Kovzanadze About Accumulated Pensions System

On February 19, the Chairman of the Budget and Finance Committee Irakli Kovzanadze talked about the importance of pension reform. He noted that even though the Finance and Budget Committee has made some remarks about the pension asset management and regulation of pension fund, adoption of the bill on "accumulative pensions" is crucial for the country.

According to Kovzanadze, the committee and the government should work together in order to improve the draft of amendments.

“I think the Parliament, the Government, and the National Bank should work together. It is also important to define the expenses of the pension fund. This is a part of those remarks prepared by the Committee, which will help to improve the draft of amendments to "accumulative pension," stated Kovzanadze on the session.

The packet of amendments to pension system considers that Georgia’s pensioners will receive money based on a model of private pension accumulation, instead of the existing social pension package. According to the bill, the state removes 2% from the monthly salary of those who are employed and puts the sum on their pension accounts. Employed people up to 40 years old will be involved in the program regardless of their will. Once they reach the pension age, 65 for males and 60 for females, they will be able to use the accumulated money together with the state pension. The state’s decision caused controversies. Part of the society, civic and political organizations criticize the idea of private pension accumulation.

Pension systems vary from country to country. Most of the EU countries have indexation rules for pensions. In cases of Spain, France, Italy and Austria, indexation is defined according to living costs. In other countries, such as Estonia, Bulgaria, the Czech Republic, Cyprus, Belgium, Latvia, Luxembourg, Hungary, Malta, Poland, Slovakia, Finland and Sweden, indexation considers salaries as well living costs. The different system of indexation is in Portugal, where the amount of a state pension is defined due to a mix of GDP growth and prices. A few Member States of the EU, such as Finland, Slovenia, Germany, Italy, Portugal and Sweden, have established a system, which that determines the amount of pension benefit at retirement. According to this new approach, the amount of a pension benefit depends on various factors, such expected demographic changes and the life expectancy at the time of retirement.

Scientists, Steven Ayres and Richard Cracknell, define three basic models of public pension provision:

Earnings-related: the level of the pension is determined by the earnings on which a pensioner paid social contributions.

Flat-rate: pensions are paid at a fixed rate (determined by reference to the national minimum wage) and entitlement depends on either a pensioners’ contribution record or on their history of residence.

Means-tested: the state guarantees a minimum pension but considers a claimant’s other income and assets (only income from pensions in Finland) in determining the amount payable.

States define pension systems taking a number of different factors into account. Since an unreasonable way of managing it leads to a great money loss and disbalance in economy, analysts believe, Georgian state needs to carefully think through the process of reforming.