New Georgian Pension System to Slow Net Wage Growth

New Georgian Pension System to Slow Net Wage Growth

New Georgian Pension System to Slow Net Wage Growth

The FINANCIAL -- At just over USD 70, which is more than six times lower than in Turkey, and over 4 times lower than in Russia, Georgian pensioners have the lowest monthly pensions compared to their neighbour countries.

With its recently-introduced new pension system Georgian officials assure the country’s citizens that their living standards will improve in the future. However, the majority of economists are sceptical about this reform. The main risk and uncertainty related to the pension reform is how reasonably the Government will be investing the population’s savings. In addition, it is expected that net wages will be growing more slowly.

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 2017 a Georgian retired man gets about USD 70, which is the lowest amount out of the neighbouring countries of Georgia. In Turkey, the average pension is about USD 460; in Russia – USD 260; Azerbaijan – USD 120; Armenia – USD 85. One of the non-governmental organizations – Society and Banks, provides a calculator for the new pension system. The calculator takes wages as constant over the years with a fixed 3% inflation rate. Thus, although the calculations are not exact, average pension amounts can be roughly estimated.

Let’s consider the example of a 30 year-old woman who has a three-time higher net wage than the average gross wage in Georgia, 2016. Such a woman would theoretically have a GEL 2 800 net wage today (GEL 3 500 gross), and would be saving 2% of this wage for the next 30 years, wanting to get a pension till they’re 80 years-old. Based on this it is expected that, calculated roughly, the woman will have a GEL 1 153 monthly pension, with GEL 523 purchasing power. This seems optimistic. However, some economists believe that such kinds of employees can invest their savings more wisely on their own and gain more money than just GEL 523 when they retire.

Now, let’s consider the example of a woman who is likely to be someone needing relatively higher government support when she retires. The lowest nominal wages in 2016 had people employed in the education and agriculture systems, with a gross wage of about GEL 550. Let’s assume her net wage will triple on average gradually. During the next 30 years let’s say she has on average GEL 1 600 net wage (GEL 2 000 gross), then she will get about GEL 660 monthly, which is GEL 300 in today’s money. A person who has GEL 1 000 net wage, will get a pension with purchasing power equal to GEL 220 on average. That is only GEL 40 higher than the pension in 2017.

Based on these models, there exist legitimate questions in society – why should participation in the pension system be semi-compulsory? Why do employees not have free choice? They might not trust the government and prefer to invest their savings on their own. Do current and future governments of Georgia have a consistent enough policy to be trusted? What if the provider of the service was the private sector, not government? What about the risks from the business sector? It is expected that companies will pass the cost on to employees in the long run and gradually decrease net average wages or will decrease demand on the labour market in the long run.

President of the Association of Young Financiers and Businessmen, Shota Gulbani says that the main risk and uncertainty related to the pension reform is how reasonably the Government will invest the population’s savings. According to the draft law about accumulative pension, for the first 5 years the pension fund must only be invested in high liquidity assets. However, everyone is aware that the Georgian stock exchange does not provide high liquidity indicators. Thus, two other sources are left to invest in: government bonds and foreign securities markets, which theoretically are considered reliable sources to invest in. “However, if we talk about the benefits, it should also be mentioned that pension beneficiaries will no longer be dependent on the government budget when they retire. Money accumulated in pension funds should be accessible to ordinary citizens and this can only happen in a well-organized stock exchange, where citizens will be the purchasers of the securities issued by pension funds. If we foresee the current reality of the Georgian stock exchange, it’s almost impossible. Hence, this really causes some scepticism about the system,” said Gulbani.

Discussing the challenges of the reform, the representative of ISET-PI, Norberto Pignatti emphasizes the risks of low coverage of the population and increased pressure on public finances (especially in the short term), unless basic pensions increase less than they would in an absence of the reform.

Furthermore, Pignatti states that it can be expected that, as time passes, part of the “employers’ share” will be shifted on to the workers during the negotiation phase of new contracts. “This does not necessarily mean that average wages will decrease. Actually, they are likely to keep increasing, given past trends. What is most likely is that net wages will just be growing a bit more slowly,” Pignatti told The FINANCIAL.

The second issue is why the Government and not the private sector. Gulbani considers that the only private sector in Georgia capable of providing this kind of service is the banking sector. “However, it can be clearly stated that it would definitely be riskier than in the case of the Government,” stated Gulbani. “The banks already own 93% of the whole Georgian financial sector and the major share of financial resources flows through several commercial banks. Lack of competition in the financial sector already damages the economy of Georgia and private sector involved in pension reform would worsen the situation. In developed economies pension funds are quite independent and their capitalization is almost equal to the banking sector. Georgia does not have such kind of strong private pension funds and that’s why the Government is forced to carry out this reform itself,” Gulbani told The FINANCIAL.

Zurab Japaridze, Head of political party Girchi, completely disagrees with the idea of pension reform. In his public speech he said that, in fact, the reform is an agreement on a financial scheme between the Government of Georgia and the banks, and it has nothing to do with the improvement of pensioners’ living standards. “The Government is going to collect millions from people, and the law about pension reform doesn’t say anything about the responsibilities of the Government of Georgia,” said Japaridze.

In 2019, the collected pension fund will be approximately GEL 900 million. According to the draft law, for the first five years, collected money could only be invested in less risky portfolios and the limit for foreign investments is 20%. So, in the year 2019, money invested in foreign portfolios can only be GEL 180 million. The remaining GEL 720 million will be invested in Georgia. 20% (GEL 144 million for 2019) might be invested in the securities of Georgian companies. Apart from this, according to the law, the Government of Georgia has permission to borrow the whole GEL 720 million (100%) from the pension fund. In addition, about GEL 675 million (75%) can be saved in the deposits of corporate banks. The draft law of the pension reform clearly reveals the interests of the Government of Georgia, banking and business sector. There is no way that the reform will be beneficial for people; no successful foreign experience; no stock exchange market development; no economic growth support; the only thing that the reform supports is Government spending and the business sector and in addition, no one is taking responsibility for giving money back to people if the system fails,” said Japaridze.

The majority of economists are sceptical about this reform, and the Government’s claims that pensioners’ living standards will be improved. However, one benefit that can be unambiguously stated is that the Government will not be able to speculate with GEL 10-20 increased pensions before the elections.