Factcheck – Roman Gotsiridze: “According to the government-proposed pension indexing rule, a GEL 400 pension will be in place in six-seven years.”

3 mins read

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

Resume:  According to the plan presented by the Government of Georgia, the state pension will be subject to indexing from January 2021. For pensioners under the age of 70 years, pensions will increase proportionally to inflation whilst for pensioners over the age of 70 years pensions will increase by an additional 80% of the annual economic growth rate on top of being adjusted to the inflation rate. However, in spite of the indexing factor effect, the annual pension growth for pensioners under the age of 70 years will be a minimum of GEL 20 whilst for pensioners above the age of 70 years, the minimum will be GEL 25. 

Given the current expectations on the economic growth rate and the inflation figure, the nominal pension for people under the age of 70 years will reach the GEL 400 milestone in 2029 whilst in the case of pensioners over the age of 70 years, it will happen in 2026. Of note is that the annual growth for both groups will be higher as compared to the growth of the price level. Of note is that the real pension will also keep an annual growth trend. In time, the fixed GEL 20 and 25 growth will subside and the growth of the real pension for people under the age of 70 years will cease whilst the real pension for people over the age of 70 years will increase only in proportion to 80% of the economic growth rate. 

The MP’s statement is factually accurate based on currently available information. It is also fair to point out that prices on products (medications, medical services and food) which are widely consumed by pensioners traditionally increase faster as compared to the general growth of the price level (inflation). Therefore, the indexing component will counter-balance but supposedly not fully offset the decreased purchasing power effect for pensioners under the age of 70 years. 

Analysis

Simultaneously with presenting the anti-crisis plan, the Georgian Prime Minister, Giorgi Gakharia, also unveiled a new pension growth plan. In response to the initiative, United National Movement MP, Roman Gotsiridze, stated:  “According to this pension indexing rule as proposed by the government, our citizens will receive GEL 400 in six-seven years in the case of moderate inflation and an approximate 5% economic growth rate. In the best case, this many happen in 2026. This means that the pension in fact does not increase and its purchasing power will remain almost similar to what it is today.”

According to the government-initiated plan, the state pension for people under the age of 70 years will be GEL 220 whilst pensioners over the age of 70 years will receive GEL 250 by the end of 2020. This is the ground zero from where the new pension indexing rule will be enforced. This rule envisions increasing the pension for people under the age of 70 years annually in response to inflation whilst pensioners over the age of 70 years will also have their pensioners increased by an additional 80% of the annual economic growth rate. In other words, if Georgia has a 6% inflation and a 5% economic growth rate, pensions for people under the age of 70 years will increase by 6% and by nearly 10% (6%+0.8*5%) for people over the age of 70 years. The same plan also decrees that the annual growth of pension for people under the age of 70 years should not be less than GEL 20 and for people over the age of 70 years, the amount should not be less than GEL 25. Graph 1 illustrates the expected growth of pensions assuming that inflation and the economic growth rate in 2020-2021 will be in line with the International Monetary Fund’s forecasts and that inflation will return to its targeted 3% threshold and the economic growth rate will be 5% from 2022. 

Graph 1:  Expected Growth of State Pension – Nominal Figure


Source:  International Monetary Fund and the author’s calculations

As illustrated by the graph, the seemingly complicated model for pensioners under the age of 70 years is simplified and their nominal pension will stably increase by GEL 20 annually and reach the GEL 400 milestone in 2029. For pensioners over the age of 70 years, pensions will steadily increase by GEL 25 including the year 2025 whilst pension growth from the new indexing rule will exceed the GEL 25 mark in 2026 with the pension reaching GEL 401. In each consecutive year, the increase in pension for people over the age of 70 years will be higher than GEL 25. 

However, what is important here is not how much the nominal pension will increase but what amount of goods and services a pensioner will be able to purchase with that money. To this end, it is important to analyse the real pension’s trend of changes. Graph 2 illustrates the changes in real pensions based on the same assumptions used for Graph 1. 

Graph 2

Source:  International Monetary Fund and the author’s calculations

As illustrated by the graph, the real pension will also increase for the entire period, albeit in a lesser amount as compared to the nominal pension. Theoretically, every year a pensioner will be able to purchase more goods and services as compared to the previous year. However, given the realities on the ground, it is logical to assume that most of the pensioners spend their pensions to purchase food and medications. Historically, prices on these products usually grow faster as compared to the general price level. 

Author – Valeri Kvaratskhelia

Category:  Economy

Leave a Reply