Accumulative Pension to Begin January 1, 2019

From January 1, several new laws will come into force in Georgia, including the first part of the law on accumulative pensions. The law was hotly debated for several months in 2017 and 2018, and finally adopted by Parliament on July 21, 2018. It has several phases – the first phase will enroll all people working in Georgia under the age of 40, apart from self-employed people, into the new pension scheme. Workers 40 years and older and self-employed people can choose to voluntarily participate.

The new pension system is designed to give Georgians a retirement savings account that is more proportional to their earnings while they were working by taking a percentage of their pre-tax salary. The pension fund will be invested within Georgia.

Employees contribute 2% of their pre-tax salary, the employer contributes an amount equal to 2% of the employee’s pre-tax salary, and the government contributes an amount equal to 2% of the employee’s pre-tax salary. One exception, however, is when an employee’s salary is greater than 24,000 Lari ($8,888) per year, in which case the government contributes only 1%, or when an employee’s salary is greater than 60,000 Lari ($22,222) per year, in which case the government does not contribute.

Last week, Radio Free Europe/Radio Liberty published an interview with Levan Surguladze, director of Georgia’s national Pension Agency – a legal entity of public law with an Investment Board overseen by the National Bank of Georgia, and its own Supervisory Board.

Surguladze explained that the program is mandatory for people under the age of 40, but the possibility to opt-out will be introduced in June 2019, which will return the pension contributions made on behalf of an employee to the respective parties. This ‘opt-out’ design is popular for pro-social policies in many countries, and sees a much higher rate of participation in programs than the standard opt-in design. For example, Spain operates an opt-out system for organ donation, whereby all citizens are automatically registered for organ donation unless they choose to state otherwise – Spain is a world leader in organ donation. The field that spearheaded this design, behavioral economics, was recognized with a Nobel Prize awarded to Richard Thaler, often called the “father of behavioral economics,” in 2017.

Georgians will have access to their pensions funds when they hit the official state retirement age – 60 for men and 55 for women. Self-employed people will have the choice to participate in the pension scheme, but at 4% personal contribution.

Regardless of whether a person participates in the new pension scheme, every retired Georgian will continue to be eligible to receive the standard state pension, which is currently 180 Lari ($67) a month.

Surguladze also explained how the pension funds are returned to retired workers. If a person was in the pension scheme for five years or less before retirement, they will be able to withdraw their full contribution upon reaching retirement age. Otherwise, an amount will be distributed each month, calculated based on the average life expectancy for Georgian men and women, as calculated by the National Statistics Office. He somewhat morbidly added that if a person “is unable to fully utilize the amount,” or, in essence, passes away before reaching the average life expectancy age, the remaining funds will go to the person’s heir. He did not elaborate on how the pension disbursements are arranged for those who live longer than average.

Surguladze assured readers that they cannot lose money by participating in the system. “Accumulated pensions are private property. The courts and banks have no access to the accounts. You cannot use this account to pay fines,” he said.

Participants in the scheme will have three options – low risk, medium risk, and high risk – correlating to the level of risk, and subsequent potential reward, of the investments for which a participant’s contributions will be used. During the first five years, participants will only be able to select a low-risk portfolio.

Since Georgian independence in 1991, the country’s pension system has been reformed multiple times. A flat rate pension was instituted in 1995. In 2004, social programs, including the pension fund, began to be funded by general budget revenues rather than the State United Social Insurance Fund (SUSIF), which was based on social contributions from employers and employees, as the system had previously worked. From 2008 to 2012, pensions included a long-service bonus of 10 Lari a month for people who had worked for more than 25 years, but in August 2012, pensioners stopped receiving long-service bonuses and instead received the combined amount as a flat rate pension benefit.

By Samantha Guthrie

Image source: GzaPress