New Accumulative Pension Program Begins

On January 1, several new laws came into force in Georgia – mandatory inspections for private vehicles, a 20 GEL increase in monthly pensions, and the first part of the law on accumulative pensions.

Georgian politicians and academics debated the law on accumulative pensions for several months in 2017 and 2018 and it was adopted by Parliament on July 21, 2018. It has several phases – the first phase will automatically 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 domestically.

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. If an employee’s salary is greater than 24,000 GEL ($8,888) per year, the government contributes only 1%, and if an employee’s salary is greater than 60,000 GEL ($22,222) per year, the government does not contribute at all. The self-employed can participate with a 4% personal contribution.

The possibility to opt out of the program will open in June of this year, returning the pension contributions made on behalf of an employee to the respective contributors. 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. 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.

When Georgians reach the official state retirement age – 60 for men and 55 for women – they will have access to their pension funds, distributed in monthly installments. The new pension scheme will not affect the current system, by which every retired Georgian is eligible to receive 200 GEL ($75) a month – a rate which increased by 20 GEL from January 1.

For those already near retirement age – a person who joined in the pension scheme five years or less before retiring will be able to withdraw their full contribution upon reaching retirement age. Otherwise, an amount will be distributed each month, as calculated by the National Statistics Office based on the average life expectancy for Georgian men and women. In the case of a person’s death before reaching the average life expectancy, the remaining funds will go to that person’s heir.

Accumulated pensions are private property and cannot be accessed by banks or courts to cover debts or administrative fines.

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 of the new program, 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. From 2008 to 2012, pensions included a bonus of 10 GEL 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.

There is still quite a lot of uncertainty surrounding the new system, coupled with anxious memories of the Soviet collapse that led to the loss of the nation’s savings, but many are also optimistic that the experiment will be successful, ushering Georgian households into a more financially stable future.

By Samantha Guthrie

Image source: Simba Law