Azernews.Az

Friday March 29 2024

Pension system in dire need of reforms

1 October 2015 14:11 (UTC+04:00)
Pension system in dire need of reforms

By Nigar Orujova

Longevity is a dream for most of humanity, but maturity may bring definite challenges. Retirement may be a long awaited event for some, but an undesirable ending for others.

The offer to increase the retirement age to 65 years could satisfy some and sadden others. To be specific, seniors will be able to retire at the age of 65, instead often current retirement age of 60 years for women and 63 years for men.

Azerbaijan, a country of over 9.6 million, is often regarded as a country of youth that respects its elders. People aged 14-29 years make up 28 percent of the total population here. However, over 71 percent of total population is aged 15-64 years, and 6 percent is above 65 years.

Currently, the State Social Protection Fund is debating possible changes to the retirement age. Chairman of the Fund Elman Mehdiyev stressed that there should be a correlation between labor experience and retiring age.

“Today, state employees are allowed to work until the age of 65 years, whilst the specified retirement age is low enough," Mehdiyev said. "Of course, this creates a kind of inconsistency. Reforms may be required in this field in the long term to ensure financial stability in the State Social Protection Fund.”

Mehdiyev admits that the country's pension system may face a shortage of funding in the future, despite the fact that the national pension-insurance system is financially stable.

The pension-insurance system in Azerbaijan has many expenses that are fed from compulsory state social insurance.

A certain portion of the pensions paid in the country, including appointed and re-appointed pensions, was created using funds accumulated before the application of social insurance legislation in January 1992, along with markups to pensions that are not drawn from payments to the compulsory state social insurance.

“We should not forget that the citizens who are paying compulsory social insurance fees will also appeal for their pensions over time. We are distributing these funds, along with state budget allocations, to pay for pensions, in particular those appointed before 1992, and those appointed for definite categories of people with specified privileges," he added.

"Although these expenses have nothing to do with social insurance fees, we have to finance them through funds paid in compulsory social insurance,” said Mehdiyev.

He warns that this trend could result in a shortage of funds in the national pension system.

Although the country has a stable and fixed pension insurance system, it still needs to eliminate some gaps to avoid further problems. For instance, it is necessary to differentiate between state obligations and the liabilities of the pension-insurance system, and that will be included in amendments to the legislation.

The country has been able to ensure the stability of its pension-insurance system over the past period, he said.

“A good example is the fact that the state budget revenues in the form of insurance charges increased by more than nine times in 2013-2015, while the average size of pensions increased by 9.5 times,” he noted.

Azerbaijan has formed a modern pension-insurance system that can accommodate new challenges and is able to solve problems stemming from changes in international pension systems, the chairman added.

Pension system in need of reforms

Meanwhile, the Chief Economist at the World Bank dealing with issues related to pension reforms in Azerbaijan, Zoran Anusic, strongly recommends conducting a thorough reorganization of the pension system.

“Simulations conducted by the WB based on the PROST model have shown that unless Azerbaijan carries out pension reform in the near future, it may lead to short-term and long-term problems in the fiscal and social spheres,” he said.

In addition, delays in reforms could gradually decrease the relative size of pensions and give rise to a pension deficit.

To solve this, Anusic proposed a number of measures and has divided them into two groups. The first group is designed to increase revenues, and the second to reduce the expenses of the State Fund of Social Protection.

"A number of measures have already been included in the concept of Azerbaijan's pension system. We also analyze other possible activities. We must first regulate insurance and basic pension, minimum pension, the development of demographic indicators, and so forth,” said Anusic.

The head of the World Bank Baku office, Larisa Leshchenko, said the WB is interested in continuing cooperation with Azerbaijan in forming mechanisms for the long-term development of the pension system, based on actuarial calculations.

“The pension system should be able to ensure proper distribution of income to the elderly population, to create a system that will not allow the elderly population reside in distress after retirement,” Leshchenko noted.

Azerbaijan took a major step in reforming the pension system in 2006 by introducing an individual registration scheme. This system allowed the population to accumulate funds until retirement.

The next stage of reforms for Azerbaijan’s pension system is aimed at doubling capital in the individual accounts of mandatory social insurance payers, Elman Mehdiyev said.

Only 50 percent of contributions for compulsory social insurance are accumulated in individual accounts at present. After the reforms, this figure will increase to 100 percent. Thus, payments will be fully accumulated in the individual accounts of payers.

“Binding granted pensions to insurance capital will enable us to set higher pensions, which in turn will provide an opportunity to strengthen the social protection of pensioners,” said the head of the state fund.

Mehdiyev said there are three main areas for further development of the pension system.

The first trend involves strengthening the insurance principles in the pension system and is associated with reforms that ensure a balance between collected funds and pension obligations.

The second important area, he said, includes the separation of state obligations and the liabilities of the pension system.

The third major area for ​​reforms is in developing mechanisms that allow for the creation of additional security through the use of voluntary social insurance.

An increase in the retirement age as a way out?

Hadi Rajabli, Chairman of the Committee on Social Policy, said the issue is not on the agenda today. “There is no intention of raising the retirement age in the near future in Azerbaijan.”

The head of the committee added that no such policy has been scheduled for discussion at the parliament.

“In Europe, the average retirement age is 65 for women and men. In most Western European countries, the retirement age for women is 63 years, for men is 67 years,” he said.

Expert economist Gubad Ibadoglu believes that the retirement age could be increased in the next year.

The expert told local press that two main factors affect the financial stability of the State Fund.

The first is the fact that the number of pensioners is increasing from year to year. Currently, their number has reached 1.3 million, of which 61 percent are labor pensioners who receive a retirement pension.

The second factor is connected to the reduction of incomes from the private sector, despite the increase in the budget of the fund. The budget of the State Fund is forecast at 3.079 billion manat for 2016, 60 percent of which will be generated from budgetary sources.

“Given the tendency to reduce the cost of the state budget, problems are inevitable in this regard in the future,” he noted.

Earlier, the State Social Protection Fund said that a change to the retirement age would not be appropriate for Azerbaijan until 2020.

The average life expectancy in Azerbaijan is 73.8 years -- 71.2 years for men and 76.5 years for women -- according to the State Statistics Committee.

In Azerbaijan, the majority of the pensioners live with their children, and according to an online survey held by the mojazarplata.az job hunting website, more than half of Azerbaijanis are ready to retire at the age of 55.

At present, the retirement age is 63 for the country. But in 2010, the retirement age was set lower, at 57 years for women and 62 years for men.

Residents of Azerbaijan are retiring later than their counterparts from CIS countries.

In particular, age norms are still 55 years for women and 60 years for men in Russia and Belarus. In Ukraine, it is 60 years for both genders. However, retirement age reforms could be carried out soon in these countries. In Kazakhstan, the retirement age limit is 58 years for women and 63 years for men.

While it is still uncertain whether an increase in the retirement age can be inspiring news for elderly people, reforms could bring necessary changes that would benefit both retirees and the pension system.

__

Nigar Orujova is AzerNews’s staff journalist, follow her on Twitter: @o_nigar

Follow us on Twitter @AzerNewsAz

Loading...
Latest See more