Compulsory Pension – Guarantee of Dignified Old Age in Georgia?
By Khatia Kardava
Friday, February 23
Georgia begins to accelerate the new pension system. Working on the reforming started several years ago, but nowadays it is already reflected in the country's socio-economic development strategic document - "Georgia 2020". Pension system reform is an integral part of the ongoing economic transformation undertaken by the government of Georgia, saying it aims at developing a modern, inclusive, liberal economy in Georgia.
The government plans to move to the new pension system from the second half of 2018. According to the draft law, all citizens under 40 years old will be obliged to accumulate pensions. Number of those under 40 is about 500-600 thousand in Georgia. For all the others, involvement in the new system is optional.
According to the pension reform project, citizens, employers and the state will have to make monthly payments into the new pension fund:
o Employed people - 2% of their salary will be transferred to the pension fund;
o Employers - 2% of salaries they pay will be transferred to the pension fund;
o State - 2% of income tax revenue received from every employed citizen will be transferred to the fund.
Accordingly, outside the system remain those who could not get into the labor market due to various factors. Taking this into consideration, authors of the draft law consider a mixed model of pension provision that envisages pension from both budgetary and accumulative mechanisms.
When the people reach their pension age, 65 for males and 60 for females, they will have an opportunity to use the accumulated money together with the state pension, which currently equals 180 GEL ($69).
Social pension is not enough to create a decent living conditions for the pension age – is the main argument of supporters of the pension reform.
Moreover, the ratio between the working population and the pensioners is changing day by day. Number of pensioners increases annually and, according to UN forecasts, this number will reach about one million by 2030, and by 2050, the number of pensioners will be about a quarter of the population. This means that in a few decades maintenance of pensioners will be very difficult even for the most "generous" government.
According to government officials, the significant benefit of the reform will be to increase the volume of savings in the country and create an additional source of investment that will positively influence the country's economic development. However, this is considered to be a risk, since it is unclear with what mechanisms and who should manage these funds.
Consequently, the following questions arise: Who guarantees the conservation of the pension money accumulated over the years? How much of these assets will be protected? How much will the consumer protection from the inflationary processes be protected?
The reform was met with criticism from the Non-Governmental sector, as well as the political opposition and experts of the field. They think, that the expectation that with the introduction of the pension savings scheme will bring about higher social welfare after retirement, does not reflect the economic-financial reality of Georgia.
“According to statistics, the number of income tax payers in Georgia is 600 000, half of whom are employed in the public sector and the other half- in the private sector. There are not many income taxpayers in Georgia, hence the notion that the money accumulated in the funds will be enough to stimulate and bolster the economy is unrealistic,” stated monitoring Program Manager at EPRC Irina Guruli.
She added that the mandatory character of the proposed reform for the employer is also controversial, which creates additional burden for private businesses and enterprises. This may ultimately lead to a hike in informal employment.
Research Director at PMCG Research Center, Ms. Tamar Jugheli considers that the current social-economic environment does not provide fertile ground for the reform and the expectations that exist about the development of capital market are overemphasized.