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Georgia Meets Pension System Reformation Unprepared

The government of Georgia has launched a partly-mandatory contributory superannuation system on January 1, 2019. The Parliament adopted the due law on July 21, 2018. After system enforcement, the special pension fund will manage the savings of Georgian citizens.

The aforementioned money will earn a certain yield, and Georgian citizens will get back the accumulated money after retirement.

The objective of the reform is to shift the burden of pensions onto citizens from the state budget, and this reform covers a quite long period – 40 years or more. Under the project, the pension fund will collect 6% from monthly salaries, of which 2% will be covered by the state, 2 % by employees and 2% by employers.

The country has met the process of pension system reformation unprepared, Zurab Lalazashvili, a managing partner for BDO, noted. The pension agency must be staffed with qualified specialists to successfully implement the reforms, he said.

Our people should make sure that their savings will be managed reasonably, they will receive benefits and their savings will not be lost in a long-term perspective.

“At this stage we have regulations, but we do not see specific steps. Therefore, it is difficult to make conclusions. The process may be developed very well. Let’s see what happens. However, I would also like to note that technical problems have already appeared. Prior to system enforcement, I was saying that we had a situation we were unprepared for. Neither infrastructure nor people were prepared. And they were assuring us that everything would work”, Lalazashvili noted.

The regulation should include a formula for calculating pension savings, he added. “There is an entry and under the regulation, pension fees must be paid, and all sources that are identified as salaries. But there are cases when the issued money  did not represent  benefits of this nature, but they are identified as benefits anyway. Similar cases are taxed by income tax, and legislators have affixed pension fees to the income tax. As a result, we have received many cases  that seem unjust”, Lalazashvili noted.

In response to the question of whether the country has met the new pension system reforms unprepared. Lalazashvili goes on to explains that the idea of creating the pension fund is right in itself, because it can bring positive economic results in the long-term perspective. Despite this, it should be noted that the current situation in terms of pension system reform, leaves the impression that the country has reached this step unprepared, he added.

Lavrenti Chumburidze, head of the Georgian Federation of Professional Accountants and Auditors, says that pension system reform was an inevitable and necessary decision, but the existing format has many defects, and the current format should be revised.

“The country has met this process unprepared. There are technical problems, but these problems are resolvable. In general, when making a system analysis, I have the impression that many  aspects are structured for attracting as much money as possible. I can name two samples: problem 1 – why is it necessary to sign a contract with a person in the case of single-time cooperation, and to pay a single-time fee? This is the wrong way. Problem 2: – payments should be optional for citizens over 40 years old, but they are obliged to pay for 3 months, and only after three months can they withdraw from the system. The authorities were to give these 3 months in advance for planning”, Chumburidze said.

The current pension scheme raises a lot of questions, he added.

Natia Tsipuria, an accountant for the Caucasus Road Project company, also talks about defects in the pension system reform project. The disordered website is the least problem, she noted.

It was desirable to provide all the information, and only after that, launch the process, Tsipuria explained.

“It is not surprising that the website does not work in order, because it should be balanced. This problem is resolvable. In reality, the major problem is that a lot of employees protest against their involvement in the system, because they do not trust it. This system should have been optional, not obligatory. This is a very serious moment for the company, because employees frequently protest that they have no interest in the pension fund, and they want to take salaries without salary deduction”, Tsipuria said.

Another problem consists of the invaluable operation of the agency, because the agency personnel cannot provide valuable answers to people, she said. “The process caused chaos from the very beginning, and companies had to submit declarations every day. Representatives of companies were calling the agency to learn when to submit declarations and pay the due sum, but the agency personnel answered  that payments were to be carried out after the issuance of salaries. And people had to submit declarations chaotically, and this is stupidity”, Tsipuria said.

Pension reform problems are discussed on the social network of Facebook, too. Namely, members of the group “Forum on Tax Issues”,  who are mainly accountants, write that the existing state of the pension system reform is unacceptable.

The Caucasus Business Week (CBW) submits comments by several accountants:

“This reform was launched at the wrong time. They were supposed to ask people. It is unclear where these sums go, and who is responsible for returning this money, if nothing to say about the disordered website, where operators give different and inaccurate answers and so on”.

“The major problem is that we do not know the exact  time for submitting a declaration. The agency provides different answers at various times. They say that we should submit declarations on salary issuance day, but maybe I have problems with the internet, must I pay a fine? It took 2 days to complete uploading a declaration on the website. There should be an option for correction. Maybe I was not supposed to indicate to one of the former employees,  and I submitted his declaration by mistake. There are a lot of similar things.

“I can explain what I do not like: 1. The law on the pension fee is unconstitutional, because it is not a tax, under the law, but citizens are obliged to pay it. This signifies they have added the function of a tax to the pension fee 2. This money is remitted to the agency account, not to the state treasury. Therefore, the responsible body for returning the mentioned sums is the Pension Agency, not the state, and this factor generates distrust in the society. If the agency fails to appraise the risks and loses the invested funds, the government may call the agency management to account, but nobody will return the lost or embezzled funds. 3. The abolished pension and social tax and the practice of appropriating  funds in previous years gave grounds to think that previous precedents may be repeated. 4. The agency has not introduced a well-balanced program for long-term perspective, with the mechanism for returning the accumulated funds. They have introduced a superficial and unsubstantiated program. In a lot of European countries, the authorities have debts before pensioners, and pensioners cannot fully receive the funds accumulated by them because of the absence of money, and it is unclear what roles the agency has in Georgia amid our unstable economy? 5. The pension law conflicts with the tax code, and it is not represented in the  declaration forms of other taxes and therefore, it generates difficulties in the process of submitting a declaration. I am saying nothing about the disordered website”.

Levan Surguladze, the Pension Fund director, disagrees with the aforementioned considerations, as if the country and the pension agency meet the reform unprepared. He told the CBW that the initial stage revealed technical problems, but they will be removed in the near future.

“All systems work in order. The agency has met the process ready, and launched operations in a legal timeframe on January 3, 2019. There were a lot of calls, and we have answered all of them. We did not expect such activity. Today, the call-center is represented in a wider format.

As to the disorders in the system, this is a new system, which works in an overloaded regime.  It took two days to move to the renewed version of the website and this process caused certain problems. And now all these problems are removed. At this stage, personal accounts are generated by the system. This is a single-time process. Personal accounts will be generated for about 700,000 persons. This process requires computer resources, and we plan to strengthen these resources. We have already purchased two powerful servers, and in early March all technical problems will be removed”, Surguladze said.

As for public trust and the lack of information, Surguladze says that there was a certain information vacuum, but the agency has been working on an intense regime since December. Training courses are being held for accountants. We have already trained 600-700 accountants, and this process continues. We plan to hold trainings in the regions too, the Pension Agency director noted.