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Essence of Contributory Pension Reforms

Contributory Pension System will not Burden Business Sector

Government of Georgia plans to launch contributory pension reforms in the second half of 2018. The scheme of the reform is as follows – all citizens will be involved in the pension scheme, who take salaries under signed labor contracts. The system comprises partly  obligatory component. Citizens over 40 years old will have the option to join the system or not, while citizens under 40 years old will be obliged to make savings.

The pension scheme refers to an employer, employee and the government. According to the initial bill, their co-participation portion is based on the following formula:

The employee transfers 2% of the monthly salary to the Fund.

The employer transfers 2% of the employee’s salary to the Fund.

The Government takes 2% from the employee’s income tax and transfers this sum to the Pension Fund.

According to Ministry of Economy, pension assets are invested due to internationally recognized standards.

The Caucasus Business Week (CBW) has inquired how business sector appraises the mentioned pension scheme and whether this system will set a financial burden on business sector and whether the pension fund management will require excessive administrative expenditures.

The contributory pension system will fuel economy, the business sector representatives noted.

Businessman Temur Chkonia said that the Government-proposed pension system is an internationally practiced experience and this model will justify definitely.

There is nothing unacceptable that Government will use and invest this money, Chkonia said.

“The main thing is that when a person retires, the Authorities will be able to give this money to its citizens. Before the money should be invested in the economy”, Chkonia noted.

Irakli Iashvili, head of supervisory board of East Gate Group, says that contributory pensions system will not set burden on business sector, because the country will create investment reserves in this way, he noted.

Georgia lacks for internal investment reserves, Iashvili said.

“This is a Latin-American model. Chile was developed thanks to these pension funds. The main thing is that the process be planned valuably. The Government should choose a right model adapted to our country. The idea of creating a pension fund that will accumulate investment reserves is a right decision. This mass of money should be invested somewhere. This 2% is an insignificant sum compared to the benefits that the state economy will receive from the pension fund’s accumulated resources”, Iashvili said.

“Every citizen retires after a certain period and we want to have certain specific revenues, when we reach this age”, Soso Pkhakadze, vice president of Business Association of Georgia noted when answering questions about contributory pension reforms.

“This is the third attempt to implement the pension system reform in this country. The first one took place in 1990s, the second one — in 2011 and the third one — now. I believe this reform will bring benefits to the involved parties”, Pkhakadze said.

Representatives of Georgian Business Association proposed 7 remarks and government officials expressed readiness to take them into account, he said.

«The discussion process is transparent and this is very important», Pkhakadze said.

The remarks refer to such issues as appointment of investment board members, distribution of funds and so on, Soso Pkhakadze said.

“I urge all citizens to participate in this reform, both businessmen and non-businessmen”, Pkhakadze said and added that the reform should be implemented definitely.

“Major part of these funds will be invested within the country, but investment policy will be determined by the investment board and if the country lacks for assets for making investments in, a part of these funds may be placed at various funds and shares abroad”, Pkhakadze noted when answering the question on where the mobilized funds would be invested.

In response to the question whether the 2% transfer  may affect the employee’s salaries, Pkhakadze said that this money is not taxed and real expenditures make up 1.6%.

Iva Chkonia, president of Business Association of Distributors of Georgia, noted that the scheme introduction is timely, however, it would be better to enact it after closer communication with the business sector.

As part of this scheme, business sector will have to pay 4% instead of 2%, he added.

“It is very difficult to persuade employees that they must pay 2% from salaries. In reality, this amount is to be paid by the employer. This is my vision. When a person is employed, they are interested only in the amount of net salary”, Iva Chkonia said.

This is one of the negative aspects. This 4% will not be a small amount and it is interesting how solvent and efficient the pension fund accumulated financial resources will be in several years, Chkonia said.

In response to the question whether this system will raise unofficial employment risks, Chkonia said that the 4% transfer cannot raise risks of unofficial employment.

Sandro Buadze, head of KAMPA company noted that the employer’s contribution to the pension fund will not be a considerable amount that the business sector cannot pay.

“If we consider this issue only in the light of business, maybe, someone will not want to pay this sum. However, pension reform is important for the country and it should be implemented”, Sandro Buadze said.

The pensions reform will improve the living condition of citizens in long-term perspective. They will acquire the feeling of stability, when making savings, Buadze said.

We remind you that Parliament of Georgia will discuss Georgian law on Contributory Pensions by the end of 2017.