Higher pensions in Georgia – what changes will pension reforms bring?
13 October, 2014
Higher pensions in Georgia – what changes will pension reforms bring?
The Ministry of Economy is working hard on a pension reform, which entails a switch to a contribution-based system. Work on this issue has started only recently, and World Bank is actively involved in it. As it was explained by the Ministry, World Bank’s role is the one of a consultant and its activities mainly include sharing experience in this field that was accumulated abroad.

“World Bank’s special workgroup is conducting an estimation of possible short-term, mid-term and long-term risks of pension reform in Georgia and provides recommendations accordingly, although it is not mandatory to take them into account” – the Ministry’s representative explained.
Idea of a contribution-based pension system lies in the person accumulating finances by contributing a portion of his income to the pension fund. After the person retires, he receives the accumulated money back as pension, but with interest. Thus, unlike the budget-dependent “pay as you go” system that Georgia currently uses, the contribution-based system will have the community itself as its source of funding. In the “pay as you go” system, provision for retirees largely falls on taxpayers’ shoulders, and such a system becomes very problematic when the amount of retirees grows quickly.

Official statistics tell us that based on retirement age, the amount of pension recipients comprised 549 902 people in 2005. In 2013, however, this amount has increased by 25%, comprising 686 675. And despite the fact that 14-15% of the country’s budget has been spent on pensions in recent years, the pension itself comprises a rather miniscule amount – 150 GEL per month, and increasing it is not planned for the budget neither for the nearest future, nor for 2015.

It is noteworthy that today there are two private pension funds working in Georgia: “GPI Holding” (functioning since 2001) and “Aldagi BCI” (functioning since 2005). According to statistics of 2012, 17 935 participated in their retirement benefit programs, although it was completely voluntary and the government did not take any stimulating or obligating action towards these funds that would be aimed at gaining profit.

It is not yet known how exactly the pension reform will be executed, although by estimates and basic predictions for years 2015-2018, contribution to pension funds will most likely become mandatory.

According to the Ministry of Economy, minimal social pension will remain unchanged after the reform and everyone will still be eligible for it, but those who contributed to the fund will receive additional
pension from it in accordance with their contributions. Also, contributions to the fund will not be subject to tax. Government role in functioning of this system is mainly expressed through creating legislation and institutional mechanisms governing private accumulation of funds, as well as using these accumulations to stimulate the communities by adding a certain sum of money to every contribution made.
International experience with similar models is quite interesting. There are usually two models according to which such systems work.

The first model entails termination of minimal age-based guaranteed pension and delegation of this function in its entirety, to private pension funds that are under strict control of the state. Workers are obligated to contribute a certain portion of their income to these funds. This model was first tried in Chile in 1980 after local pension reform, and later it was tried in other Latin-American countries. It is noteworthy that this system ended up creating a significant boon in development of capital market in these countries and pension funds remain one of the leading financial institutions in these countries to this day.

The second model is founded in splitting the pension into three parts. The first part is minimal pension guaranteed by the government that is given out regardless of work experience and contributions to the pension fund. The second part entails the worker being obligated to contribute a part of his income to pension funds, which is supplemented by sums provided by both the government and the given worker’s employer. The third part is voluntary and allows the worker to contribute additional sums of money to the fund. This model is used by most European countries as well as the US; in fact, it is a contribution-based system built on top of a “pay as you go” system.

Ioseb Archvadze,
an economic expert, claims that pension reform should have happened in Georgia long ago and that it is an inevitable necessity.

“This reform should’ve occurred long ago; now it is long overdue and every day that passes without this reform getting implemented is a sign of nothing but trouble, because the system that will be established by this reform will reach its textbook condition only in 30 years.

The government simply cannot decline performing one of its main functions – ensure a minimal quality of life for all its citizens, although it currently cannot use its budget for increasing the quality of life for retirees – this is a sad truth that needs to be acknowledged. Accordingly, delaying this reform even further will negatively influence the quality of life for retirees in the future,” says Archvadze.

As of now, it is not known when exactly the pension reform will take effect, but according to the Ministry of Economy, its preparation is quite time-consuming. Development and implementation of the required system is necessary, as well as creation of a certain legislative framework to support it. All this is bound to take approximately two years.

Author: Lasha Kelikhashvili

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