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PENSION REFORM
Nagorno-
Karabakh
Adjara
South
Ossetia
Abkhazia
analytical
No. 113 January 2020
■ Introduction by the Special Editor:
e Rise of Pension Privatisation in the South Caucasus 2
■ Economic and Political Aspects of the Pension Reform in Armenia 3
By Gayane Shakhmuradyan (American University of Armenia)
■ OPINION POLL
e Attitude of the Armenian Population towards Pension Reform 8
■ Pension Privatization in Georgia: Accumulation Against Solidarity 10
By Alexandra Aroshvili and Tornike Chivadze
■ e Current State of the Pension System in Azerbaijan: Challenges and Prospects 14
By Gubad Ibadoghlu (Economic Research Center, Baku)
digest
caucasus
www.laender-analysen.de/cad
Special Editor: Martin Brand
(CRC 1342 “Global Dynamics of Social Policy” and Research Centre for East European Studies at
the University of Bremen)
www.css.ethz.ch/en/publications/cad.html
Research Centre
for East European Studies
University of Bremen
Center
for Security Studies
ETH Zurich
CRRC-Georgia
German Association for
East European Studies
Center for Eastern European
Studies
University of Zurich
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 2
Introduction by the Special Editor:
e Rise of Pension Privatisation in the South Caucasus
e privatisation of pension systems has spread worldwide, especially in the 1990s and 2000s, rst mostly in Latin
America, followed by numerous countries in Central and Eastern Europe. In recent years, South Caucasus countries
have also reformed their pension systems. Armenia and Georgia have introduced amandatory system of private, indi-
vidual pension savings, while Azerbaijan has so far maintained its pay-as-you-go system with supplementary volun-
tary private pension savings.
e late rise of pension privatisation in the South Caucasus is surprising given that in the wake of the 2008 global
nancial crisis, many countries in Central and Eastern Europe scaled down mandatory private retirement accounts
and restored the role of public provision. Hungary de facto nationalised private accounts in 2010/11, Poland turned
the mandatory funded pension pillar into avoluntary one in 2014, and Russia froze the funded part of its pension
system in the same year to use the contributions for current pension payments.
Assisted by international nancial institutions, Armenia (in 2014/18) and Georgia (in 2019) converted their pen-
sion system to compulsory individual accounts for all employees under 40 years of age. In Armenia, employees pay
2.5% and the state pays 7.5% of salaries into an individual pension account, while in Georgia, employers, employees
and the state each pay 2%. e authors of this special issue have dierent views on this fundamental reform of the
pension system.
In the rst article, Gayane Shakhmuradyan is quite optimistic that the reformed system can ensure better retirement
income for future retirees. She argues that despite the continued public disapproval of the mandatory funded scheme,
the Armenian pension system is now more sustainable and robust, and economic ineciencies are being overcome.
In contrast, Alexandra Aroshvili and Tornike Chivadze are sceptical about the reform of the Georgian pension
system. In the second article, they point out that the privatisation of the pension scheme cannot adequately meet the
needs of current and future pensioners. eir main criticism is that there is neither abasic pension nor any redistribu-
tion mechanism, which leads to injustice between the generations.
In the third contribution, Gubad Ibadoghlu provides an overview of the current state of the pension system in
Azerbaijan. He believes that the current pension system in Azerbaijan is not sustainable in the long run and should
be reformed. In particular, the social security principle should be strengthened, and non-insurance benets by the
state should be reduced. However, thus far, there seems to be no major debate about amandatory funded pension in
Azerbaijan.
Martin Brand
(Collaborative Research Centre 1342: Global Dynamics of Social Policy, Research Centre for East European Studies at
the University of Bremen)
Bibliography
• Orenstein, Mitchell A. (2013): Pension Privatization: Evolution of aParadigm, in: Governance, Volume 26, Issue2,
pp.259–281.
• Marek Naczyk, Stefan Domonkos (2016): e Financial Crisis and Varieties of Pension Privatization Reversals in
Eastern Europe, in: Governance, Volume 29, Issue 2, pp. 167–184.
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 3
Economic and Political Aspects of the Pension Reform in Armenia
By Gayane Shakhmuradyan (American University of Armenia)
DOI: 10.3929/ethz-b-000391399
Abstract
is article examines the past and the present aspects of retirement income provision in Armenia, with anout-
look for the future. It particularly looks at the main drivers behind the systemic reform and the structure and
operation of the old and new systems. e public attitude towards and the discourse about reform are also
analysed. An assessment is made whether the reformed system can better ensure retirement income provision.
Introduction
e reform of the pension system in Armenia has argu-
ably been one of the most contested policies adopted
since its independence. Legislatively enacted in 2010, the
reform entails atransition from anexclusively publicly
nanced and managed system (Bismarckian or pay-as-
you-go (PAYG)) to one that combines tax-nanced tiers
with privately managed funded tiers (a multipillar system).
e introduction of amandatory funded scheme for those
born after January 1, 1974, met signicant opposition
from the society, resulting in the formation of amove-
ment called ‘Dem Em’ (‘I am against’). On April 2, 2014,
the Constitutional Court of Armenia declared several
provisions of the Law on Funded Pensions as unconstitu-
tional, and the law went into eect covering only public
sector employees. Since July 2018, both public and pri-
vate sector employees have been involved in the scheme,
with acontribution rate of 2.5% of their gross wages.
is paper looks at the operation of both the old and
the new systems, with the purpose of discussing the causes
that made the former system ineective in providing retire-
ment income and the features that are meant to enable the
latter to full its purpose. e rst two sections look at the
structure of the pension system and its operation. e prob-
lems faced by the old system and the extent to which the
reformed system copes with those are also discussed. e
third section contains adiscussion of the public discourse
about reform and the attitude towards its implementation.
Structure of the System
Prior to reform, the pension system in Armenia consisted of
asingle tier that employed apay-as-you-go (PAYG) dened
benet (DB) scheme to provide pensions, i.e., benets to
the retired population were nanced through the contri-
butions of the working-age population. e system fol-
lowed the Bismarck ian logic of social insurance, implying
that apart from being used by the government to nance
the pensions of the retired population, the social security
contributions made by employees and their employers
earned for these individuals aright to pension. Social assis-
tance was provided to the members of the retired popula-
tion who did not have the required length of service (ve
years in 2010) to qualify for anearnings-related pension
(National Assembly of the Republic of Armenia, 2002).
By the reform, atransition has been made to amulti-
tier system, which is modelled on the World Bank ’s pro-
posed framework (Holzmann and Hinz, 2005; World
Bank, 1994) and includes the following components:
1. A zero pillar, which provides old-age, disability, and
survivor pensions to individuals with no insurance
coverage. Benets are nanced from the state budget
and are equa l to the minimum food basket allowance.
2. A rst pillar, which provides old-age, disability, and
survivor pensions to those with insurance coverage
who were aged above 40 in 2014, thus replacing their
lost income. Benets are nanced from the state
budget and depend on personal earnings.
3. A second pillar, which will provide pensions to those
who were aged below 40 in 2014 and who make con-
tributions to their mandatory individual accounts.
Benets are self- and state-nanced with contribu-
tion rates of 2.5% by the individual and 7.5% by the
government. Pension benets will depend on the
amount of accumulated funds at retirement and the
investment return, net of management fees.
4.
A third pillar, which will provide pensions to those who
make contributions to the voluntarily funded scheme.
e third and fourth tiers of the system employ dened
contribution (DC) schemes and operate as acomplement
to the second tier, which retains the DB scheme of the old
system. Benets from all tiers may be received upon reach-
ing the statutory pensionable age (currently 63 years old for
both men and women), except for cases specied by law.
e required period for qualifying for anearnings-related
pension has been increased from ve to ten years (National
Assembly of the Republic of Armenia, 2010a, 2010b).
Operation of the System
Pension systems carry out two main functions: insurance
against the incapacity to work because of advanced age
or disability and alleviation of old-age poverty through
redistribution from the lifetime rich to the lifetime poor
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 4
(Barr and Diamond, 2010; Holzmann and Hinz, 2005;
Schwarz, 2006). ese functions, which are also objec-
tives of social policy, can be fullled only if certain con-
ditions are met. For one, the population has to be cov-
ered by the operating scheme, which involves workers as
contributors and the retired as benecia ries. For another,
the size of the pension must be enough to ensure anade-
quate standa rd of living for the elderly population. Other
conditions include the aordability and sustainability
of the retirement income provision given the popula-
tion and economic growth rates, equity, economic and
administrative eciency, as well as the robustness of the
system or its ability to withstand adverse social, politi-
cal, and economic developments (Holzmann and Hinz,
2005; Holzmann, Hinz, and Dorfman, 2008; White-
house, 2012). In the following paragraphs, the situation
in Armenia pre- and post-reform is discussed, followed
by anassessment of whether the reformed system can
better ensure the provision of retirement income.
Coverage: In 2010, the pension system covered less
than ¼ of the working-age population, as only 529,100 of
the 2.2 million contributed to it (State Social Security Ser-
vice of the Republic of Armenia, 2020; Statistical Com-
mittee of the Republic of Armenia, 2019a). Being close to
those observed in Georgia, Azerbaijan, and Albania, that
rate of coverage was substantially below the near-univer-
sal coverage seen in the countries of Central and Eastern
Europe (International Labour Organization, 2019; Pal-
lares-Miralles, Romero, and Whitehouse, 2012, pp.166–
169). In terms of beneciaries, coverage was high, as the
number of those who were above the statutory pension-
able age was 376,000 in 2010, while old-age pensions were
provided to 465,084 individuals or 14% of the popula-
tion (National Statistical Service of the Republic of Arme-
nia, 2013, p.17). As of October 31, 2019, the number of
contributors to the funded scheme was 537,627 (Central
Bank of the Republic of Armenia, 2019), which is equal to
89% of the registered workers and 47% of the labour force
(Statistica l Committee of the Republic of Armenia, 2019a,
2019c, p.70). Approximately one thousand individuals
contribute to the voluntarily funded scheme (Capital A sset
Management CJSC, 2020). e number of recipients of
old-age pensions has decreased to 322,692 (Statistical
Committee of the Republic of Armenia, 2019b, p.459).
Adequacy: Poverty rates among the elderly popula-
tion were high in 2010. Approximately 33% lived below
the upper general poverty line of 33,500 AMD (at that
time equal to approximately 90 USD), thus being qual-
ied as ‘ poor ,’ and 2.5% lived below the food or extreme
poverty line of 19,000 AMD (50 USD) (‘extremely poor’).
Elderly individua ls accounted for the largest share (11%)
of the poor population (National Statistical Service of
the Republic of Armenia, 2011, p.39). In 2018, the
respective rates were lower standing at 21% for poor and
0.5% for the extremely poor, but the elderly population
continued to account for the largest—and larger com-
pared with the percentage in 2010—share of the poor
population at 14% (Statistical Committee of the Repub-
lic of Armenia, 2019d, p.52). e replacement rate of
pensions (dened as the average pension relative to the
average wage) was 26% in 2010 and 23% in 2018 (Stat-
istical Committee of the Republic of Armenia, 2019a).
Aordability and Sustainability: In 2010, pensions
made up the largest share of government expenditures
at 18.5%. at total equalled 5% of GDP and was sub-
stantially more than the spending of other social sectors,
including education and healthcare (National Statistical
Service of the Republic of Armenia, 2011, p.26). Pen-
sion spending accounted for 7% of the GDP and 19% of
the government expenditure in 2018 (Statistical Com-
mittee of the Republic of Armenia, 2019e, p.408–410).
e system dependency ratio (the number of contributors
divided by the number of beneciaries) was 0.98 in 2010
(State Social Security Ser vice of the Republic of Armenia,
2020), i.e., there was roughly one contributor per retiree,
which is well below the ratio of 3:1 necessary for main-
taining systemic stability (Government of the Republic
of Armenia, 2008). e old-age dependency ratio (the
share of population aged 65+ within the population aged
15–64) was 16% in 2010 and is projected to reach 34%
by 2050 (United Nations Population Division, 2019).
Equity: Data from the World Bank’s ASPIRE data-
base (World Bank, 2020) reveal that in pre-reform years,
greater social security benets were provided to those
in the lower quantiles of income distribution. us, the
PAYG system was intra-generationally equitable. How-
ever, in terms of intergenerational equity, the system
would be inequitable if left unreformed, as benets would
be provided to current workers that were lower than their
contributions (24% of wage in 2010). is is because of
the high emigration and low birth rates (25% and 1.5 on
average, respectively, for the period 2010–2017) (Stat-
istical Committee of the Republic of Armenia, 2019a).
Economic Eciency: Conceptual documents on the
reform reected the argument presented in the literature
that social security contributions in aPAYG-DB system
create disincentives for formal employment and private
saving, t hus hindering economic growth (Government of
the Republic of Armenia, 2005, 2006, 2008). Statistical
data are supportive of that claim in that the rate of non-
agricultural informal employment decreased notably
from 22% to 18% in 2014, the year when social security
contributions were unied with income tax (Statistical
Committee of the Republic of Armenia, 2018, p.112).
Administrative Eciency: e administrative costs of
the Social Insurance Fund accounted for approximately
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 5
2% of its total expenditures and 7% of the non-pension
expenditures (National Statistical Service of the Repub-
lic of Armenia, 2008, p.365). To reduce the administra-
tive costs associated with running the individual accounts,
two features are incorporated into the reformed system.
First, recordkeeping is centralized and carried out by the
Central Depository of Armenia; second, acap has been
placed on the fees that asset managers can charge (1.5%
of the net asset value (NAV)) (National Assembly of the
Republic of Armenia, 2010a). As of January 8, 2020, the
fees charged by the two asset ma nagers are below the legis-
latively set 1.5%, while the rates of return on pension fund
assets have been positive since its inception in March 2014.
e average return has been 10% for balanced and xed-
income funds and 9.6% for conservative funds (Amundi
ACBA Asset Management Armenia, 2020; C-QUADR AT
Ampega Asset Management Armenia, 2020).
Robustness (Security of Benets): e two determi-
nants of the robustness of apension system are the extent
to which its nancing and management are diversied
(Holzmann, Hinz, and Dorfman, 2008) and (specically
for DC schemes) the share of the assets that are invested
in secure nancial instruments, such as government
bonds and deposits (Pension System Awareness Center,
2018). As opposed to the old system, which relied exclu-
sively on apublicly nanced and managed scheme, the
reformed system is diversied; pillars 0 and 1 are tax-
nanced and managed by the state, while pillars 2 and
3 are funded and managed privately. Data published by
the Central Bank of Armenia and the Central Deposi-
tory of Armenia show that approximately two-thirds of
the pension fund assets are currently invested in govern-
ment bonds and deposits (Central Bank of the Republic
of Armenia, 2019; Central Depository of A rmenia, 2019).
A general assessment of the reform that can be made
at this point is that although replacement rates remain
low and poverty among the elderly population persists,
the reformed system can ensure a better retirement
income for future retirees, as coverage, sustainability,
and robustness of the system have been improved, and
economic ineciencies are being overcome. Given the
challenges of ageing and the emigration of the work-
ing-age population, those are the gains from the reform.
Public Discourse and Attitude towards the
Reform
e reform was advocated by the government as ameans
to ensure ahigher standard of living for the elderly pop-
ulation. Increased individual responsibility in the provi-
sion of retirement income, captured by the motto “Not
only the state but also the citizen,” was seen as the key to
that objective (Government of the Republic of Armenia,
n.d., p.1). It was emphasized that the tax burden on the
employees and their employers would not increase, as
social security contributions and the income tax would
be integrated in asingle tax on income (Ibid.). To pro-
mote public awareness, a number of initiatives were
started, among which was the establishment of the Pen-
sion System Awareness Center (PSAC).
e opposition to reform, represented by the four
non-governing factions in the parliament (Prosper-
ous Armenia, the Armenian National Congress, the
Armenian Revolutionary Federation, and the Heritage
parties), discredited the reform as anattempt by the rul-
ing party (the Republican Party of Armenia) to renege
on its responsibility of ensuring the sustainability of
the pension system. A social movement called “Dem
Em” (“I am against”), initially comprised of IT sector
employees, organized rallies and demonstrations against
the reform. Leaders of the movement declared that by
making the funded component mandatory, the govern-
ment was impinging on the constitutionally enshrined
rights and freedoms of the citizens, particularly that of
property, and was violating the constitutional provision
that Armenia is asocial state (Dem Em Initiative, 2020).
In December 2013, opposition MPs led acase with
the Constitutional Court of Armenia to determine the
constitutionality of a number of articles in the Law on
Funded Pensions. In its decision published on April 2,
2014, the Court declared those provisions unconstitutional,
urging the Government and the Nationa l Assembly to take
steps towards revising the law (Constitutional Court of
Armenia, 2014). Public opinion survey data from arep-
resentative sample (Caucasus Research Resource Centers,
2015) revealed that the majority of the population across all
age groups and income levels disapproved of the reform (for
details see Figures 1a and 1b at the end of this contribution).
e revised law went into eect in June 2014, with
only public sector employees being required to contribute
to the funded scheme. e mandatory operation of the
funded scheme for private sector employees, conditioned
by the changes in the tax code, was scheduled to take
eect on July 1, 2018 (Azatutyun, 2016). e disappro-
val ratings of the reform remained high in 2017 (Cauca-
sus Research Resource Centers, 2017), though adecreas-
ing trend comparable with that in 2015 did take place
(see Figures 2a and 2b at the end of this contribution).
In June 2018, confronted with the decision of either
halting the taking eect of the law or not undertaking
any action at all, the post-revolutionary government of
Nikol Pashinyan chose amiddle approach. e funded
scheme, which by then already covered some 200,000
employees, was not abolished, but the contribution rates
were altered, with individual rates decreasing from 5%
to 2.5% of wages and the government contributions
increasing from 5% to 7.5%. Referring to the negative
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 6
consequences that the abolishment of the funded scheme
would have for the society and the economy, the prime
minister noted that the reform “was in the national inter-
est of the Republic of Armenia and in the long-term inter-
est of its citizens” (CivilNet, 2018). e bill was passed
in the parliament with 78 votes in favour, two against,
and seven abstaining (Asbarez, 2018). e MPs who ini-
tially disapproved of the reform expressed conditional
support for the new government with the expectation
of further deliberations and reform (Panorama, 2018).
Members of the “Dem E m” movement planned to renew
their protests (Azatutyun, 2018), but as of this writing,
no large-scale protests have taken place. Tax law changes
introduced by the new government (adopted in June
2019, eective as of January 1, 2020) envisage that in
the period 2020–2023, personal income tax rates will
gradually decrease from the current 23% to 20% for all
citizens (at taxation), while social security contribu-
tion rates will be restored to the pre-2018 rates (5% by
the individual and 5% from the government) (National
Assembly of the Republic of Armenia, 2019a, 2019b).
Conclusion
In anattempt to solve the scal sustainability problem
of the PAYG system, the government of the Republic of
Armenia chose to transition to amultipillar system that
combines tax-nanced tiers with fully funded tiers. e
opposition to this reform from parliamentary factions
and society at large led to the questioning of several pro-
visions of the Law on Funded Pensions and its ultimate
revision. Although the reformed system has the poten-
tial to address the problems that the old system faced,
thus providing adequate retirement income, public dis-
approval of the mandatory funded scheme remains high.
About the Author
Gayane Shakhmuradyan is analumna of the American University of Armenia, with anMA in Political Science and
International Aairs (2019). Her research interests are in the eld of comparative politics, and she wrote her master’s
thesis on the pension system reform in Armenia. Currently, she is doing research at the American University of Arme-
nia and plans to apply for PhD studies.
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Pension Indicators and Database Brief 1. http://documents.worldbank.org/curated/en/114161468330910597/
Pension-indicators-reliable-statistics-to-improve-pension-policymaking
• World Bank. (1994). Averting the old age crisis: Policies to protect the old and promote growth. New York: Oxford
University Press.
•
World Bank. (2020). e Atlas of Social Protection: Indicators of Resilience and Equity. https://databank.worldbank.
org/home.aspx
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 8
OPINION POLL
e Attitude of the Armenian Population towards Pension Reform
Figure 1a: How much do you support or not support the introduction of the cumulative pension system? (by age
groups, November 2015)
50
55
52
19
20
20
19
16
21
11
8
6
2
1
1
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
18–35
36–55
56+
Do not support at all Rather don’t support Neutral Rather support Strongly support
Source: Caucasus Resea rch Resource Centers. (2015). Caucasus Barometer 2015 Armenia. https://caucasusbarometer.org/en/datasets/
Figure 1b: How much do you supp ort or not support the introd uction of the cumulative pension syste m? (by income
groups, November 2015)
63
60
53
43
58
46
68
55
13
14
22
21
21
22
8
16
12
19
17
18
11
21
25
15
12
7
7
11
5
10
14
7
4
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
up to USD 50
USD 51–100
USD 101–250
USD 251–400
USD 400+
no personal income
DK
RA
Do not support at all Rather don’t support Neutral Rather support Strongly support
Source: Caucasus Resea rch Resource Centers. (2015). Caucasus Barometer 2015 Armenia. https://caucasusbarometer.org/en/datasets/
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 9
Figure 2a: How much do you support or not support the introduction of the cumulative pension system, which will
be obligatory starting from 2018 for citizens born after 1974? (by age groups, October 2017)
39
38
47
13
21
13
25
22
25
18
14
12
3
4
3
2
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
18–35
36–55
56+
Completely disapprove Rather disapprove Neutral Rather approve Completely approve DK/RA
Source: Caucasus Resea rch Resource Centers. (2017). Caucasus Barometer 2017 Armenia. https://caucasusbarometer.org/en/datasets/
Figure 2b: How much do you support or not support the introduction of the cumulative pension system, which will
be obligatory starting from 2018 for citizens born after 1974? (by income groups, October 2017)
31
45
43
40
23
40
53
39
19
10
15
24
21
14
13
23
32
32
21
17
34
22
16
17
5
3
4
4
5
86
3
12
9
14
16
16
22
4
16
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
up to USD 50
USD 51–100
USD 101–250
USD 251–400
More than USD 400
no personal income
DK
RA
Completely disapprove Rather disapprove Neutral Rather approve Completely approve DK/RA
Source: Caucasus Resea rch Resource Centers. (2017). Caucasus Barometer 2017 Armenia. https://caucasusbarometer.org/en/datasets/
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 10
Pension Privatization in Georgia: Accumulation Against Solidarity
By Alexandra Aroshvili and Tornike Chivadze
DOI: 10.3929/ethz-b-000391399
Abstract
On 01 January 2019, anew pension plan was launched in Georgia. Oriented towards long-term accumu-
lation and based on individual contributions, the plan represented aGeorgian version of anotherwise typ-
ical private pension system where, together with the employee, the employer and the state (each contribut-
ing 2% of the employed person’s taxed salary to the pension account) participate in pension accumulation.
With this reform, apart from improving the social conditions of the pensioners in Georgia, the government
should have responded to ongoing demographic and scal challenges, according to which the number of pen-
sioners will be constituting aquarter of the population by 2030, while the number of hired workers (payers
of income tax) is already lower than the number of existing pensioners (Geostat 2018). us, considering
the current budgetary parameters, asubstantial increase in basic non-contributory pensions seems to be out
of reach. is article discusses why Georgia’s pension reform cannot adequately meet the needs of current
and future pensioners, the short- and long-term impacts that we should expect from ongoing reform, and
what might be the real motivation behind this process. Additionally, we will contemplate the existing alter-
native and the problems with the political discussions around it.
Elderly Individuals in Georgia
Georgian pensioners have been Soviet citizens for dec-
ades, and their retirement insurance was centrally cov-
ered by the Soviet state-run pension system “Gosstra kh”.
Based on intergenerational contributions, this system
generated generous retirement benets throughout the
Soviet Union (Koplatadze, 2000; Buckley, 1998). How-
ever, due to the collapse of the Soviet Union and years
of hyperination, these deposits vanished into thin air.
After the fall of the Soviet Union, Georgia attempted
to recover its share of Gosstrakh (the organization itself
was under Russian ownership by that time) in vain:
Under severe international pressure in the late 1990s,
Georgia was forced to sign a so-called “Zero Option
Agreement” with the Russian Federation that aimed to
restructure interstate debt (Gugushvili, 2009). Apart
from the fact that the country could no longer receive its
share in the Soviet pension fund, this agreement implied
that Georgia was free from the responsibility of return-
ing these funds to the beneciaries of the Soviet insur-
ance system or compensating them as anindependent
state. Since that time, no signicant pension reform has
been implemented in Georgia that would oer a pen-
sion higher than the equivalent of minimum subsistence.
e basic at-rate universal pension in Georgia today
is 200 GEL (equal to approximately 70 USD), and this
is the highest rate over the course of almost 30 years of
independence. However, the current pension cannot
meet even the most basic needs of elderly individuals as
the ocial minimum subsistence level is 193 GEL. e
current pension replacement rate in relation to the aver-
age salary is 19%. ese indicators are alarming when
they are compared to EU and OECD averages (ranging
from 60 to 75%) and aregional average of 40% (Min-
istry of Economy 2014).
Despite its miserably low amount, the existing pen-
sion has asignicant impact on general inequality and
poverty, which illustrates that the socio-economic con-
ditions in the country are alarming. As of 2017, if we
subtract old age pensions from household incomes, the
poverty level in the country would increase by 20%. In
addition, the impact of existing pensions on general ine-
quality is stronger than the impact of social assistance,
and this impact has anupward tendency (Kakulia et
al. 2017). According to the World Bank, an increase
in pensions of 100 GEL (equal to 35 USD) would have
reduced the poverty level by 15%, and anincrease of
just 20 GEL (equal to 7 USD) would have decreased the
poverty level by 2.8% (Ministry of Economy 2014). e
introduction of basic pensions in 2006 had apositive
impact on poverty reduction among children, also indi-
cating that basic pensions remain animportant mech-
anism for combating general poverty. (UNICEF 2014)
Due to the involvement of international nancial institu-
tions, the Ministries of Economy and Finance of Geor-
gia have developed aprivate saving pension plan, which
does not provide the reinforcement of basic pensions or
integrate any redistributive mechanisms into the pen-
sion system. is particular action was also the govern-
ment’s oer of rethinking the historica l meaning of pen-
sion: withdrawing its social function and considering
pensions as anindividual responsibility or as apower-
ful macroeconomic tool for economic growth and cap-
ital market development. As the website of the Pension
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 11
Agency maintains: “In long and short-term perspec-
tive, the pension assets will create a signicant invest-
ment capital base (several billion GEL), which will be
crucial in Georgia’s capital market development and its
80% at least will serve the economic growth of Geor-
gia its acceleration”.
Who Will Benefit and Who Will Pay the
Price?
e reform is based on a6% contribution of monthly sal-
ary to the personal account of the employee. According
to the approved law, the accumulated assets will be con-
trolled by the LEPL “Pension Agency” and then trans-
ferred to private companies for management. Assets
will be invested in nancial markets using avariety of
nancial instruments, and the proceeds will be placed
in the personal accounts of the employees. After retire-
ment, the beneciaries can receive asingle lump sum
pension or amonthly programme payment based on
the sum of proceeds divided by the number of month
between retirement age and average life expectancy (set
by the National Statistics Department of Georgia at the
time of retirement).
One of the most important criteria for evaluating
pension plans is coverage of the workforce. Participa-
tion in the retirement plan is mandatory for employees
under 40 years of age. Inclusion in the plan for those
who are self-employed is voluntary with a4% contribu-
tion. Individuals over 40 can leave the plan.
In developing countries, anadditional feature of pen-
sion plans is the facilitation of the labour formalization
process. It should be noted that in the process of estimat-
ing the coverage of reform, the structure and character-
istics of the domestic labour market, which is aected
by alarge shadow economy, have not been taken into
account. e reform also relies on inappropriate meth-
odological assumptions, such as employee registration
and average wages.
Employment in Georgia is calculated according to
the ILO standardized methodology, which aggregates
hired and self-employed workers. However, the vast
majority of self-employed people are actually unem-
ployed. By 2017, 51% of the employment rate repre-
sented self-employed individuals, 82% of whom were
involved in agriculture. (Ministry of Economy 2018)
eir share in total employment is 43%, while their
share in GDP is only 8% (Geostat 2017) indicating low
agricultural productivity and limited incomes. As of
2015, only 2% of self-employed individuals were entre-
preneurs or employers and would register as taxpayers.
It is obvious that most of the self-employed individuals
would not formalize their labour and would therefore
refuse to join the pension plan because if they joined,
they would have to pay anadditional 20% in income tax
as well as the 4% pension contribution. Consequently,
the 2% subsidy of the state does not act as anincentive
for the formalization of labour.
Notably, the average salary of employees aged 50
to 60 was approximately 650 GEL as of 2015 (Geostat
2015, equal to 270 USD at the time). Typically, in the
last decade of working age, incomes tend to decrease
rather than increase, which suggests that hundreds of
thousands of future retirees, whose incomes are low,
will depend on the basic pension because they will not
have enough time to save enough for ahigher pension.
e gure used for the average salary, which
amounted to 1125 GEL (425 USD) at the time the
reform was launched, is also irrelevant for the planning
of the reform. is gure does not take into account
the median distribution, income inequality, or the dif-
ference between very high and very low salaries, and by
using average values, fails to determine the uctuations
in the wages of the majority of the population. Data
obtained from the Georgian Revenue Service indicate
that in 2017, 64% of total revenue recipients received
less than 1,000 GEL, which is 21% of total revenue. In
total, 90% of the revenue recipients received only 50%
of the total revenue, while the remaining 10% received
50% of the total revenue.
e reform also disregards important characteristics
of the Georgian labour market such as the sectoral struc-
ture of the economy and the overall quality of jobs: service
and construction development are the two leading sectors.
(Ministry of Labour 2015) ese sectors are characterized
by low wages and unstable and informal employment.
(Solidarity Center 2018) Consequently, contributions are
irregular and insucient for accumulation. Overall, the
data indicate that low incomes and uneven redistribution
would render the individual accumulation system point-
less, since the majority has nothing to accumulate, and
labour market inequality will transfer into old age pov-
erty. e government’s pension reform does not integrate
any type of specialized concession for target groups, nor
does it consider redistribution mechanisms often found in
traditional pension systems, for example: providing con-
tinuous contributions for the temporarily unemployed or
early retirement for employees working under severe or
harmful conditions. Other redistribution mechanisms
are solidarity funds for low-income contributors or the
augmentation of healthcare services for elderly individu-
als or the strengthening of the basic pension. It should be
noted that these types of balancing mecha nisms are vitally
important in the context of uneven coverage of reform
and generally, in anunequal society (Barr and Diamond,
2006) since without them, only anarrow segment of the
population benets from the pension.
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 12
e reform does not cover current retirees or those
retiring in the next 10–15 years because they do not
have sucient time to accumulate funds. It also does
not cover self-employed individuals or the majority of
the 20% of employees who are under 40 years old and
working at unstable and low-wage jobs. As aresult, only
avery narrow segment of the population benets—those
who already enjoy aprivate pension plan.
It is important to note that in addition to the above-
mentioned problems and the contradictions between
the proposed pension plan and local needs, the reform
excludes solidarity as a fundamental notion. It does
not allow for intergenerational redistribution or redis-
tribution within generations and has akind of “extrac-
tive” character: the pension scheme primarily extracts
funds from those with low incomes and the state. (e
contribution from the employer is unprecedently low.
Under this new reform, the contributions of employers
and employees are not taxed—the actual contribution
of the government is 2.8% out of amonthly contribu-
tion of 6%. According to Eurostat, the average contribu-
tion of anemployer in pension systems is at least twice
as much as the contribution of anemployee.) Finally,
these funds are transferred towards nancial markets.
Historically, the real prot from these types of
schemes goes to nancial players, namely, stock mar-
kets, insurance companies and capital ma rkets, not only
locally but globally. (Naczyk and Palier, 2014). How-
ever, the existing joint-stock market in Georgia is not
developed enough. Additionally, the 2008 experience
has shown that nancial crises weigh heavily on pen-
sion assets and pension funds. (Orenstein, 2011) Con-
sidering the probable eects of the reform, additional
resources will become necessary to limit social harm.
ere Is an Alternative
During the pension reform, the social-democratic fac-
tion of the Georgian parliament proposed abill, with
amain pillar that was based on the principle of intergen-
erational solidarity. e scheme allotted 4% of the over-
all 6% contributions to the pillar of intergenerational sol-
idarity a nd the remaining (minimum) 2% to individual
accumulation accounts. e intergenerational solidarity
pension was ca lculated on the basis of contributions and
their duration. e proposed pension contained some
mechanisms of redistribution: 1.Bonus years were pro-
vided to the beneciaries in the rst decade of the sys-
tem since they did not have sucient years for contri-
butions. 2.e bonus years were reduced annually for
new beneciaries who had more years of real contribu-
tions than their predecessors. is should have provided
for arapid and massive rise in pensions and the covering
of thousands of future retirees, who would not receive
anadequate pension raise even with the 6% individual
contributions.
By calculating average lifetime earnings, those earn-
ing less than the existing average salary would benet
from “accrual rates”—the lowest earning individuals
would receive the highest rate, etc. We see identical for-
mulas in similar pension schemes in the Czech Republic,
the U.S., Switzerland, Portugal and the U.K. e policy
was thus oriented on reducing poverty and potentially
reducing labour market inequalities among elderly indi-
viduals. Since the calculations were based on the aver-
age of lifetime earnings and not the salary of the most
recent working years, the proposed method involved
valorisation, which considers the ination in the years
of contribution and permits the indexation of pension
on current ination. e draft also proposed supplying
temporarily unemployed individuals with contributions
over asix-month period.
is plan would stimulate the formalization of
employment, as citizens would benet from alarger pen-
sion based on small contributions, especially in the rst
years. Since the plan was based on contributions, there
is astrong balance bet ween the current contributors (the
active labour force) and the beneciaries (retirees who
contributed in the past), which allows large amounts
of funds to accumulate and be distributed to retirees,
whose numbers rise annually. e draft also meant for
the investment of pension assets (the funds remaining
after the distribution of pensions) into housing: the
formation of aNational Housing Fund, which would
have worked with the Pension Fund on aordable hous-
ing policies.
e primary dierences between the draft provided
by the social democrats and the approved reform lie in
the fundamental principles. e former was oriented
towards institutionalizing intergenerational solidarity,
while the latter was oriented towards encouraging indi-
vidual saving. e alternative draft was created to bene-
t the workers, those with low incomes and other target
groups. In contrast to the approved reform, the alterna-
tive draft proposed that beneciaries receive pensions
from the beginning of their retirement until their death.
e alternative draft was not supported by the Geor-
gian parliament. One member of the social-democratic
faction Beka Natsvlishvili left the parliamentary major-
ity in protest.
What Does the Pension Reform Reveal?
Considering the incredibly sensitive nature of the sub-
ject, the government should have tried to obtain public
legitimation. However, as research reveals, the details
of the reform were unknown to the majority of society.
Based on a representative poll conducted in 2017 by
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 13
Friedrich Ebert Stiftung, we can conclude that only
2% of the survey participants considered themselves to
be fully informed (FES 2017). After implementing the
reform, apoll conducted by NDI has shown that 51%
of the survey participants had never heard of the pen-
sion reform at all (NDI 2018).
Because t he vast majority of society had no awareness
and consequently no legitimation or involvement in the
process, the government was able to pass the prepared
scheme as “the main pillar.” e main pillar originally
represents atraditional intergenerational solidarity plan
that often exists in multipillar pension systems. It pro-
vides the main pension incomes for elderly individuals
along with the universal public pensions in countries of
the European Union and OECD. In reality, the above-
mentioned pillar was neglected. e plan proposed by
the government is atypical private plan that is volun-
tary almost everywhere because its foundation stands
on the principle of individual accumulation.
is subject has been also excluded from the polit-
ical and media debates about the reform. e argu-
ments that parliamentary opposition used to criticize
the given reform were even more libertarian in means
of problematizing its obligatory character as well as gov-
ernment participation in the reform. A similar position
was held by the majority of non-governmental organi-
zations. To sum up, the political discussions about the
pension reform had revea led considerable incompetence
of the media, experts and politicians about this issue.
Implementing the reform has also revealed aglobal
tendency: developing countries are manipulated into
employing such radical solutions. e historical analy-
sis shows how the representatives of local governments
were used as secondary actors by international nancial
institutions and other nancial players to carry out sim-
ilar reforms mainly in post-socialist and Latin Ameri-
can countries (Naczyk and Palier, 2014). According to
pension system experts, this process involves the pri-
vatization of pensions and implies that pensions have
transformed from having ahistorically social function
to having amacroeconomic function that employs mar-
ket principles (Ebbinghaus, 2015) and is subordinated
to growth imperatives.
Conclusion
By instituting active pension reform:
1. e state did not restore justice for existing retirees
(to balance the loss of Soviet contributions).
2. e state has not fullled its social obligation to the
abovementioned generations by providing them with
adequate living pension allowances during their lives.
3. e state did not full either its moral or social obli-
gations of developing aplan that considers redistribu-
tion mechanisms based on the principle of intergen-
erational solidarity, which would have the capability
of signicantly mitigating the condition of retirees
and vulnerable groups of future generations—the
latter being the majority of the population.
4. e Parliament declined to use the alternative bill—
anadditional pillar that did not imply the complete
replacement of the government’s reform. is deci-
sion has closed down the opportunity of reducing
retirement poverty in coming years, at the very least.
At the most, it has eliminated the possibility of pay-
ing anancially stable and socially just pension of
higher value to future generations.
About the Authors
Alexandra Aroshvili is anindependent researcher working mainly in the sphere of social politics. She is also the Editor-
in-chief of the analytical media-portal European.ge. In recent years, she has been working on researches focused on
the connections among the labour market andeducation system; on theinformal employment and labour safety. She
was asenior researcher and anauthor of “Pension Reform in Georgia”, apublication that will be published in 2020.
Tornike Chivadze is apolitical scientist and editorial board member of European.ge. From 2018–2019, he was invited
to work on aresearch project entitled ‘e Alternative Vision of Pension Reform of Georgia: Solidarity, Sustainabil-
ity and High Benet’ and to draft law on the PAYG pension scheme, which was initiated by social democrats in the
Parliament of Georgia.
Bibliography
• Barr, N. and Diamond, P., 2006. e economics of pensions. Oxford review of economic policy, 22(1), pp.15–39.
• Buckley, C., 1998. Obligations and expectations: Renegotiating pensions in the Russian Federation. Continuity
and Change, 13(2), pp.317–338.
• Ebbinghaus, B., 2015. e privatization and marketization of pensions in Europe: A double transformation facing
the crisis. European Policy Analysis, 1(1), pp.56–73.
• FES (Friedrich Ebert Stiftug), 2017. Attitude of Population towards Pension System Reform in Georgia.
• Geostat (National Statistics Oce of Georgia) 2015. Processed data of Integrated Household Survey, Structure
of Self-Employment.
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 14
• Geostat (National Statistics Oce of Georgia) 2017. Distribution of employees by economic activities
• Gugushvili, A., 2009. Political economy of old-age pension reforms in Georgia.
• Institute of Social Studies and Analysis, 2017. Attitude of Population towards Pension System Reform in Georgia.
Tbilisi: Friedrich-Ebert-Stiftung (FES)
• Kakulia, M., Kapanadze, N. and Khurkhuli, L., 2017. Chronic Poverty and Income Inequality in Georgia. Tbil-
isi: Friedrich-Ebert-Stiftung (FES).
• Koplatadze, I., 2000. e role of pension funds in macroeconomic regulation at the transition stage towards mar-
ket economy.
• Ministry of Economy and Sustainable Development of Georgia, 2014. Pension Reform In Georgia.
• Ministry of Economy and Sustainable Development, 2018. Labour Market Analysis of Georgia.
• Ministry of Labour, Health and Social defence, 2015. Labour Market Demand Component Study.
• Naczyk, M. and Palier, B., 2014. Feed the Beast: Finance Capitalism and the Spread of Pension Privatisation in
Europe. Available at SSRN 2551521.
• NDI (National Democratic Insitute) 2018. Public attitudes in Georgia.
• OECD, 2007. Pensions at aglance 2007: Highlights.
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Social Security Review, 64(3), pp.65–80.
• Solidarity Center, 2018. Labor Conditions and Safety in formal and informal employment of Construction Sec-
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• UNICEF, 2014, Reducing Child Poverty In Georgia.
e Current State of the Pension System in Azerbaijan: Challenges and
Prospects
By Gubad Ibadoghlu (Economic Research Center, Baku)
DOI: 10.3929/ethz-b-000391399
Abstract
is contribution gives anoverview of the current state of the pension system in Azerbaijan, examining the
regulation of the retirement age and disability pensions as well as the generosity of pension benets. Major
indicators are compared to those of other countries in the post-Soviet region. e contribution continues
to assess reform needs and reform plans. e contribution concludes with brief recommendations for pen-
sion reform.
Introduction
According to ocial data, at the beginning of 2019,
13.2% of the total population of Azerbaijan (equal to
1.3 mn out of nearly 10 mn people) were pensioners.
(State Statistical Committee 2019) In comparison to the
post-Soviet region, this is avery low number. While in
Azerbaijan, as indicated above, there are 130 pensioners
per 1,000 people, the gure is 154 in Armenia, 157 in
Kazakhstan, 200 in Moldova, 264 in Ukraine, 273 in
Belarus, and 296 in Russia. (Interstate Statistical Com-
mittee 2019) Furthermore, Azerbaijan’s state nances
have beneted from anoil boom. Accordingly, pressure
for pension reform has been relatively weak. However,
the current system is not sustainable in the long run.
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 15
e law “On Labour Pensions”1 adopted on Febru-
ary 7, 2006, regulates the pension system in the coun-
try. e state pension policy of the Republic of Azerbai-
jan is determined by the “Concept of Pension Reform
in the Republic of Azerbaijan for 2014–2020”2. ere
are three categories of labour pensions: old age pension,
pension for disabled persons and pension due to loss of
the family head. e following sections give an over-
view of the related regulations as of 2019.
Retirement Age
Amendments to the law “On Labour Pensions” of March
10, 2017, provide the right to retirement with a pen-
sion if the pension capital accumulated in the insurance
section of the individual account of aperson who has
reached the pension age allows for apension payment
that is not less than the minimum amount of the labour
pension; alternatively, if that is not the case, aninsur-
ance period of 25 years also entitles aperson to receive
anold age pension.
To reduce pension payments, the retirement age has
been gradually increasing since July 1, 2017. Accord-
ing to Article 7 of the law “On Labour Pensions”, each
year 6 months are added to the minimum retirement
age. According to the adopted schedule, from July 1,
2019, to June 30, 2020, the age limit is 64 years and 6
months for men and 61 years and 6 months for women.
After July 1, 2026, when the transition period ends, the
retirement age will be equal for men and women, stand-
ing at 65 years.
Compared with the region, the retirement age of
65 years is high. Among the post-Soviet countries, only
Georgia, Latvia, and Lithuania currently apply this age.
Kazakhstan, Kyrgyzstan, Tajikistan, Armenia and Esto-
nia follow with 63 years. In Russia, Ukraine and Bela-
rus, the retirement age is currently 60 years. It is also
important to note that the Soviet tradition of gender
dierences in the retirement age, i.e., women retiring
earlier than men, has currently been abandoned only
in 6 countries (Latvia, Lithuania, Ukraine, Kazakh-
stan, Armenia, Estonia).
While the retirement age of 65 is not high when com-
pared to Western countries, the lower life expectancy
in the post-Soviet region has to be taken into account.
us, Estonia and Belarus are among the post-Soviet
countries with the highest average life expectancy after
retirement and thus with the longest average payment
period for old age pensions. e corresponding gure
in both countries is 14 years. Armenia follows with 12
1 http://www.e-qanun.az/framework /11566
2 https://president.az/articles/13330
3 http://sosial.gov.az/elilliyegoreemekpensiyasi
years, and Russia and Ukraine with 11 years. In Azer-
baijan, the gure is only 7.5 years. (CESD 2017. p.16).
According to the latest WHO data published in 2018
the life expectancy in Azerbaijan stands at 73.1 years
(70.3 years for men and 75.7 years for women). With
this gure Azerbaijan ranks 96th in aglobal comparison.
e ongoing increase in the retirement age in Azerbaijan
will further reduce the average period of pension pay-
ments per person, which will become afactor contrib-
uting to adecline in social welfare. Furthermore, the
fact that the period of receiving anold age pension is so
short creates diculties in pursuing eective collection
policies, because incentives to care for one’s pension are
low when the pension payments cover only afew years.
Disability and Loss of Family Head
Pensions
A labour pensioner has the right to move from one type
of labour pension to another, except for the transition
from the old age pension to disability pension, accord-
ing to Article 34 of the law “On Labour Pensions”. At
the same time, only one pension is granted to adult
persons who have dierent pension rights. is means
that adisability pension is only paid as long as aperson
receives no old age pension.
In Azerbaijan, the disability pension is established in
connection with the limitation on aninsured person’s
ability to work for reasons of mental or physical disability
resulting from illness or injury. Disability groups, causes
of disability or limited health under the age of 18, as well
as the period of disability occurrence are determined by
medical and social expert commissions in accordance
with the legislation. Disability pension is provided to
Group I disabled persons if they have 4 months of insur-
ance period for each full year of the working age, pro-
vided that the total insurance period is not less than
5years. Disability pension is provided to Group II and
III disabled persons if they have adetermined insur-
ance period, provided that the pension capital recorded
in the insurance section of the personal account allows
apension guarantee that is not less than the minimum
amount of labour pension.3
According to the current legislation, family members
(children under the age of 18 with parents who are
deceased or killed, as well as children of disabled per-
sons over the age of 18 whose limitations on health
were identied up to the age of 18, and students study-
ing full-time at aneducation department of educational
institutions up to the age of 23) who assume the respon-
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 16
sibility of the deceased or killed head of the family have
the right to alabour pension due to the loss of afamily
head.4 Labour pensions due to the loss of afamily head
consist of only the insurance section.
Pension Benefits
Old age pensions and pensions for disabled persons con-
sist of two parts, one part based on insurance and one
part based on individua l savings. Both parts are recorded
in anindividual pension account, and the respective part
of the old age pension is calculated as the ratio of the
pension capital in the respective part to the number of
months of the expected pension payment term.
Since 2017, each year the old age pensions have been
indexed according to the annual growth rate of the aver-
age monthly nominal salary for the previous year, as
dened by the State Statistical Committee. Until 2017,
the labour pensions were based on the consumer price
index for the previous year. For orientation purposes, the
average nominal monthly wage growth rate in 2017 was
5.7 percent and in 2018 it was 3 percent, while ination
amounted to 12.9 percent and 2.3 percent, respectively.
According to the data from early 2019, the average
monthly pension in the country was 222.6 manat5 (at
that time equal to approximately 130 USD), amount-
ing to just 40% of the average monthly nominal salary
in the country. In detail, the old age pension stood at
249.3 manat (145 USD), the disability pension at 185
manat (110 USD) and the loss of family head pension
at 175.4 manat (110 USD).
As shown in table 1 on p.18, 2.56 insured people
in 2016, 2.7 insured people in 2017 and 2.86 insured
people in 2018 corresponded to one pensioner. Although
the dynamics of the past three years have been posi-
tive, Azerbaijan has not yet reached the minimum level
of sustainability for this system—3 insured people per
pensioner.
Reform Objectives
At present, the main objectives of the pension system of
the Republic of Azerbaijan are to reduce the dependence
of the pension system on budget f unds (to minimize non-
insurance costs), to increase the functional dependence
between the size of the social insurance collection and
the size of the amount of the designated pension, to con-
cretize government obligations to nance the pension
system, to stimulate the transition to “minimum pen-
sion capital”, to create opportunities for the application
of avoluntary savings component to the insurance and
4 http://sosial.gov.az/ailebashchisiitirmeyegorepensiya
5 http://m arja .a z/news/37393
6 http://sai.gov.az/upload/les/DSMF_layihe2018_27OKTYABR _F%C4%B0NAL.pdf
7 http://sai.gov.az/upload/les/DSMF_deyishiklik_Final.pdf
to create opportunities for the establishment of non-gov-
ernmental pension funds (institutions). To achieve these
goals, the base part of labour pensions has been abol-
ished so far, the minimum age for the right to receive
anold age pension has been increased, the “minimum
pension capital” criterion has been introduced, and the
requirement of minimum work experience to obtain the
right to labour pension has been abolished. e required
level of work experience for those who are entitled to
alabour pension on preferential terms has been increased
by 5 or 10 years in dierent elds and, as aresult, since
2017, Azerbaijan has transitioned from athree-tier sys-
tem to atwo-tier system of labour pensions. However,
in the Concept, important issues such as the increase in
the insurance premium rates for 2014–2015, as well as
the increase in the insurance rates of those people who
pay the mandatory state social insurance based on the
minimum wage (persons who use agricultural lands on
their property, persons engaged in private businesses and
labour activity) have not yet been resolved.
Moreover, the pension system in Azerbaijan has not
yet been adapted to the needs of the market economy
and has not been integrated into internationa l standards.
In addition, the pension system has not been nancially
viable, and this system has not been able to achieve the
reliable social protection of retirees in the long term due
to the continued serious dependence on state nancial
resources. us, anumber of the non-social insurance
obligations of the existing pension system in our countr y
have led to anincrease in social security spending and
transfers from the state budget, signicantly increasing
the nancial burden of this system.
As aresult, expenditures in the approved budget of
the State Social Protection Fund in 2018 amounted to
3578.7 million manat6, which is six times more than
in 2006, with 589.5 million manat. During the same
period, the amount of transfers from the state budget
increased 7.8 times, from 167 million to 1300 million
manat, and the share of total expenditures increased
from 28.3 percent to 36.3 percent. In the budget of
2019, incomes for mandatory state social insurance are
predicted to be 67.1%, and the funds allocated from the
state budget are predicted to be 32.8%.7
Although recent actions taken at the state level in
the direction of formalizing work places, registering
labour contracts, and eliminating informa l employment
expanded the possibilities of using the savings potential
of the mandatory state social insurance, in Azerbaijan,
the indication of the specic weight of expenses on the
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 17
payment of labour pensions by age has had atendency
to decline compared to international indicators, while
in contrast, the indication of the specic weight of the
expenses on the payment of labour pensions by disabil-
ity, has had atendency to increase in comparison with
the specic weights of world practices.
e “Concept of economic and social development of
the Republic of Azerbaijan for 2018 and the next three
years” is aimed at the self-regulation of the insurance-
pension system and the achievement of an independ-
ent future development. As apriority of the policies on
social protection and social security, the Concept also
aims at improving the structure of the mandatory state
social insurance premium rates, increasing the insur-
ance rates of the people who pay the mandatory state
social insurance based on the minimum wage (persons
who use agricultural lands on their property and per-
sons engaged in private businesses and labour activity),
and optimizing the ratio of the number of people pay-
ing the insurance premium to the number of pensioners
in 2018–2021.
e Impact of Lower Oil Prices
In 2015 Azerbaijan’s economy started to be eected by
lower world oil prices. Since then, various measures have
been put in place to reduce the share of transfers from the
state budget to the State Social Protection Fund. us, as
outlined above, the retirement age is currently increased
step by step to 65 years. e retirement age of 65 will
be introduced in 2021 for men and in 2027 for women.
Another measure has been to change the method
of calculating compulsory social insurance contribu
-
tions. According to the new methodology, employers
pay 15 percent (previously 22 percent), and employees
pay 10 percent (previously 3 percent) compulsory social
insurance contributions if the monthly wage more than
200 AZN (117.65 USD). Finally, the authorities have
tightened controls in order to detect and legalize hid-
den employment.
Recommendations
In connection with the above, appropriate measures
should be taken to further strengthen nancial sustain-
ability, regulate the impact of the nancial burden of
expenditures on government obligations not based on
social insurance principles on the system, and strengthen
the link between social security contributions and social
insurance payments for the long-term development of
the pension system. For this purpose, the non-diversi-
cation of pension insurance principles for both property
and payment sources shows that the use of the reform
potential in the country is low.
In conclusion, I would like to emphasize that to
strengthen the pension system in Azerbaijan and reduce
its nancial dependence (ensuring abalance between
income and expenditure), the government should rst
try to legalize the labour market. In this way, it would
be possible to increase the ratio of the number of insured
persons to the number of pensioners, as well as increase
the income of the Social Security Fund. At the same
time, it is necessary to regulate the amount of expendi-
ture by automation and transparency of the mechanisms
of pension assignment.
About the Author
Dr. Gubad Ibadoghlu is Senior Analyst at the Economic Research Center, Baku.
References
• CESD (2017): Pension Attainability: Evaluation of the Latest Amendments to the Law on Labor Pensions, Baku:
Center for Economic and Social Development, available online at http://cesd.az/new/wp-content/uploads/2017/10/
CESD_EU_UNDP_Policy_Paper_Pension_Sistem_in_Azerbaijan_eng.pdf
• Interstate Statistical Committee of the Commonwealth of Independent States (2019): Pensions, http://www.cisstat.
com/eng/pens_obespechenie-eng.htm
• State Statistical Committee of the Republic of Azerbaijan (2019): Social Security Statistics, https://www.stat.gov.
az/source/healthcare/
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 18
Table 1: Key Indicators of the Pension System for 2016–2019
Indicator Unit 2016 2017 2018 2019
Number of insured people registered in
the individual accounting system thousand people 3372 3545* 3737 -
Number of labour pensioners (at the end
of each year) thousand people 1315 1311 1304 130 0
By age thousand people 782 769 760 756
For disabled persons thousand people 384 384 380 390
By loss of family head thousand people 150 15 8 16 4 149
Average monthly amount of pension manat 192 209 217 223
USD 120 122 128 131
Minimum amount of pension manat 110 110 110 200**
USD 69 65 65 118
Cost of living for labour pensioners manat 123 13 0 14 4 149
USD 77 76 85 88
Notes: * to November 1, 2017, ** from Octo ber 1, 2019
Source: State Statistics Commit tee of the Republic of A zerbaijan
CAUCASUS ANALYTICAL DIGEST No. 113, January 2020 19
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