Refusing to Raise Pensions, Government Offers an Alternative Pension System

Prior to every single election, a pension increase remains one of competing political forces’ main promises. But all too frequently, it continues to remain nothing more than a promise. Let us face the facts: To this day, no efficient pension reform has taken place in Georgia. At the end of 2014, an economic council chaired by the Prime Minister discussed the possible creation of a private contribution-based system, which will allow providing retirees with a decent pension in the long run. NGOs that joined the process were tasked with raising public awareness of this new development. Giorgi Khistovani, head of research department of IDFI (Institute for Development of Freedom of Information), has shared with us the implications of having such a pension system and whether it will prove to be an alternative to increasing pensions:

– The fact of the matter is that the pension system in Georgia is still in shambles. Upon reaching a certain age, all citizens, regardless of their merits to the country or working experience, receive the same pension. Part of the society considers such a system to be unjust, hence the reason why the government offers citizens an alternative contribution-based system. To be more precise, the new system will take effect on January 1st, 2017, which means the citizens will be urged or even obliged to lay aside part of their income for the future. Today the government claims that it would get progressively harder for it to raise pensions, since the amount of people reaching the retirement age is increasing and the small budget can only be stretched so far. This is why people are given an opportunity to save up their own money for when it’s time for them to retire. The Ministry of Economy and Sustainable Development even opened a special service dedicated to this subject.

– Yet during the elections, the government promised to raise the people’s pensions. So does it mean that since citizens will soon have to look out for their own pensions, and that the state will completely relieve itself from any responsibility before them in this regard?

– Incorrect. The government claims that such a promise was never made and those who want better pensions will be given appropriate stimulus and opportunity. Namely, if an employed citizen transfers 2 percent of his monthly salary to the retirement fund, the government and the employer will be obliged to triple this sum. For example, when a person with a salary of 1000 GEL transfers 20 GEL to the fund, 20 more GEL is added by the government and another 20 by the employer. This is what the government is offering – an opportunity for the citizen to create his own pension.

– How well is such a change going to sit with Georgian reality? Are employers content with having to add to their employees’ pensions? Also, what about the people who are on the brink of retirement age and do not have time to contribute to their own pensions?

– The government has all the tools to make things happen without having to negotiate with the employers. What matters is that no one is allowed to access the fund before retiring. The contribution-based pension system will bring actual benefit only to those who are currently 30-35 years old. Unfortunately, those who have already retired or are about to retire will not be able to benefit from this system, despite them comprising a significant part of the country’s population.

– What will the retirement fund do with the money it receives from citizens and what guarantees will it offer them? Let me remind you that in the 1990s, people lost a lot of money after the retirement fund they invested in collapsed.

– The government will invest this money and receive income from it. A private fund will be created that would manage the funds without governmental intervention, although there will be limits to how much they can use. For example, it will not be allowed to deposit more than 20 percent of the fund’s finances into private banks or invest more than 30 percent of it into foreign stocks. It will also be unable to lend more than 40 percent of it to the government and so on. What matters is making sure that these parameters will not change together with future governments. There is also a risk of the retirement fund becoming one of the government’s donors, which may lead to an increase of the fund’s lending parameters. Monitoring is vital to avoid such events, and we NGOs will closely observe the process, with certain social groups assisting us. Now to winning the people’s trust. It is true that Georgians are very suspicious and skeptical towards long-term governmental projects and 30 years is ample time to be worried, but the system we are going to use is European-tested and approved. The government should provide people with maximum guarantees to ensure that the employed citizens start thinking about investing into the pension fund early.

– Do you have any information about how many citizens are saving up for retirement today?

– There are several private insurance enterprises that offer clients this service, but the amount of people who make use of this is very low, numbering in dozens.

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