Resume: In accordance with the Pension Agency’s estimates, a 40-year-old individual who retires in 20 years with a gross salary of GEL 500 will receive a pension in the amount of GEL 104 under the accumulated pension plan. Given the inflation (increase in consumer prices) rate, GEL 104 in 2039 will have the same purchasing parity as GEL 46-73 has in 2019. These figures are in line with Zurab Tchiaberashvili’s numbers.[1] However, the MP leaves unnoticed the fact that the total amount of a retired individual’s pension also includes a social pension in addition to the money he is supposed to receive from the accumulated pension plan.

In accordance with the existing information, the amount of social pension will be calculated on the basis of its current value (GEL 200) and will increase in line with inflation (indexation). In other words, the social pension’s purchasing power will be kept at the GEL 200 level in current prices. Therefore, the aforementioned retired individual, given the possible scenario of events, will receive GEL 390-560 as a nominal pension in 2039. With this amount of money, a pensioner will be able to purchase the same amount of goods in 2039 as it is possible to buy with GEL 246-273 today. However, without indexation, the purchasing power of the total pension which a retired individual is supposed to receive in 20 years will be in the margins of GEL 134-213.

Analysis

European Georgia – Movement for Freedom MP, Zurab Tchiaberashvili, whilst speaking about the accumulated pension, stated that upon retirement at the age of 60, the purchasing power of the pension, which a 40-year-old woman with a GEL 500 salary is supposed to receive, will be GEL 85.

The Parliament of Georgia adopted the Law on Accumulated Pension on 18 July 2018 and it entered into force on 1 January 2019. In accordance with the law, joining the accumulated pension plan is mandatory for all employees who have a salaried income and are younger than 60 (in the case of women, younger than 55) before 1 January 2019. For other employees (including self-employed), participation in the pension plan is also mandatory. At the same time, if an employee who had turned 40 before this law entered into force does not wish to be a pension plan participant, he is allowed to address the Pension Agency and withdraw from the pension plan after five months from joining.

In regard to pension payments, 2% of an employee’s taxable income is transferred to an employee’s individual pension account and an additional 2% is transferred by the employer from his own funds. Different from a hired employee, a self-employed individual makes a pension payment in the amount of 4% of his annual income (share of employee and employer). If a pension plan participant’s (both hired employee and self-employed) annual taxable income is less than 2%, then the state transfers an additional 2% to the participant’s pension account. In the case when an employee’s income is between GEL 24,000 and GEL 60,000, the state transfers 1% whilst in the case of employees with an annual income higher than GEL 60,000, the state is no longer a contributor. In addition to the pension which will be given as a part of these accumulated funds, the social pension component will also be kept and currently amounts to GEL 200.

In accordance with the Pension Agency’s estimates, a 4% annual growth of an employee’s salary is expected. At the same time, the earnings from funds accumulated in the pension account will be an annual 7%. Taking these assumptions into account, a 40-year-old woman with a GEL 500 gross (taxable) salary who is assumed to retire at the age of 60 (in 2039) and stops accumulating funds will have GEL 21,273 in her account. Given the fact that the average life-expectancy for females is more than 77 years in Georgia, rough estimates for an average woman to be on pension is 17 years. Therefore, the nominal monthly pension will be GEL 104.3 in 2039 (without the social component). At the same time, it needs to be taken into account that price levels have a growth tendency. Therefore, the purchasing power of GEL 104 in 2039 will be less as compared to the current purchasing power of GEL 104. In other words, one will be able to buy fewer products with GEL 104 in 20 years than is possible today. Hence, in order to have a precise understanding of the amount of income, it is necessary to adjust the nominal income in line with the inflation rate.

To make these calculations, we have to know what the inflation rate will look like in the upcoming years although it is impossible to have precise estimates. Therefore, in this case too, calculations have to be based upon assumption. In the nearest future, the expected inflation rate for Georgia is 3% in the case of a basic scenario, 1.8% in the case of a pessimistic scenario and 4.2% in the case of an optimistic scenario. Table 1 shows the current purchasing power of the monthly nominal pension in 2039 in the case of alternative scenarios of price increases.

Table 1: Current Purchasing Power of Estimated Nominal Pension in 2039 (GEL)

Source: Pension Agency, Ministry of Finance, author’s calculations

As seen in the table, if the nominal pension is GEL 104 (only accumulated funds without the social pension), it will be possible to purchase the same amount of products in 2039 that we can purchase with GEL 58 today in the case of a basic scenario (an inflation rate of 3%). Given the alternative estimates of price growth, the figure for 2039 fluctuates from GEL 46 to GEL 73. The MP referred to the accumulated pension and left the amount of social pension unnoticed. Theoretically, it is possible to keep the social pension unaltered at its existing value (GEL 200) or index it which is a more likely alternative (in regard to the indexation of pensions, see FactCheck’s research). In regard to the total pension (the total sum of earnings from the accumulated pension plan and the social pension), the nominal pension will be within the margins of GEL 390 to GEL 560 in 2039 in the case of an indexation of the social pension in line with inflation whilst its purchasing power will fluctuate from GEL 246 to GEL 273. In other words, with the income a pensioner receives as the sum of the accumulated and social pensions, he will be able to purchase the same amount of products in 20 years that is possible to purchase with GEL 246-273 today.

Of necessary note is that the aforementioned calculations are based upon the assumption that salaried income will increase by 4% annually and the Pension Agency will be able to receive annual earnings of 7% and transfer the money deposited to the individual pension accounts once their owners retire.