The pension systems of Bosnia and Herzegovina are facing a growing crisis that is becoming increasingly visible. Driven by unfavorable demographic trends, constant emigration and a decrease in the number of those who pay contributions, the foundations of the pension systems in the Federation of Bosnia and Herzegovina and the Republic of Srpska are under constant fiscal pressure. What was once a question of long-term sustainability has become a short-term budgetary concern that is increasingly forcing authorities to finally grapple with finding systemic rather than temporary solutions.
The challenge is not unique to Bosnia and Herzegovina, but its institutional complexity, fragmented labor market and high inactivity rate increase the risks. As the number of retirees continues to grow and the labor force shrinks, the systems increasingly rely on transfers from general government revenues, blurring the line between Social Security and tax-funded welfare.
The roots of the imbalance of pension systems lie in changes in the population. Bosnia and Herzegovina faces a combination of low fertility rates, an aging population and continuous outward migration, especially among younger and working-age people. This demographic contraction directly weakens the contribution base on which the pension system depends.
By mid-2025, the total labor force was approximately 1.44 million people, of which about 1.28 million were employed. Although official unemployment has fallen to just above 11 percent, this improvement masks deeper structural problems. Less than half of the working-age population participates in the labor market, while almost 1.43 million people are classified as inactive. This group includes students, early retirees, workers who are not actively looking for work, and individuals outside of formal employment for a long period of time.
Long-term unemployment remains particularly problematic. More than half of the unemployed have been looking for work for two years or longer, which reduces the likelihood of them re-entering formal employment and making regular contributions to the pension system. Gender differences also exist, with men making up roughly 60 percent of the workforce, further narrowing the contributor base.
Informal work and erosion of contributions
In addition to demographics, informal work (“unofficial” work) plays a major role in the weakening of pension finances. An estimated 25 percent of workers operate outside the formal tax and contribution system, creating a permanent gap between economic activity and social security income. These workers often rely on various forms of social benefits later in life despite having contributed little or nothing to the pension system during their working lives, thus creating an additional burden on those who contribute to filling the state budget.
High social security contribution rates on formal wages further complicate the picture. These costs only reinforce the case for remaining informal or inactive, reinforcing a cycle in which fewer and fewer ratepayers are asked to finance a growing population of retirees.
The financial consequences of these trends are already embedded in the public accounts. Because pension funds are integrated into treasury systems, these transfers compete directly with other spending priorities, including infrastructure, health and education. This arrangement reduces fiscal flexibility and increases vulnerability during economic downturns, when incomes decline but pension obligations remain fixed.
The institutional structure of Bosnia and Herzegovina complicates these challenges. Two separate pension systems operate in the Federation of Bosnia and Herzegovina and the Republika Srpska, with additional administrative complexity arising from the Brčko District. The absence of a single economic and social space hinders the mobility of the labor force, the collection of contributions and long-term planning.
Fragmentation also makes coordinated reform difficult. Measures that might be fiscally neutral or beneficial in one entity may have an effect in another, while political disagreements often slow down decision-making. As a result, structural imbalances persist even as their long-term cost becomes increasingly apparent.
International reference models
In the search for potential solutions, the authorities are presented with several international pension frameworks that illustrate different approaches to balancing adequacy, sustainability and risk.
The United States system is often described as a diversified structure that combines a public pillar of current financing with components filled by employers and employees through individual savings. The strength of this system lies in the distribution of retirement income across multiple sources, reducing reliance on any single pillar. However, this diversification shifts some of the risk to individuals and exposes retirement outcomes to market swings, making income security more variable.
Northern European systems, especially in the Netherlands and Denmark, rely more heavily on collective capitalization. These models have accumulated pension assets that exceed national GDP and emphasize intergenerational risk sharing. By balancing gains and losses over time, they reduce volatility for retirees. At the same time, they require strong governance, sophisticated financial operations and long-term institutional trust, which takes time to develop.
The pension reform in Croatia offers a closer regional comparison. The introduction of the mandatory capitalized second pillar in the early 2000s diversified the financing of pensions by redirecting part of the salary contributions to individual accounts. This approach reduced long-term dependence on the public system, but created significant short-term transition costs, as the first pillar lost income while still paying existing pensions.
Another limitation appeared in asset allocation. A large proportion of private pension funds’ assets were invested in domestic government bonds, thus re-linking capitalized pensions to public finances, which limited real diversification. The Croatian experience highlights both the potential benefits and fiscal risks associated with transitions to multi-pillar systems.
Another possibility is both a hybrid model and a risk-sharing model that moves away from the state bearing full responsibility for pension outcomes. These arrangements may combine a reduced public pension with mandatory or voluntary savings components, or redistribute future costs between employers and employees.
The main advantage of such models is risk diversification. By spreading responsibilities to multiple actors, they can reduce pressure on public budgets and align incentives between contributors and beneficiaries. Their weakness, on the other hand, lies in complexity and political sensitivity, particularly where reforms affect future benefit levels or contribution burdens.
Broadening the non-work income base
Considering the high rate of inactivity, one of the options is to separate the financing of pensions from direct employment. This would include earmarking a portion of consumption taxes, such as value added tax, to fund first-pillar pensions. This could reduce reliance on wage contributions and potentially lower the costs of formal employment.
The strength of this approach lies in the broader tax base, which includes income from the inactive population and informal consumption. Its main drawback is exposure to economic cycles and political resistance to targeting taxes for specific purposes.
Another set of options focuses on partial upfront financing through government reserve or investment funds. By saving and investing resources today, governments can mitigate the fiscal impact of future demographic peaks.
Although such funds can increase intergenerational equity and reduce future budget shocks, they require disciplined management and long-term political commitment.
Increasing labor force participation, particularly among the long-term unemployed and inactive groups, would directly expand the contributory base. Improving the discipline of paying contributions at state-owned enterprises, which account for a large share of tax liabilities, could also bring immediate gains in income for pension funds.
These measures are usually less visible than structural changes, but can bring incremental improvements without redesigning the entire system.
As part of the broader discussion on adapting the pension system to demographic and fiscal realities, specific legislative initiatives have already been launched in the Federation of Bosnia and Herzegovina. The Draft Law on Amendments to the Law on Pension and Disability Insurance was submitted to the procedure of the FBiH Government, with the aim of strengthening the stability and internal fairness of the system, with the express retention of all pensioners’ already acquired rights. The central novelty is a new pension adjustment model related to economic indicators, which would enable regular semi-annual adjustment and greater income predictability. At the same time, a differentiated lowest pension is introduced according to the length of service, which more strongly emphasizes the connection between work, paid contributions and realized rights. The key goals of these changes are to increase the fairness of the system, strengthen user confidence and preserve long-term fiscal sustainability.
In the Republika Srpska, the reform discourse has a more pronounced strategic and long-term feature, with a focus on the transformation of the existing single-pillar pension system into a multi-pillar model. Such an approach is based on the need to align the mandatory pension system with long-term demographic trends and the limitations of public finances. The introduction of voluntary pension insurance is seen as an instrument to diversify income in old age and reduce dependence exclusively on the public pillar. The reform was conceived as a part of a wider transition process, connected with the development of the market economy and the strengthening of individual responsibility for security in old age.
Its main goals are long-term financial sustainability, reducing the risk of poverty among pensioners and preserving social stability.
Each of the mentioned options has its advantages and disadvantages in terms of fiscal sustainability, social adequacy and political feasibility. What is clear from the data is that demographic and labor market trends are constantly narrowing the space for inactivity.
The future of the pension system will depend on how politicians balance these competing goals within the existing institutional framework of the country. The challenge is not in choosing the perfect model, but in managing transition costs and risks in a way that preserves social stability while adapting to demographic reality.
The pension systems of Bosnia and Herzegovina are facing a growing crisis that is becoming increasingly visible. Driven by unfavorable demographic trends, constant emigration and a decrease in the number of those who pay contributions, the foundations of the pension systems in the Federation of Bosnia and Herzegovina and the Republic of Srpska are under constant fiscal pressure. What was once a question of long-term sustainability has become a short-term budgetary concern that is increasingly forcing authorities to finally grapple with finding systemic rather than temporary solutions.
The challenge is not unique to Bosnia and Herzegovina, but its institutional complexity, fragmented labor market and high inactivity rate increase the risks. As the number of retirees continues to grow and the labor force shrinks, systems increasingly rely on transfers from general government revenues, blurring the line between Social Security and tax-funded welfare, reports Zenith.
