Because of the reason mentioned above, pressure from the population towards the government is increasing for a higher social pension. This circumstance causes an increase of the budgetary expenditures and causes questions about the fiscal sustainability of the reform.
Reason #7: The pension reform will cause informal labor deals and encourage the shadow economy, which could be a reason of reduction in budget revenue.
Pension contributions are considered as a type of tax for both, the employee and the employer. For the employee this contribution reduces the monthly income, and for the employer it is an additional expense that reduces the annual net profit. Therefore, we can say that the pension contribution is a “quasi-tax”. Consequently, both, the employees and the employers, will try to use informal employment mechanisms to avoid these costs.
Reason #8: The Doing Business in Georgia become complicated
Other than the fact that the pension reform creates new liabilities, the existing intricate system of the reform will complicate business administration (especially for SMEs).
Reason #9: The government will try to use the accumulated funds to finance the increased expenses
In the future, the government will try to finance the increased expenses by directly or indirectly using the accumulated recourses of the pension fund. This will be especially intensified when the above- mentioned factors will be at hand (reasons 5 and 6). The same is true for international experience (e.g. experience of Eastern European countries); the state is usually trying to overcome the crisis by using the accumulated pension funds.
Reason #10: Investing the accumulated resources of the pension fund in Georgia is not recommended because of associated high risk in investing in the country
It is well known, that accumulated pension funds must be invested in less risky portfolios. According to the standards of investment policy of the international pension funds, it is forbidden to invest the citizens’ savings in countries like Georgia due to high risks. Therefore, investing the accumulated funds in Georgia (Fitch: BB-; Moody’s: Ba2 (stable)) should be prohibited.
At the same time, according to the current version of the pension reform, for example funds allocated in deposits of Georgian commercial banks are classified as less risky investments and the pension reform requires assets to be invested in such less risky investment portfolios for the first 5 years.
Reason #11: Political risks
International experience dictates that this model is not a politically justified model. In case of every regional or global economic/financial crisis the accumulated pension funds are first to take the hit, which causes a political turbulences. Among others, in Eastern Europe this caused not only an economic but also a political crisis.
Reason #12: Because of creating increased and unrealistic expectations, in case of the failure of the reform, trust towards the government will deteriorate
The level of trust towards the government and political institutions is low in the Georgian population which is resulted by past experience (the so called lost deposits, the failed cooperative constructions and other state-promised projects). In case of failure, the level of trust will be further deteriorated because of the unrealistic and increased expectations created by the pension reform.
Reason #13: In case of passing the existing version of the pension reform bill, any amendments or total abolishment will be impossible; the reform does not have flexibility and is irreversible
It is not clear what the strategy is in case of a failure. Consequently, from risk assessment side of view, this will not only be the basis of financial and economic but also a political crisis.
2. Technical remarks
a) Explanatory note of the Draft Law needs to be explained – in particular, the purpose of the proposed draft law. This draft law shall obviously result in the amendment of numerous legislative acts, e.g. tax legislation. Thus, this legislative initiative shall be submitted in a form of a legislative package that will give us full picture and understanding of a range of issues.
b) ICC Georgia would like to receive information regarding the most successful models worldwide which were examined, evaluated and analyzed in the process of working on the accumulative pension reform.
c) ICC Georgia would like to receive information regarding Regulatory Impact Analysis of the planned pension reform on the private sector and state budget. In particular, if there is any specific calculation regarding the supposed amount of issued funds based on current average income in Georgia, considering assets accrued on the participant’s individual account, inflation and the future purchasing power of the accumulated money.
d) According to the draft law, pension scheme is mandatory. ICC Georgia believes, that if the government does not consider to abandon the mandatory nature of the scheme (arguing that otherwise, pension reform will not work) then at least each individual should be given an option to choose between the scheme offered by the government and the one offered by the private sector. The pension reform should have an option for private pension funds. It should not exclude the private businesses already operating in the pension sphere, as we believe that, it might kill existing businesses.
e) Supervisory Board of the Pension Agency consists of 4 members, 3 of which will be acting ministers – therefore, the Board will be a political body. Pension Agency should be composed primarily on the principle of independence, on more transparent and consensual basis, avoiding political and governmental influence.
f) The Selection criteria for Director, Investment Board, Senior Investment Officer (and other relevant officers) of the Pension Agency should be expanded and it needs to be clearer and more specific.
g) The provision whereby people over 40 can opt out of the pension scheme while people under 40 cannot, could arguably be declared unconstitutional and should be considered further.
h) Duties of fiduciaries under Article 35 should be expanded, e.g. conflict of interest matters must be considered in greater details.
i) More clarity is required in the following area: distribution of dividends/gains; taxation of employer’s contribution into the scheme. To begin with, the draft law should define more clearly how are the pension fund profits distributed and what benefits it holds for the members. It is also unclear if employer’s contribution to the accumulative pension scheme shall be deemed as a benefit received by the employee according to the Tax Code of Georgia and whether it shall be taxed as employment income. Double taxation of the pension withdrawals should be avoided.
j) It is also important to know, upon enactment of the law, how will those persons who had retired before could accumulate funds on their individual pension accounts and how will the reform ease budgetary burden.
k) Pension Agency should not be engaged in investing in Georgian State bonds or other securities causing the conflict of interest with state. Neither should it be able to invest in countries with history of animosity and potential of political retribution.
l) Withdrawal of own contributions should be more flexible before achieving the pension age.
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