Resume:The Minister of Finance of Georgia, Ivane Machavariani, spoke about dissociating the political aspect from the growth of pensions in the future and about the necessity to introduce pension indexation rule. Zurab Tchiaberashvili, MP, has commented on this issue and noted that indexation of pensions implied only marginal growth of pensions and could not improve the pensioners’ well-being.
Indexation of pensions is nominal pension growth adjustment mechanism, based on the changes in other economic data. Normally, indexation of pensions in a country is carried out in accordance with the changes in consumer price index (inflation) and if the Government of Georgia opts for indexation of pensions, most likely that very system will be implemented in Georgia as well.
If we take into account that in 2019 nominal social pension will be GEL 200, whilst estimated inflation rate in 2020-2022 is 3%, it can be said that in case of introduction of indexation of pensions, in 2020-2022, average annual growth of pensions will be GEL 6.28. Of note is that if pension inflation rate grows proportionally, real pension will remain unchanged. In other words, despite growth of nominal pension, a pensioner will be able to purchase exactly the same consumer basket, which can be purchased by today’s pension. Therefore, it is apt to claim that social conditions of the pensioners will remain the same under the indexed pensions.
Theoretical objective of indexation of pensions based on inflation is to maintain current purchasing power of pension and prevent deterioration of pensioners’ well-being. However, of note is that the products (medications, foodstuffs) which are primary consumption items for an average pensioner, normally get more expensive as compared to general price level (inflation). Therefore, well-being of the pensioners is expected to deteriorate if pensions are indexed in line with inflation.
Analysis
The Minister of Finance of Georgia, Ivane Machavariani, during the presentation of Georgia’s 2019 state budget spoke about dissociating the growth of pensions from political aspects in the future and about the need to introduce the rule of indexation of pensions. In his speech on these topics, Zurab Tchiaberashvili, European Georgian – Movement for Freedom MP stated that under indexation of pensions, possible annual growth of pensions could be Gel 8-11 and not more. As a result, pensioners will have to live in constant poverty.
Speaking of indexation of pensions, it is necessary to clarify the meaning of the term. Indexation is a growth adjustment mechanism of certain consignment. In this case it is nominal pensions, which is tied with the changes in other economic indicator. In other words, if the economic indicator, based on which the pensions are indexed does increase, nominal pension will increase as well. The aim of indexation of pensions is to maintain pension’s current/present purchasing power at least, although in certain cases purchasing power might increase as well. Theoretically, there are several alternative ways of indexation of pensions, such as: based on inflation, based on nominal economic growth, based on growth of nominal average salary and mixed approach. In accordance with the 2016 study of the Ministry of Economy and Sustainable Development of Georgia, tying changes in pensions to changes in average salary was considered as s less likely scenario. In accordance with the aforementioned document, if the amount of social pensions increases proportionally (is indexed) to average salary, given the expected changes in demographic structure, expenses for age pensioners to GDP ratio will increase signficiantly and reach 10% by 2060, which constitutes a third of total budget revenues. In case of similar scenario, significant growth of tax incomes will be necessary, which is an unacceptable alternative.
Normally, majority of the countries seeks to increase pension based on inflation rate (CPI – consumer price index) to at least preserve the existing social conditions of the pensioners. It is highly likely that the same mechanism will be selected in Georgia as well, although for the purpose of analysis, Graph 1 includes two alternatives of growth of nominal pension - when indexation of pensions happens based on inflation and based on GDP nominal growth. It is assumed that pension in 2019 is GEL 200, whilst inflation and nominal GDP growth indicators match with basic scenario of main financial and economic indicators.
Graph 1:Indexed Pension Based on Existing Estimates
Source:Author’s Calculations, Ministry of Finance of Georgia
As illustrated by the graph, if indexation of pensions happens in line with inflation, nominal pension will increase by GEL 6-6.56 annually in the next four years. This growth theoretically will offset the impact of price increase and a pensioner will be able to purchase exactly the same consumer basket is he/she does today. Therefore, pensioner’s social conditions will not be improved and remain at the present level.
In the less likely scenario, when pensions increase in proportionally to nominal GDP growth, annual growth of pensions amount GEL 16.40-23.42 and as long as nominal economic growth exceeds inflation rate a pensioner’s social conditions will improve theoretically.
