ICC Georgia, largest business organization has criticized new draft law on pension system introduced by the government. “According to the suggested pension reform there is no societal group that will be a beneficiary and at the same time satisfied with its results. Furthermore, economic, financial, and political risks are very high and in case of these expectations the consequences will be irreparable”, said ICC in its statement. ICC Georgia has listed 13 main reasons why it believes that the suggested pension reform should not be implemented.
According to the Georgian Government’s new pension reform model, citizens, employers, and the state will all have to make monthly payments into the new pension fund. For employed people – 2% of their salary will be transferred to the pension fund; employers – 2% of salaries they pay will be transferred to the pension fund; the state – 2% of income tax revenue received from every employed citizen will be transferred to the fund.
Reason #1: For 70% of the employed population, despite the contributions for over 30 years, the pension reform fails to provide the so called “adequate pension”
According to the Georgian Government’s new pension reform model, citizens, employers, and the state will all have to make monthly payments into the new pension fund. For employed people – 2% of their salary will be transferred to the pension fund; employers – 2% of salaries they pay will be transferred to the pension fund; the state – 2% of income tax revenue received from every employed citizen will be transferred to the fund.
In Georgia, as of 2016, economically active population was 1,998,300 people (total work force). Only 37.3% of these are employed. The rest of the population is either self-employed (about 50.9%) or unemployed (about 11.8%). Based on official data and its analysis, as of 2016, out of 745.4 thousand employees around 520 thousand had monthly salary less than GEL 6001 (gross).
In case of saving 6% (2%+2%+2%) of GEL 600 (gross), for 30 years2, as a best case scenario, the total “replacement ratio” (the sum of accumulated pension and social pension) will be 36.4%, which exceeds the current “replacement ratio” of 30% by a mere 6.4%. This cannot be seen as an “adequate pension” resulted by the pension reform.
Reason #2: The pension reform fails to create an alternative for the existing social pension system
Employees with monthly salaries less than the average will not see a substantial benefit from the pension reform. Taking the above mentioned assumptions into consideration, in case of an average monthly salary of GEL 600, the “replacement ratio” received by the pension reform at the beginning of pension age will be mere 18.6% (the current “replacement ratio” is 30%).
Reason #3: The pension reform will not manage to cover the self-employed (50.9% of total work force) and the unemployed (11.8%), which will result in an important social dissatisfaction.
Although the pension reform considers a scheme for the self-employed, the probability that a significant portion of the self-employed population will be involved in the scheme is minimal. The main reason is the lower than average income of the self-employed population, the mandatory high input (4%), and the program administration terms and conditions.
At the same time, the unemployed (approximately 11.8% of total workforce) and the population outside the workforce remain outside the scheme.
Reason #4: Only 10% of the economically active population (of total work force) will see a hypothetical benefit from participating in the scheme
Even though only 10% of economically active population (employees with high income), will see a hypothetical benefit in case of 30 years of savings, this group will also lack satisfaction since they could manage these funds more effectively and see a bigger profit.
Reason #5: The reform encourages the increase of social inequality in Georgia
Based on the above-mentioned arguments, we can say that the potential beneficiaries of the reform are only a small part of the population (with incomes higher than the average). All other groups of the population cannot benefit from the reform. Accordingly, all else unchanged, the level of inequality of the population at the pension age is increasing.
Reason #6: Instead of reducing budgetary expenditures associated with pensions in the long run, the risk of increasing similar costs gets higher as a result of the reform.
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