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Roman Gotsiridze: “Real pension decreases.”

Verdict: FactCheck concludes that Roman Gotsiridze’s statement is TRUE.

Resume:

The amount of pension for people under the age of 70 years in 2022 is set to increase by 8.3%; that is, by GEL 20 and will reach GEL 260. However, given the inflation forecasts, the basic pension should have increased by at least 13% which is nearly GEL 32 in order to have a real pension growth in January 2022 as compared to the same period of the previous year. On the other hand, the average annual inflation figure forecasts were one percentage point higher as compared to the nominal pension growth. Therefore, Roman Gotsiridze’s statement is TRUE.

Of note is that the pension calculation rule was changed after amending the Law of Georgia on State Pensions in 2020. In particular, for pensioners under the age of 70 years – in case of the basic pension – the pension increases by the average figure of the last 12 months of inflation but by no less than GEL 20. This rule is supposed to ensure that inflation does not “eat up” pension growth. The inflation is calculated in the period when the draft budget is submitted. The average inflation rate for the previous 12 months was 7.9%, but because of the following growth of prices, the inflation indexation rule fails to ensure real pension growth in 2022. However, it is expected that this decrease will be offset in the upcoming years.

Editor’s Remark: At the moment of the statement, December 2021’s annual inflation figures were available. Therefore, calculations are made in line with the situation vis-à-vis the statement’s publication date.

Analysis:

Member of the United National Movement, Roman Gotsiridze, made the following publication on his personal Facebook account on 18 December 2021: “Currently, the basic pension is GEL 240. In 2022, it will increase by GEL 20 and reach GEL 260. This year, the inflation rate will be 13%. In order for the pension to maintain its current purchasing power, it should increase by GEL 33. In fact, the ‘real pension’ decreases.” The aforementioned publication is one of the few where Roman Gotsiridze responded to the statement of the Prime Minister of Georgia, Irakli Gharibashvili.

In time, money’s purchasing power decreases. In other words, one can buy less goods and services with same money than was previously possible. The price growth on goods and services is called inflation. Incomes are divided into nominal and real categories. Nominal income shows net amount of money, denominated in a specific monetary unit whilst real income reflects real value, earned by an individual or a subject after adjusting to inflation. For instance, if a hypothetical citizen consumes a loaf of bread which costs GEL 1 and his income is GEL 100, in fact he can buy 100 loaves of bread. If this citizen’s income increased by GEL 50 whilst the price of bread grew by 100%; that is, GEL 1, this citizen’s nominal wage increased by 50% although his real wage decreased by 25% because he will only be able to buy 75 loaves of bread with GEL 150. Naturally, there are different cases when real income may increase, decrease or stay the same in parallel with the growth of the nominal income of domestic households.

Table 1 shows the dynamic of nominal and real basic pension according to the average annual and the annual inflation rates in 2012-2021. Average annual inflation is 12 months of averaged inflation which shows average prices throughout year whilst annual inflation shows inflation rate of the month of a certain year as compared to the same month of the previous year. Annual inflation shows how prices increase during the reporting budget year. Of note is that real pensions will decrease according to the 2021 inflation forecasts as compared to 2020 when both annual (GEL 5.8) and average annual inflation are considered (approximately GEL 1.1).

Table 1: Nominal and Real Pension in GEL in 2012-2021 (2012=100)

Source: National Statistics Office of Georgia, author’s calculations

According to Roman Gotsiridze’s statement, the basic pension should have increased by at least 13% which is nearly GEL 32 in order to have a real pension growth in January 2022 as compared to the same period of the previous year. A GEL 20 growth of the nominal basic pension, which is 8.3% under a 13% inflation rate, means a decrease of the real annual pension by 5%. Of note is that the annual average inflation was set at 9.2% in 2021 according to the International Monetary Fund’s forecasts. Therefore, the real pension calculated in line with this figure would also decrease.

The pension calculation rule was changed after amending the Law of Georgia on State Pensions in 2020. In particular, for pensioners under the age of 70 years – in the case of the basic pension – pension increases by the annual figure of the last 12 months of inflation but by no less than GEL 20. For pensioners over the age of 70 years, pension growth will be total sum of the average inflation figure for the last 12 months and the 80 % of the average real GDP growth in the last six quarters, but by no less than GEL 25. This rule should ensure that pension growth is higher than inflation. However, inflation is calculated in the period when the draft budget is submitted. Therefore, inflation registered by the end of 2021 is not taken into account in January 2022 precisely when pensions increase. According to the explanatory note of Georgia’s 2022 budget law, the National Statistics Office of Georgia says that the average inflation for 12 months is 7.9%. Given the fact that pension growth calculated with this indicator (240*7.9%=18.96) is below the legally needed GEL 20, the budget envisions a GEL 20 pension growth which should be GEL 260 from January 2022. This means there was an 8.3% growth. However, the average inflation in November 2021 for 12 months was 8.6% which exceeds real pension growth. Therefore, real pensions will decrease from 1 January 2022 as compared to the average figure of the previous year.


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