Issue 3, 2018. June-July

   

EXPLAINER: GEORGIA'S NEW PENSION SYSTEM

The Georgian government has asked Parliament to consider a draft law to reform the country's universal pension form and create a pension fund. Investor.ge's Nino Bakradze asks pension specialists and other experts on the reform about how it will affect pensioners, employers and the self-employed.

The long-discussed government plan to revamp Georgia's universal pension system is in the works in Parliament. MPs are scheduled to pass the final vote this summer, and the reform should be actively implemented after the third quarter of 2018.

The plan devised by the government would create a pension fund and encourage citizens to save for retirement.

The universal pension system would remain in effect for certain social groups.

Over 734,000 pensioners live in Georgia currently; the state budget spends about 132 million lari each month on their pensions.

How will the new pension system work?

Participating in the accumulative pension scheme would be obligatory for any employee under age of 40; persons over the age of 40 could opt into the system if they want.

Under the new system, six percent of every worker's monthly paycheck would be deposited in the state-run pension fund: employees would save 2 percent of every monthly paycheck, while the government and employer would each also put aside 2 percent of workers' monthly salaries.

For instance, a person earning 1,000 lari a month would accumulate 60 lari in the pension fund every month.

How would the system treat the self-employed?

Half of Georgia's active workforce is self-employed, according to official statistics.

Under the proposed system, people who are self-employed are not legally obligated to participate in the new pension program.

Nikoloz Gagua, Deputy of Finance Minister, argues, however, that the accumulative pension system will be very beneficial to the self-employed.

"The government decided to help self-employed people declare their income by setting a 1 percent income tax for them, which is very low compare to 20 percent, the common rate for employers [. . .] Once a self-employed person pays 1 percent [of his or her monthly income] as income tax, the government will deposit [the equivalent of] 2 percent [of that person's monthly income] into that person's pension account," Gagua told Investor.ge.

Otar Sharikadze, the Managing Director of Galt & Taggart, says it is likely that only a small number of self-employed people may participate in the accumulative pension scheme.

"They will remain under the universal pension scheme funded by the state budget," he said.

"Going forward, I think that the existing universal pension scheme should be limited to certain segments of population in order to avoid major spending from the state budget in a long term. Moreover, the acceleration of economic growth in Georgia should reduce the number of self-employed people in the country and increase their involvement in the second pillar pension scheme," Sharikadze said.

Martin Hutsebaut is an independent expert of pension systems from Belgium. He evaluated this upcoming reform for Friedrich Ebert Stiftung's Georgian office, and believes that the pension scheme provided by Georgian government lacks some social safety nets.

For example, in the case of a prolonged illness, maternity leave or unemployment, a person will not be able to save money in the pension fund.

Gagua stressed, however, that the universal pension system will continue to operate for some groups and no citizen will be left without a pension in his or her old age.

Who will manage the pension fund?

According to the draft law, the pension fund will be managed by the LEPL Pension Agency, which will appoint an investment council. Gagua underscored that the members of this council will be internationally qualified experts.

The council will be created after Parliament approves the pension reform law, which should happen in early summer this year. The investment council will be tasked to decide how to use the savings accrued in the pension fund, i.e. where to invest the money. The council will have the right to invest the pension savings in private companies or lend it to the government.

A transparent competition process will be used to determine where to invest money from the pension fund and should have a good international reputation and experience, according to the Georgian Ministry of Economy.

Sharikadze agreed that the asset managers should be selected based on their reputation and experience. He noted that Galt & Taggart is a clear candidate for the position in light of its experience managing the pension fund for Sakaeronavigatsia Ltd. (Georgian Air Navigation).

What are some challenges for the reform?

There are serious questions about how successful the reform will be, based on the fact that half of Georgia's active workforce is self-employed and over a million citizens currently live abroad.

Gagua noted, however, that based on the government's calculations, 35-40 percent of employed citizens will voluntarily participate in the program initially, and there is an expectation that the number will double in 12 years.

At initial stage of the pension scheme, Sharikadze, does not expect a high rate of involvement of those segments of employed population who are not obliged to participate in this scheme. "People will wait to see how successful this reform is and how carefully money is managed by the fund. We need to clearly explain to potential participants the benefits of the accumulative pension system. If we want to consume more in the future, we should reduce current spending and save more today," Sharikadze said.