Old-Age Social Protection in Central Asia and the South Caucasus

8/3/2019 Old-Age Social Protection in Central Asia and the South Caucasus

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Old-Age Social Protectionin Central Asia and the South Caucasus

Jane Falkingham

ESRC Centre for Population ChangeUniversity of Southampton

Help Age International, London, 7th October 2011


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Outline

The inheritance: Soviet old-age pensions in brief

The impact of transition

Socio-economic and demographic trends since 1991 Pensions and pension system reform post 1991

The role of social pensions

Concluding comments


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Extensive system of social welfare

Comprehensive system of social security benefits includingold age pension, survivors benefits, disability, family

allowance

Non-cash benefits including subsidies for heating,foodstuffs (bread), housing, kindergarten and annualholidays in work lace sanatorium

Free education and health care

Full employment; majority working in state enterprise orsate owned (sovkhoz) or collective (kolkhoz) farm


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Virtually universal coverage

Non contributory for employees

Low eligibility criteria

25 years service for men; 20 for women

Extensive credits (university, military service, childbirth, hazardouswork)

Low retirement ages & generous opportunities for early retirement

60 for men; 55 for women

Generous earnings related benefit

60% highest average earnings for minimum service record, plus 1%for each additional year above min

High average replacement rate (2/3 or higher)


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In addition

Non-contributorysocial pensionproviding safety net

Set at minimum wage, reflecting social minima Basket of goods reflected consumption of average person

Social minima based on social solidarity rather than basicneeds

Very few failed to qualify for old age pension, so in realityeligibility for social pension limited


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The socio-economicimpact of transition


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The impact of transition, 1991 -

Immediate impact was severe economic dislocation assupply lines and trading routes disrupted


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Trends in real GDP per capita, 1990-2007

(1990=100; constant $US in 2000 prices)

0

20

40

60

80

100

120

140

160

180

200

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Armenia

Azerbaijan

Georgia

Kazakhstan

Kyrgyzstan

Tajikistan

Turkmenistan

Uzbekistan

Source: UNICEF 2009 Transmonee database


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Rising poverty


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Most countries in Central Asia and South Caucasus continue to have

high rates of absolute poverty and vulnerability

Source: World Bank 2007


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Rising poverty

Widening inequality


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Gini coefficient 1989-mid 2000s,

Central Asia and the South Caucasus

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45

Armenia

Azerbaijan

Georgia

Kazakhstan

Kyrgyzstan

Tajikistan

Turkmenistan

Uzbekistan

latest year

1989

Source: 1989 from Atkinson and Micklewright (1992), latest year from ILO (2009).


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Rising poverty

Widening inequality

Falling labour force participation and growingunemployment


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Unemployed as a percentage of the labour force,

by gender, 1995-2005

0

2

4

6

8

10

12

14

16

18

Armenia Georgia Kazakhstan Kyrgyzstan

1995 Men

1995 Women

2000 Men

2000Women

2005 Men

2005 Women

Source: ILO (2010)


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Rising poverty

Widening inequality


Falling fertility, high out-migration


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Rising poverty accompanied falling GDP

Widening inequality


Falling fertility, high out-migration

An ageing population


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Percentage of the population aged 60 and over

Central Asia and the Caucasus, 2010-2050

0 5 10 15 20 25 30 35

Tajikistan

Turkmenistan

Uzbekistan

Kyrgyzstan

Azerbaijan

Kazakhstan

Armenia

Georgia

2050

2030

2010

Source: Source: UN (2009) World Population Prospects. The 2008 Revision


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The consequencesfor pensions


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Declining coverage and shrinking contribution

base Declining labour force participation rates + rising

unemployment rates = decline in contributors

Further exacerbated by out migration

Move from large state enterprises to small private firms +increasing self-employment & informal sector = increasetax evasion

High pension system dependency rate


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Percentage of working agepopulation who are active contributors & older

people in receipt of state pension, mid 2000s

0

10

20

30

40

50

60

7080

90

100

Armenia Azer Gerogia Kaz Kyrgyz

Contributors

Pensioners


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2. Policy responses

Increasing contribution rates

By mid 1990s employer contributions were 1/3 grosswage bill in Armenia, Georgia & Kyrgyzstan

Increasing employee contributions (up from zero inUSSR)

Increasing retirement ages

Tighter eligibility criteria

Reduced benefit levels

System reform (PAYG => Funded; DB => DC)


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Typology of pension systemCentral Asia & South Caucasus

Conventional PAYGTodays contribution fund todays

benefitsPension based on a defined benefit

Armenia (to 2011), Azerbaijan,Georgia, Tajikistan,Turkmenistan, Uzbekistan

Notional accountsTodays contribution fund todays

benefitsPension based on a defined

contribution

Kyrgyzstan

Fully fundedIndividuals contribution fund

individuals benefitsPension based on a defined

contribution

KazakhstanArmenia (from 2011)


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What role for social pensions?

Established at a time when membership of contributorysystem universal; entitlement low and benefit relativelyhigh

All countries continue to have a social pension Now generally payable at level below the base old age

pension

60% base pension in Azerbaijan

38% in Kyrgyzstan

Eligibility criteria vary

Means-tested v. age-based


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Case study: Kazakhstan

1998 abandoned old PAYG system; moved to fully fundeddefined contribution system

Accruals under old system frozen

New mandatory individual accounts for workers of all ages;funded by 10% of employee wages

Transitional employer tax to pay for accrued rights

Initially NO minimum guarantee of pension return/annuitythat might be expected

2005 citizens pension payable at 40% subsistenceminimum


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1998 abandoned old PAYG system; moved to fully fundeddefined contribution system

Accruals under old system frozen

New mandatory individual accounts for workers of all ages;funded by 10% of employee wages

Transitional employer tax to pay for accrued rights

Initially NO minimum guarantee of pension return/annuitythat might be expected

2005 citizens pension payable at 40% subsistenceminimum


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Initial signs positive; contribution base (c.61% workforcecovered)

BUT

Questionable whether 10% contribution will yield incomestream of sufficient value to maintain replacement rates

Move DB to DC impacts on workers with interrupted

earnings histories, who are predominantly female

Call on citizens pension may but ??? adequacy


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Case study: Armenia

Proposing to switch to fully funded model 2014

First pillar: employment pension

Flat rate basic pension + element based on contributionsprior to reform

minimum eligibility 10 years of social tax contributions

Second pillar: individual accounts

Zero pillar: social pension for those without 10 years ofsocial tax payments set at 80% basic pension


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Case study: Armenia

High proportion of population excluded and will bedependent on zero pillar

Pension Working Group estimates only 32% of workingage population pays social tax

Agricultural sector (c50% EAP) not required by law tocontribute

Informal workers and migrants also not accruing service

Issues of complexity and transparency

Lack of understanding (only 3% knew what an assetmanager did) & high level mistrust; people lost savingsafter collapse of USSR, fears may happen again


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Case study: Tajikistan

No reform

High levels of eligibility and receipt

BUT

Low benefit levels issues ofadequacy

Private transfers, especiallyremittances, play critical role

in keeping older people out of poverty


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Poverty reduction and

the role of public & private transfers

010

20

30

40

50

60

70

80

90

Lone pensioner Pensioner

couple

Pensioner &

kids (no WAA)

RemittancesPrivate transfers

Public transfers

Ex post poverty


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Conclusions

Under soviet system, majority qualified for contributory pension; socialpension important safety net for minority

Since 1991, extensive & generous soviet system proved to beunsustainable

Likely increasing role for social pensions in future

coverage contributory system

? adequacy of future DC benefits

also increasing role for social safety net today

value of old age benefits in payment

reliance on remittances, which may not be sustainable

Old-Age Social Protection in Central Asia and the South Caucasus

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