An accumulated pension system is scheduled to be launched in Georgia on 1 June 2018. The Parliament of Georgia will discuss the draft Law on Accumulated Pension in the nearest future (no later than 9 March). The proposed model, in fact, increases income tax. In addition, considering the country’s macroeconomic environment, the sustainability of an accumulated pension system is doubtful from the very beginning.

Proposed Accumulated Pension Model In accordance with the aforementioned draft law,

the accumulated pension system envisions 6% savings which is added by investment earning. Specifically, an employed individual is supposed to transfer 2% of his taxable income to an individual pension account, his employer is supposed to transfer another 2% and an additional 2% is added from the state budget. In the case of self-employed individuals, they are supposed to transfer 4% of their income and the state also contributes 2%. If the salary of an employed or self-employed person exceeds GEL 24,000 per year, the state payment decreases to 1%. If the salary of an employed or self-employed person exceeds GEL 60,000 per year, neither the state nor the employer makes pension payments.

The accumulated pension system is voluntary for self-employed individuals. All other hired employees automatically join the system. For citizens of Georgia under the age of 40 and who are hired employees, participation in the accumulated pension system will be mandatory whilst employees over the age of 40 are allowed to decline participation. The process for declining to participate in the system involves sending a letter to the Pension Agency within a period of five months after having been automatically added to the accumulated pension system. This said, they can only withdraw from the accumulated pension system no earlier than three months after being added. The aforementioned three-month period is unclear since participating in the accumulated pension system is voluntary for persons over the age of 40. There is no information about this three-month period in either the draft law or its explanatory note.

The LEPL Pension Agency will be established for administering and governing the accumulated pension system. Pension actives for further use will be given to an asset management company which will be selected by the Pension Agency’s investment council. Pension actives can be invested in monetary form and in deposits, state securities or shares of enterprises, etc.

Challenges before the Mandatory Accumulated Pension System

The state budget allocates GEL 1,700 million for pensions which constitutes nearly 18% of the total budget expenses and 5% of the gross domestic product (GDP). If we take a look at statistical data, the number of pensioners is constantly growing and, correspondingly, the budget’s social expenditures are also on the rise. The Government of Georgia acknowledges the need to introduce the accumulated pension system in order to ensure the sustainability of the pension system overall.

However, the necessary precondition for an accumulated pension system to succeed is a high and growing figure of hired employment as well as a high rate of incomes (average salary) both of which are practically absent in Georgia.

In accordance with the latest data

of the National Statistics Office of Georgia, 57% of the total employed population is self-employed. Self-employed individuals mostly do not have monthly income with the majority of them identifying themselves as job-seekers according to sociological surveys which means that they will also most likely not be able to afford making pension savings. Of the 1.763 million employees, only 745,000 are hired employees and of these only 310,000 are under the age of 40. If we take a look at the statistics from the previous years, we will see that the number of hired employees does not increase significantly. Furthermore, the number of hired employees experienced a decline in 2016. It seems, therefore, that the accumulated pension system will incorporate only a small portion of the population.

If we consider the average salary of the employed and its growth rate, the population will not create large savings with a 6% contribution. In accordance with the latest data, the average monthly income (including income tax) of employed persons is GEL 940. Hypothetically,

an employee, whose salary is the same as the average salary, will make his pension savings for a period of 30 years (considering the 3% inflation rate and the 5% annual profit) and will spend 15 years in retirement which means his monthly pension will presumably be GEL 371 which will be GEL 179 if calculated according to the current purchasing power. The existing social pension will also be added to this amount.

This pension reform will be an additional tax burden for the population which already has a low income. The accumulated pension model, proposed by the Government of Georgia, increases the expenditures of private companies as well. Most likely, these increased expenditures will also happen at the expense of cutting an employed individual’s salary.

The Government of Georgia claims that the pension contribution is not a tax. If we take a look at the official definition

of tax, this is true – tax is a mandatory, unconditional payment to the budget whilst a pension contribution is accumulated in a personal account and transferred back to us once we reach the age of retirement. However, a pension payment is an additional indirect tax because incomes will be subject to mandatory taxation.

Employees pay 20% of their monthly income as income tax. Two percent will now be added for pension savings. In the case of employees in the private sector, it is highly probable that the 2% payment which the employer is supposed to pay will be made from an employee’s salary. In total, an employed person will pay 24% of his salary monthly instead of 20%.

The state’s contribution to the pension system increases budget expenses. In the 2018 state budget,

GEL 80 million is allocated for the co-funding of the accumulated pension system. This is a six-month budget because the pension system will be launched from the third quarter of the year. In addition, the Pension Agency will be funded from the state budget for the first three years according to the draft law.

Of important note is that the accumulated pension system reform is not based on any research which would demonstrate what the benefits are for the country. The Government of Georgia could not provide an example of this system as a successful experience for any country.

In a number of Eastern European countries, however, there were examples of failures of accumulated pension systems. The PMCG think-tank research study

analyses cases of suspending and annulling accumulated pension systems in certain countries. For instance, Hungary nationalised its mandatory private accumulated pension funds in 2011 and the Polish government confiscated a part of its pension assets (50% of the fund assets) invested in treasury bonds. The mandatory accumulated pension reform instigated protests in neighbouring Armenia in 2014 where the court ruled on the unconstitutional nature of some articles of the law because they implied mandatory participation in the pension system. After certain amendments, the reform was postponed to 2017 and a temporary quasi-mandatory system was launched in Armenia.

The aforementioned factors give ground to assume that the accumulated pension system may not succeed. This reform constitutes an additional tax burden for the population which might also prompt social turmoil.