Pension revolution – the World Faces Dilemma

Maka Ghaniashvili

Georgian government’s decision on increasing pensions entered into force from December 11. The minimum pension 38 GEL increased to GEL 55.

Besides, pensioners will receive additional sums envisaged by the Georgian legislation according to the longevity of their service. State budget of Georgia has allocated GEL 14 for this project. The increase of pensions is planned during the coming year as well. The minimum pension will be 76 Gel from autumn 2008 due to which additional GEL 250 million will be allocated form state budget.
Georgian minister for labor, health and social care David Tkheshelashvili stated at a special press conference: ‘Our objective is to increase pensions in Georgia until it reaches one hundred USD, we plan to follow this direction for the coming period.’ Although working out a new social policy and implementing a pension reform is an important issue not only for Georgia – the world faces financial crisis that will inevitably take place unless strong social reforms are implemented.
There are five basic attitudes on forming and organizing pension system in the world:
1. Paying pensions from the state budget – these pensions exist almost in all countries of the world, taxes are the source of pension scheme funding.
2. Employed people pay pension to the unemployed– these funds as a rule are created for local groups of workers that are united under professional, sector or some other principle. Mainly these funds belong to state and it is necessary to make payments in them.
3. A company pays pension to its ex-worker – in this case Pension fund is not created as the specialized organization. Pension is provided through special sources of a company (for example in Japan or in the US). Disadvantages of this scheme are obvious – there are no stable guarantees of payment, being greatly depended on a company’s financial situation, for this is the additional activity that is not a company’s main profile.
4. Insurance Companies – a pension system based on insurance companies does not envisage creation of specialized pension funds. Pension is formed after buying insurance policy that gives lifelong annuity (annual rent).
5. Pension provided through so called ‘Pension Funds’ – a pool of assets forming an independent legal entity that are bought with the paymentss to a pension plan for the exclusive purpose of financing pension plan benefits. According to the legislation, total assets of pension funds should equal to taken obligations before current and future pensioners.
Separating pension system became a standard in every developed country of the world in middle ages of the past century; a state was responsible to separate and somehow distribute received social funds by corresponding order. Pension systems of successful European and American countries used generation solidarity principle – employed population pay social taxes to the state budget and the budget gives these means to those who retire. Everything went all tight from the beginning – birth rate, as well as employed populations’ percentage was rising. Paid taxes enabled a state budget not only to pay pensions but to give social privileges and bonuses to pensioners as well.
The first disadvantage of the system showed itself in European countries. The reason is quite simple: change of demographic situation – decreased birth-rate and rise of life expectancy. Changes in life expectancy are as follows: in Great Britain – 8 years, Italy – 12 years and Japan – 16 years. Average length of living in the United States was 47 in 1900. Today the indicator is 76 years. Number of People 65+ years old was 4,1% of the US population and in 2000 it was 12,4 %. This is not a positive perspective, in 2008 generation born in 1946-1964, about 77 million people retired in the United States. The same tendency is in Georgia as well. The average living length gradually increases and if in 2001 this indicator was 71 years, by 2005 it increased to 73 years.
According to UN experts in 2030 population aged 65 years and over will be the quarter of the total population in Western Europe, the US, Canada, Japan, Austrailia and New Zeland. At present the indicator is 15%. EU experts’ forecasts are also alerting, according to their calculations Euro countries should allcate additional EUR 456 billion in coming 35 years. At present in 15 member state of the European Union the GDP pension exceeds 10, 4% and by the year of 2040 it will reach 13,6%. In 1960 34 millions of people aged 65 and more lived in the same 15 states. By the year of 2010 their number will reach 69 millions. As a result of aforementioned, number of elderly persons increase in 13 % per every decade. The length of life turns out to be quite expensive for the employed: tax payers seem to be under pressure, for they are fewer in number. One of the necessary conditions for functioning of pension system separation scheme is a better conform between pensioners and workers, otherwise fund’s deficit appears, any way for solving this problem – increasing taxes, decreasing pensions or increasing the pension age- seems unpopular and causes a sharp protest of any democratic society.
Although not only abovementioned activities cause a danger to the development of democracy. There are certain callings in the world: pensioners should be prohibited to participate in elections and only employed part of the society should be able to vote and participate in lections – that certainly is the denial of democratic principles. Still, the reality is as follows: the world faces dilemma – either democracy or economic stability of a country. The fact is that, as a rule, pensioners are actively involved in elections and their votes quite often bear great importance. The best example of it is Poland, where Lech Kaczynski’s party was mainly supported by pension age voters. The elections confirmed that winning pensioners hearts during the pre-elections period is an important step foreword. Number of experts believe that pensioners make their choice only after receiving promises on increasing pension and having social privileges from one or another candidate. Politicians’ purpose in this case is not an economic stability and development but attracting more and more voters, that has a negative influence on the development of a country’s economy.
Situation in Georgia is also a good example of it – pre-election period in a country and pensioners have already received increased minimum pension, with the perspective of increasing in the nearest future. Part of experts assume that all this is a pre- election PR.
According to international experience its not right to analyze a pension system reform automatically as it is connected and is the part of budgetary and taxpaying regulation systems.
While talking on real incomes and salaries it becomes obvious that increased pensions should be followed by rising salaries as well. Pension system will have no effect if salaries are increased twice and pensions are increased ten times. Citizens’ increased salaries will be totally used on pensions. Other social aims should also be taken into consideration. Modern system of salaries and incomes in Georgia does not give an opportunity to have enough pension account, accordingly pension reforms should be implemented together with the salary reforms.
Although there is other way out, that had been discussed in many countries of the world as the way of overcoming existing crisis – moving existing and successfully functioning private pension funds to the state sphere. The system of this scheme is quite simple – employed citizen saves his/her own pension, and will be ensured according to the amount saved before the retirement age. The best example of the model is the pension reform started in Chile in 1980. Privatization of the pension system started there the first time in the world. Each employed person was given an opportunity and became obliged to care about his/her own future. Individual pension deposits replaced state pensions. Employed citizens were given an opportunity to move to a new system voluntarily. Young Chileans, who had just started their work, were automatically involved in it. The system was successful in Chile that had positive influence not only on social sphere but on the country’s economy as well. Saving system members do not pay any “distribution” tax and pension is the property of the future pensioners. At the same time depositors are free to put this amount at a certain extant – they are able to trust one or another company and invest the amount on open market values portfolio. The employed transfer 10 % of their salaries to their own accounts opened in authorized companies, receive profit and the right to control it. As the person reaches a retirement age, he/she may withdraw total amount or take it out little by little, every month. In case of collecting enough amount of pension deposit, a citizen has a right to retire before the age of 60-65 or even continue working after reaching this age.
Private Pension Insurance in Georgia – this is a voluntary insurance pension offered by the insurance company GPI Holding (Georgian Pension and Insurance Holding) in 2001 to Georgian customers. Pension scheme of the Holding mostly represents corporate pension fund. Majority of clients are staff members of over 300 companies of diverse sizes, fields of activity and profiles.
The following are main elements of private pension insurance scheme:
– Customer creates his/her own pension fund and controls it.
– Customer opens his/her private pension account, and saves in the appropriate currency GEL or USD.
– Pension fund works continuously and earns profit per quarter.
Minimal amount of payment is 10 Gel, that is implemented at any intervals – per month, per quarter or annually. By pension age a customer is able to take one type of pension ( according to Georgian legislation men at the age of 65 and women after the age of 60): short term pension, (from 5 to 10 years), or lifelong pension .
Besides, a customer may withdraw his/ her own pension completely in case of necessity without any penalty sanctions. A customer may control his/her own pension fund through internet and may see detail record from account.
Insurance company offers its customers different kinds of policies, for example a policy Care when the payment is fixed and amounts to 10, 50 or 100 GEL. The owner of the policy is insured till the age of retirement. The owner’s family gets Gel 1000, 5000 or 10 000 (depends of chosen insurance package) plus the total pension saving in case the owner becomes incapable or passes away.
Owner of the policy Care uses free medical services, namely:
– Ambulance;
– 24 hour telephone consultation;
– Echoscopy
– 10% discount on other ambulatory type researches and specialists’ consultations.
Another type of policy offered by GPI Holding to its customers is Euro pension. The pension scheme covers pension, life, accident insurances as well as free medical service and internet fund. There is a fixed amount of account for Euro pension customer – 100 EUR per month.
Pension payments may be implemented in different ways: Personal payments (on the basis of individual contract), Payments by the employer (on the basis of mutual contract), Combination of the above two.
As for the pension types, Generally one year in advance of reaching pension age, members of pension scheme make choice between the two types of pensions: Short-term pension – 5-10 years and Long-term pension – lifetime.
Pension Funds’ activities are monitored by State supervision service. Pension sums of Insured persons (members of pension scheme) are their own property and are put on pension accounts. Voluntary pension fund and pension insurance company managing the fund are two different legal persons. This gives additional guarantees to pension scheme members regarding the safety of their sums.