22 April 2018

Sunday, 06:52



Azerbaijan makes serious amendments to the pension system



The government has made yet another decision to introduce radical changes in the pension system, perhaps the most actively reformed sphere of the country's social life. In principle, current and future pensioners are always ready for changes - over the past 10 years, the pension system has been renewed almost every year.

However, the amendments and additions to the law "On labor pensions" approved by the parliament (Milli Majlis) of Azerbaijan in early March suggest a radical restructuring of the pension system. This time, however, the concept of "basic component and employment period" and 12 years of working experience required to be eligible for a pension are discontinued in favour of the increased retirement age for both the women and men (65 years). The updated bill consists of 47 articles and 98 amendments. As the changes affect predominantly all future pensioners, opinions on appropriateness of measures diverge.

Firstly, the discussions are mainly focused on gradual increase of the retirement age (from 63 to 65 years for men, and from 60 to 65 for women). Introducing the draft amendments to the law, Deputy Minister of Labor and Social Protection of Azerbaijan Idris Isayev said that the retirement age would increase every year for 6 months for men until 2021, and for women until 2027.

The developers of amendments indicate that the decision is well-founded, since life expectancy in Azerbaijan has recently increased noticeably. According to the head of the parliamentary Committee on Labour and Social Policy, Hadi Rajabli, the quality and life expectancy have improved, people's health allows them to work in old age. Moreover, "people are extremely unhappy that they are so early deprived of the opportunity to work", said the deputy.

Mr. Rajabli believes that in world practice, the ideal retirement age is the one after which a person can on average live 12 years. In principle, in countries with advanced economies, retirement age often reaches 65 years: for example, it is 67 years in Germany and Spain.

Indeed, the fact that experienced teachers, scientists, engineers, and doctors have been massively retired in recent years has caused social discontent. However, there is a downside as well. The middle-aged ordinary workers such as builders, employees of plants and factories, oil fields, etc. are barely able to withstand the stress, and are eagerly awaiting pension for a well-deserved rest. The same is true about journalists, bank employees, people in a number of spheres of art, etc., where employers give preference to younger generation due to specific characteristics of these professions. Therefore, a number of experts point out the advisability of introducing a differentiated approach to retirement age, which would be a justified solution. But, on the other hand, they note, although the system of social protection of the population has been successfully reformed recently, this additional approach requires additional technical improvement, which is unlikely at this stage.

It is noteworthy that the last time when the government of Azerbaijan increased the pension age was in 2009 (63 years for men, and 60 years for women). Experts believe that after that the number of new pensioners annually began to decline by 10 thousand people - by about 9-10%. From the new increase in the retirement age, they expect about the same effect.

Taking this into account, the experts note that raising the bar of retirement age is mainly aimed at easing the pressure of the pension burden on state budget. Thus, according to Ali Masimli, Azerbaijan is ranked the 96th among 193 countries in terms of the level of life expectancy and in many of the advanced countries, the retirement age is 60-63 years. "In 2010, the number of citizens over 70 years was 396 thousand people, in 2016 - 375 thousand people, that is, 5.3% less. It turns out that we are going to increase the retirement age in conditions of increasing mortality among pensioners. Especially these amendments are inappropriate for regions, where pensions are sometimes the main source of constant income for many families," noted A. Masimli.

Economist Rovshan Aghayev noted that today, 75% of the Social Insurance Fund is formed at the expense of public sector, including transfers to the Fund from the state budget and deductions for social insurance from employees of budget organizations. That is, it turns out that only 25% of the pension fund is formed by the private sector, which accounts for almost 80% of the employed population. A simple calculation show that if it were not for state subsidies, the average size of pensions across the country would not exceed ₼50. Accordingly, it is time to eliminate gaps in all areas requiring large subsidies.

Incidentally, each pensioner in advanced economies accounts for up to four social insurance payers. In Azerbaijan, this figure is almost 1 to 1, which forces to replenish the pension budget by almost 40% at the expense of the state budget.

It was this very moment, which determined other fundamental changes in the pension system of Azerbaijan. Thus, the members of parliament voted for complete elimination of the concept of "basic component of the pension" instead of which the concept of "minimal pension" is introduced into the law. Since January 1, 2017, minimum pension in Azerbaijan is equal to ₼110.

Also, another change is connected with the transfer to the individual account of the citizen of the greater part of the paid contributions for compulsory state social insurance.

"Currently, the employer pays 22% of compulsory state social insurance premiums, while employees pay only 3%. Half of this amount were paid by citizens to their social insurance account while the remaining half remained at the disposal of the State Social Protection Fund, which is unfair. We offer to offer 90% of the said amount to individual social insurance accounts, which will lead to an increase in pensions," said Hadi Rajabli.

Minister of Labor and Social Protection of the Population Salim Muslimov noted that for the appointment of a pension, it is necessary to accumulate a certain minimum on his individual account. "If this amount is less, the citizen applies to the bodies of the Ministry of Labor and Social Protection of Population, where he is assigned a social allowance. Thus, the citizen is responsible for the size of his pension, that is, the amount of his pension will depend on how much he earned," said Muslimov." He also added that the amount of funds accumulated from 2006 to 2016 in individual accounts will be multiplied by two.

"Let's assume that the monthly salary of a citizen is ₼5,000 but he has 10 years of work experience. So, for 120 months, or 10 years, he will earn ₼600,000 in total. According to existing regulations, the amount accumulated on his individual account must be divided by 144, which results in a rather large amount (₼2,083.3) and is higher than his average monthly pension. But since the employee does not have 12 years of service, he does not receive the right to pension. This is unfair.Today, there are people in Azerbaijan whose monthly salary is ₼20,000," said the minister.

So, the next stage of pension reforms in Azerbaijan has just started. It will be possible to observe their application in practice soon. At the same time, as noted above, this area is flexible enough for us and ready for change. Therefore, we can hope that all negative aspects will be taken into account and eliminated in the future.