An expert from the Association of Young Financiers and Businessmen Paata Bairakhtari says that the government’s strategy regarding pensions is correct

After PM’s meeting with the parliament majority, the Finance Minister of Georgia changed his position regarding pensions and decided to increase them for everyone. Nodar Khaduri announced that instead of increasing the pension for 100,000 people only, 700,000 pensioners would receive more money. However, the increase would be less than what it was previously planned to be. Initially the socially unprotected individuals were going to have an increase of 25 laris. Now the increase is going to be uniform for everyone: 10 laris.

We think that the government’s strategy regarding pensions increase and allocation is absolutely justified. The government is preparing grounds for creating individual savings funds. The pension system in Georgia is extremely outdated and in reality it represents a social assistance program. This is why it should be gradually replaced by a more progressive and smart system, such as the individual savings fund.

Today the government’s objective is to provide its retired citizens with a subsistence minimum. We consider this a correct approach, however the method of calculating the subsistence minimum has to be critically re-evaluated.

It was the PM’s initiative to increase every citizen’s pension by 10 laris. The Association supports this step fully, since increasing pensions for every pensioner by some value, albeit small, is absolutely necessary. The trend of increase in pensions will continue in 2016 as well. The increase might not be sufficient, however, one should keep in mind that this increase comes directly from the state budget, which, obviously, has limited resources. It should also be noted that we are not talking about 10 laris merely, but the 10 laris that will be added to the existing pension of 150 laris. Moreover, the increase should be more feasible now that the pensioners’ and other citizens’ expenditures went down after the reforms in healthcare took place.

Increase of pensions represents the most speculated subject in the Georgian politics. The opposition often appeals to this topic when it wants to discredit the government’s actions. However, these appeals are a lot of times mistaken.

The most widespread mistake in evaluating the pensions increase comes from looking at pension’s nominal value only, without looking at its purchasing power in the economy. In this aspect, the actual picture of pensions increase over the last years looks the following way:

1) During “The United National Movement:”

When “The National Movement” came to power, the pension constituted 14 laris. The new government started increasing the pension gradually. The increase over the years was the following: 2004 – 14 lari, 2005 – 28 lari, 2006 – 38 lari, 2007 – 62,5, 2008 – 77,6 lari, 2009 – 87,1 lari, 2010 – 87,4, 2011 – 107,5 lari, 2012 – 112 lari. (Pension became 122 laris in 2012, however the monthly average constituted 112 laris, since the increase took place in September). During the same period of 2004-2012 lari’s purchasing power fell to 40%. This means that if in 2004 pensioners could buy, say, 10 loaves of bread with 10 laris, in 2012 they could only buy 4 loaves using the same amount. Taking into consideration lari’s purchasing power, the pension in 2012 constituted only 44,8 laris. This means that the “National Movement” increased pensions 3,2 times during the 9 years of being in power, which is 0,32 times a year.

2) During the “Georgian Dream Coalition:”

When “The Georgian Dream” came to power, by the end of 2012, the pensions constituted 112 laris. The new government increased the sum to 150 laris. Although the pension became 150 laris only in September of 2013, so the average monthly pension for that year constituted 131 laris. The government is planning to increase the pension by additional 10 laris. This is the nominal value. Now let us consider the purchasing power of this sum taking into account the change in prices. The consumer price index increased by 3,8% in the period of January 2013 – October 2014. Currently there are no drastic changes expected in this sphere. However, in 2015 the government and the national bank are planning to set the inflation rate at 4%. This means that during the three-year period of 2012-2015 the increase in the level of prices will be 8%. Accordingly, the purchasing power of the nominal pension of 2015, 160 laris, will become 147,2 laris. However, since the increase will take place starting September 1st of 2015, the average monthly pension that year will be 142 laris. This means that the “Georgian Dream” will increase pensions 1,1 times in a three-year period. This amounts to a 0,37 times increase a year.