Retirement planning: Crisis delays pension reform in Armenia

The introduction of a new pension system planned for 2010 will be delayed by a year mainly because of the financial and economic crisis.

The new retirement plan (now expected to go into effect on January 1, 2011) envisages that citizens under 40 will be saving their future pensions themselves, paying five percent of their salaries every year, on which the state pledges to add an equivalent sum.

This means that in the future a pension will be formed not based on the labor service record as it is the case now, but on the amount of wages – the higher the wages are the higher will be the pension.

“Compulsory payments given for pensions will be calculated on personal accounts of citizens, they will be introduced at corresponding accumulation funds and when receiving age pension people will have a sufficient basic sum of money for living,” says Head of the Social Security Service Vazgen Khachikyan.

Despite the fact that it’s been several years that the government has planned a transition to the new system, a majority of the public are unaware of the real impact of the changes, including its disadvantages and risks.

The main advantage of the reform is that it provides a likelihood of getting a secure life after retirement, but also contains greater risks to the retirement plan investment.

The funds, accrued from incomes of all citizens of Armenia born after 1970, will be private funds licensed by the state and will be investing into securities on the market, and in this case the state will act only as the regulator and supervisor of the system.

According to Khachikyan, the greatest risk is that the state does not act as the guarantor for the funds, but only follows the process.

“Classically, in the event of the bankruptcy of accumulation pension funds in all countries sums are transferred to the government. It is always the state that bears responsibility for the payment of pensions, however, funds will get licenses only if and when they have sufficient capital that in the event of insolvency they could compensate the sums invested by citizens.”

Many, however, are skeptical that this circumstance will work in Armenia where, as economists stress, the securities market is not developed yet.

Ara Nranyan, an economist and member of parliament with the Armenian Revolutionary Federation’s faction, says such a system is risky.

“It is surprising for me that seeing the consequences of the latest financial crisis they still continue to talk about this program. Millions of people lost their money on the securities and treasury bills market and much of that was money accumulated by pensioners over years,” Nranyan tells ArmeniaNow.

However, representatives of the pension system reject such concerns.
“Crises are like weather. If it rains now, then will be sunny and rain has no great consequences in the long term, this system will ensure high revenues and it is impossible that there will be a recession all the time,” Khachikyan tells ArmeniaNow.

Elena Zezulina, a legal affairs expert for USAID’s Social Protection Systems Strengthening Project shares this opinion. She acknowledges that financial crises may impact pension accumulations, but says that in the long term losses can be again repaired.

As the best example she singles out Sweden where after the 9/11 attacks on the United States in 2001, like in the rest of the world, the securities market went down and pension sums lost some 30 percent.

“But they left their sums in the banks, and when prices went up in the following years, their sums grew as well and they benefited,” says Zezulina.

Demographic problems are cited by specialists as the main argument in favor of the introduction of the new system.

In Armenia today 460,000 working people provide pensions for 520,000 pensioners, i.e. there are fewer working than retired people.

Meanwhile, for a normal pension provision the ratio should be one pensioner per four workers. In Soviet times, three workers maintained one pensioner.

The average pension size in Armenia is 26,000 drams ($67), which is at least by 10,000 drams ($25) less than the minimum living wage.

The situation is expected to get more complex in 20 years when the number of workers will half, since the number of births in the 1990s was twice as few as in the 1970s-80s.

“Already now we are in a crisis situation, meanwhile the predictions for 2050 are even worse and the only way to save the situation is the accumulation pension system,” says Khachikyan.