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

Jane Falkingham ESRC Centre for Population Change University of Southampton

Help Age International, London, 7th October 2011

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

The inheritance: Soviet old-age pensions in brief

Extensive system of social welfare
Comprehensive system of social security benefits including old age pension, survivors benefits, disability, family allowance Non-cash benefits including subsidies for heating, foodstuffs (bread), housing, kindergarten and annual holidays in work lace sanatorium

Free education and health care

Full employment; majority working in state enterprise or sate owned (sovkhoz) or collective (kolkhoz) farm
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The inheritance: Soviet old-age pensions in brief

Virtually universal coverage Non contributory for employees Low eligibility criteria 25 years service for men; 20 for women Extensive credits (university, military service, childbirth, hazardous work) 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)

The inheritance: Soviet old-age pensions in brief

In addition
Non-contributory social pension providing 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 basic needs

Very few failed to qualify for old age pension, so in reality eligibility for social pension limited
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The socio-economic impact of transition

The impact of transition, 1991 Immediate impact was severe economic dislocation as supply lines and trading routes disrupted

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Trends in real GDP per capita, 1990-2007 (1990=100; constant $US in 2000 prices)
200 180 160 Armenia 140 120 100 80 60 40 20 0 Azerbaijan Georgia Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

Source: UNICEF 2009 Transmonee database

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The impact of transition, 1991 Immediate impact was severe economic dislocation as supply lines and trading routes disrupted
Rising poverty

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Most countries in Central Asia and South Caucasus continue to have high rates of absolute poverty and vulnerability

13 Source: World Bank 2007

The impact of transition, 1991 Immediate impact was severe economic dislocation as supply lines and trading routes disrupted
Rising poverty

Widening inequality

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Gini coefficient 1989-mid 2000s, Central Asia and the South Caucasus
Uzbekistan Turkmenistan Tajikistan Kyrgyzstan Kazakhstan Georgia Azerbaijan Armenia 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45

latest year 1989

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

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The impact of transition, 1991 Immediate impact was severe economic dislocation as supply lines and trading routes disrupted
Rising poverty

Widening inequality
Falling labour force participation and growing unemployment

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Unemployed as a percentage of the labour force, by gender, 1995-2005

18 16 14 12 10 8 6 4 2 0 Armenia
Source: ILO (2010)

1995 Men 1995 Women 2000 Men 2000Women 2005 Men 2005 Women

Georgia

Kazakhstan

Kyrgyzstan

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The impact of transition, 1991 Immediate impact was severe economic dislocation as supply lines and trading routes disrupted
Rising poverty

Widening inequality
Falling labour force participation and growing unemployment Falling fertility, high out-migration

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The impact of transition, 1991 Immediate impact was severe economic dislocation as supply lines and trading routes disrupted
Rising poverty accompanied falling GDP

Widening inequality
Falling labour force participation and growing unemployment

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
Georgia Armenia Kazakhstan Azerbaijan Kyrgyzstan Uzbekistan Turkmenistan Tajikistan 0 5 10 15 20 25 30 35 2050 2030 2010

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

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The consequences for pensions

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 = increase tax evasion

High pension system dependency rate

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Percentage of working age population who are active contributors & older people in receipt of state pension, mid 2000s
100 90 80 70 60 50 40 30 20 10 0 Armenia Azer Gerogia Kaz Kyrgyz
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Contributors Pensioners

2. Policy responses
Increasing contribution rates
By mid 1990s employer contributions were 1/3 gross wage bill in Armenia, Georgia & Kyrgyzstan

Increasing employee contributions (up from zero in USSR)

Increasing retirement ages

Tighter eligibility criteria

Reduced benefit levels System reform (PAYG => Funded; DB => DC)
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Typology of pension system Central Asia & South Caucasus

Conventional PAYG Todays contribution fund todays benefits Pension based on a defined benefit Notional accounts Todays contribution fund todays benefits Pension based on a defined contribution Fully funded Individuals contribution fund individuals benefits Pension based on a defined contribution Armenia (to 2011), Azerbaijan, Georgia, Tajikistan, Turkmenistan, Uzbekistan Kyrgyzstan

Kazakhstan Armenia (from 2011)

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What role for social pensions?

Established at a time when membership of contributory system universal; entitlement low and benefit relatively high
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 funded defined 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/annuity that might be expected

2005 citizens pension payable at 40% subsistence minimum
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Case study: Kazakhstan

1998 abandoned old PAYG system; moved to fully funded defined 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/annuity that might be expected

2005 citizens pension payable at 40% subsistence minimum
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Case study: Kazakhstan

Initial signs positive; contribution base (c.61% workforce covered)
BUT

Questionable whether 10% contribution will yield income stream 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 contributions prior to reform minimum eligibility 10 years of social tax contributions Second pillar: individual accounts Zero pillar: social pension for those without 10 years of social tax payments set at 80% basic pension
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Case study: Armenia

High proportion of population excluded and will be dependent on zero pillar
Pension Working Group estimates only 32% of working age population pays social tax Agricultural sector (c50% EAP) not required by law to contribute Informal workers and migrants also not accruing service

Issues of complexity and transparency

Lack of understanding (only 3% knew what an asset manager did) & high level mistrust; people lost savings after 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 of adequacy Private transfers, especially remittances, play critical role in keeping older people out of poverty

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Poverty reduction and the role of public & private transfers

90 80 70 60 50 40 30 20 10 0 Lone pensioner Pensioner couple Pensioner & kids (no WAA)
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Remittances Private transfers Public transfers Ex post poverty

Conclusions
Under soviet system, majority qualified for contributory pension; social pension important safety net for minority Since 1991, extensive & generous soviet system proved to be unsustainable

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
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