Kazakhstan Aims to Improve Pension System with Personal Retirement Savings

By Serik Akhmetov

Providing decent pensions for elderly citizens is an important and complex socio-economic problem for any country, regardless of economic stability or prosperity.

Kazakh President Nursultan Nazarbayev consistently stresses the importance of reforms in the social sector in his addresses and articles, emphasizing the issue of pensions in particular.

The worldwide problem of pension coverage is becoming more acute every year as populations age, life expectancy rises and birth rates in some areas decline. According to predictions by the United Nations, by the year 2050 people over the age of 60 will account for half of the world’s adult population. At the same time, the working population and those who pay taxes is decreasing. Countries must adapt their national pension systems to these changing economic and social conditions.

National reforms are carried out with regard to demographic, economic, social, cultural, political and other features and possibilities. Pension security in any country must, of course, be based on a number of organizational, financial and other factors. The unifying ground is a “three-tier” pension system, which includes the state, the employer and the employee as participants.

The first tier is protection against poverty, usually implemented as part of the distribution system. At this level, pensions do not depend on labour input and wages.

The second tier is intended to provide for a comfortable retirement. It is primarily oriented to the working population, stimulating and sometimes obliging them to participate in the formation of additional pensions. At this level, application of both distribution and cumulative funding is possible.

The third tier is for voluntary contributions; for instance, pension provisions which every individual can accumulate by their own methods.

One of the oldest of these pension systems is the German pension system, the foundations of which were laid in 1889 during the reign of Chancellor Otto von Bismarck. Pension coverage (or insurance) had three forms: government, corporate and private.

National insurance in Germany is mandatory for those whose monthly income before tax deductions does not exceed 3,900 euros. Of the 19.5 percent deducted from monthly salaries, half is paid by the employee and half is paid by the employer. Money is not collected, but used for ongoing payments, adhering to the principle of solidarity between generations.

In large German companies, such as Mercedes, Airbus or Siemens, employees can rely on an additional corporate pension. This comes from voluntary contributions by employers. The company either independently creates savings funds for its employees or enters into a contract with a bank. The corporate pension of a highly qualified specialist is about 600 euros per month; an ordinary worker’s is 100-200 euros.

Similar schemes have been adopted by most developed countries. Until recently, the pension system in our country rested on the principle of solidarity between generations. But with the recent global economic and social problems, as well as the collapse of Soviet-model governments, Kazakhstan, as well as the countries of Eastern Europe and CIS, is looking at reform.

The current pension system in Kazakhstan was introduced in 1997, when the government approved the concept of pension system reform and adopted the law, “On Pension Provision in the Republic of Kazakhstan.”

The long-term objective of the reform is to transition from the solidarity pension system with defined benefits to the financially defined contributions (defined contribution pension system).

According to recent World Bank calculations regarding the development of Kazakhstan’s pension system, it is assumed that this transition will be completed by 2043. By this time, pensioners should be receiving pensions entirely from the savings of their mandatory individual accumulative accounts.

In order to overcome the pension system crisis accompanied by the burden on employers, the debt to the Pension Fund and to pensioners, and to reduce the state budget deficit, the retirement age was raised from 55 and 60 years of age for women and men, respectively, to 58 and 63 years for women and men, respectively, and preferential (early) retirement was abolished.

Later, the Concept of Social Welfare, approved by Kazakhstan’s government on June 27, 2001, and the above mentioned law were amended with provisions to establish the level of voluntary pension schemes based on voluntary contributions to pension funds made by both the employee and the employer.

Then, in June 2005, within the framework of the programme of further expansion of social reforms in Kazakhstan from 2005 to 2007, approved by the government on November 30, 2004, the basic pension level was introduced. The pension system of Kazakhstan now has three levels.

The first, beginning Jan. 1, 2011, the basic pension payment, reached 50 percent of the subsistence level. This year, the basic pension of 8,720 tenge is almost three times greater than those introduced in 2005. As part of Kazakhstan’s strategy of development until 2020, the amount of basic pension benefit will be 60 percent of a living wage in 2015, and will gradually increase to the minimum subsistence level.

At the second (mandatory) level, pensions are paid within the framework of the transition from the solidarity to the defined contribution pension system.

At present, 1.7 million people (who, as of Jan. 1, 1998 had no less than six months of work experience) receive solidarity pensions.

From Jan. 1, 2012 the size of pensions grew by 9 percent for all pensioners. Over the past 12 years, from 2000 to 2012, the minimum pension increased by almost 7.5 times (from 3,500 to 26,211 tenge), the average pension increased by 8.7 times (from 4,447 to 38,720 tenge), and the maximum grew by 6.9 times (from 8,156 to 56,047 tenge).

The systematic increase in pension payments has, to a certain extent, improved the living standards of the elderly. If we compare pension size in the CIS, Kazakhstan, with a minimum pension of 177 dollars per month is ahead of all the countries of the commonwealth in terms of minimum pension size. Simultaneously with the solidarity and basic pensions, members of the defined contribution pension system receive pension payments from the pension funds at the account of mandatory pension contributions.

Currently, there are 11 pension funds in Kazakhstan and about 8.4 million individual accounts have been registered in the system. The total amount of pension savings increased from 23.5 billion tenge in 1998 to 3,031.9 billion tenge as of Oct. 1, 2012, and reached about 10 percent of the gross domestic product of the country.

At the third (voluntary) level, pension benefits are also paid from voluntary and voluntary professional pension contributions. The voluntary system allows each citizen to increase his or her own retirement savings.

Today, all pension funds have voluntary retirement accounts, the number of which has already exceeded 40,000. Within the framework of the president’s state of the nation address of Feb. 28, 2007, “New Kazakhstan in a New World,” the state guarantees the preservation of mandatory pension contributions, taking into account the inflation rate at the time of acquisition of the right for pension payments.

As of Oct. 1, 2012, 174,500 recipients were paid the state guarantee in the amount of 8.1 billion tenge from the national budget. It should be noted that Kazakhstan is the only country in the world that pays state guarantees for the reimbursement of pension assets.

The reform of the pension system of Kazakhstan provided the transition from the first level based on the principle of intergenerational solidarity to the second level with the principle of personal retirement savings. Currently in transition, both systems complement each other, but in the long term the main role in pension provision will be given to the defined contribution pension system.

However, at the present stage, the issues of the pension system’s development require further modernization at all levels.

Today, at the President’s instruction, much work is being done to improve the pension system. Some issues voiced in the address have been already developed within the framework of the roadmap for the development of a funded pension system and the securities market of the Kazakhstan.

For its implementation, three parallel working groups were formed in the Ministry of Labour and Social Protection, working in different directions. A study, “Further improvement of the pension system of the Republic of Kazakhstan,” was also conducted under the Joint Economic Research Programme for actuarial calculations at all levels of the pension system between the government of Kazakhstan and the World Bank.

The author is the Vice-Minister of Labour and Social Protection of the Republic of Kazakhstan.

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