories is receiving a serious budgetary impulse (489 million denars planned for 2026, compared to only 31 million in 2024).

But the deep reform of higher education remains blocked . New laws on higher education have not yet been adopted, and without them, neither mandatory internships, nor double degrees, nor international competitiveness can be realized. The science budget is growing nominally, but total research and development spending remains at only 0.36–0.40% of GDP – far behind the planned 1%. At the same time, despite all the positive developments, the education budget has not yet reached the promised threshold of 5% of GDP, but remains at 3.8%.

Health : Limited progress with a few significant displacements

Of the 31 monitored measures in healthcare, four have been fully implemented, two partially, and two are in the initial phase of implementation – for most of the rest, there is currently insufficient evidence of significant progress. The most visible results have been achieved in personnel policy and access to certain healthcare services : the employment of healthcare workers who had been engaged for years under a contract for work has begun, the capitation point for family doctors has been increased, and economic directors in public healthcare institutions have been abolished. Up to six free attempts at in-vitro fertilization have been made possible at the expense of the Health Insurance Fund. In the area of investments, activities have been launched for the reconstruction of several healthcare institutions and the procurement of medical equipment, a tender for 100 new emergency medical vehicles has been announced, and the positive list of medicines with facilitated reimbursement processes has been expanded.

However , the reforms with deeper systemic effects everything take place slower from expected . No everything they notice more significant improvements in digitalization on healthcare , reduction on the administrative ones procedures , management with the hospital system , the reduction on the lists on waiting or the improvement on availability to specialist health services . Hence , it can yes everything conclude that the past year was marked with solving on part from the long-standing personnel and organizational problems with​ realization on a few specific measures with direct effect on citizens . However , the key structural reforms which need yes provide A more efficient , accessible and high-quality healthcare system still remains a challenge.

Youth: institutional progress, insufficient implementation of specific measures

31 promises were monitored , of which 4 were fulfilled , 5 are on track to be fulfilled , and 22 were not fulfilled . In the second year of the mandate, youth policies delivered two concrete and visible promises that were in the unfulfilled category after the first year. The 250 euro vouchers for electronic devices for students were paid in 2025, and the “Buy a House for Youth” project was operationalized – subsidizing a monthly installment for young couples moving to the countryside. These two fulfilled promises have significant symbolic weight and high popularity among young people.

However, behind these successes, structural challenges remain unresolved. The youth employment rate (15–29 years) fell to 34.6% in Q1-2026 after reaching 36.1% in 2025 – the promise of 70,000 new jobs for youth is in the opposite direction of fulfillment. Even more worrying is that not a single digital skills training was implemented in 2025, after 735 trained in 2024.

The number of local youth centers – a key infrastructure for the implementation of youth policies – has stagnated at 14, against the target of 42 envisaged by the National Youth Strategy 2023–2027. New centers are opening, but they are closing just as often. The five unfulfilled promises – including reduced working hours for students, the M-application for youth standards and free internet in educational institutions – directly affect the daily lives of young people and have not seen even minimal visible progress after two years.

The total action is supported from The government on Switzerland through Civic Mobility . Civic mobilitas is a project on The government on Switzerland , which it implemented by MCIC, NIRAS and FCG. The opinions which everything expressed here no necessary them reflect the attitudes on The Swiss Government , Civics mobility or the organizations what me implement .