ILLEGALS ON THE BOOKS

What is going on in the world economy is gradually having a knock-on effect on Azerbaijan's domestic economy. While our country is not facing the threat of the closure of major enterprises and mass redundancies, it is already clear that business for major and medium-sized companies is restricted and the economic policy of many managers is to stop taking on more staff and in some cases to make staff cuts. All this was bound to have an effect on the social insurance system which depends directly on the payroll of enterprises and organizations. Therefore, in his recent speeches the head of the State Social Insurance Fund of Azerbaijan, Salim Muslumov, has sounded a more cautious and warning note and called for decisive action. This is understandable. The State Social Insurance Fund accumulates funds and distributes them to the most vulnerable sections of Azerbaijani society - pensioners, the disabled and mothers on maternity leave. One or two days' delay in making payments becomes a cause for mass dissatisfaction. Nothing of the kind occurred in 2008, but will 2009 be as stable?

Just one way…

The head of the State Social Protection Fund has directly acknowledged the problems of meeting the revenue side of the fund's budget for 2009. The fund is obliged to ensure the collection of compulsory social insurance contributions of 1,278.4 million manats, of which 735.5 million manats come from private enterprises. Compared with 2008, this figure has grown by 35.6 per cent. "However, processes in the world economy, Azerbaijan's oil revenue and the way it is used, possible problems in meeting the expenditure part of the budget, the trend for an increase in wages in conditions of deflation - all this causes us concern about meeting forecasts on collecting funds for social protection," Salim Muslumov said.

And in fact, why should employers increase wages in deflation conditions? It's another matter that it looks very unlikely that we'll end 2009 with zero or negative inflation - even the government and IMF are forecasting a minimum 9-per-cent increase in prices. However, in any case experts recommend not hoping for a tangible addition to revenue - for this to happen enterprises have to be operating at a profit, which is very unlikely at the peak of a crisis.

In this situation, the reasons for wages not going up concern the State Social Protection Fund less than the effect this might have on income to the fund's budget. The head of the fund sees one way out of the predicted deficit - strengthening measures to legalize the number of workers in private organizations and to record their real wages. "In past years we have really tried to regulate the issue through publicity and public awareness campaigns, but unfortunately with no result," Salim Muslumov said.

He said that the State Social Protection Fund proposes devising special economic mechanisms which would force entrepreneurs to show the real wage bill. "The main starting point could be the value of the output produced by an enterprise. It has to take account of the real wage bill," Salim Muslumov said. "The situation in every enterprise must be analysed and the relevant conclusions drawn. Moreover, we could apply concrete figures to the wage fund - let's say 20 per cent of the overall value of output. And the entrepreneur pays his contributions based on this sum. This is one of our proposals, there are other options too." He said that problems in showing the real size of the wage bill now exist in such areas as agriculture, transport, wedding restaurants and the restaurant business, trade etc.

As well as these measures, the financial result of which is still uncertain, the Azerbaijani State Social Protection Fund is suggesting a more precise option to ensure stability in paying pensions: to have a monthly reserve of 120-130 million manats. "Today the State Social Protection Fund pays out pensions on around the 15th of the month. For their part, enterprises make social protection contributions at the end of the month. So to ensure the timely and full payment of pensions we need a reserve," Salim Muslumov said. He said that there are various ways of forming a reserve in international practice. "We have given the government our proposals on this issue and consider a reserve equivalent to the monthly volume of payments to be effective. Today this is around 120-130 million manats."

The prospects for an increase in pensions in Azerbaijan are uncertain in the light of what has been said above. It is known today that from 1 January 2009 the insurance part of pensions in Azerbaijan is being raised. As for the basic pension, this depends on the rate of inflation. "On the subject of changes in the consumer prices index, as an economist I find it difficult to make any forecasts against the backdrop of the world financial crisis," Salim Muslumov said. "According to our forecasts, there will be deflation in Azerbaijan in the first six months of 2009, as prices in Azerbaijan are mostly influenced by the import of inflation from countries that are our trading partners, while they are expecting a fall in prices next year in the context of the recession in the world economy." At the same time, he said that an increase in the basic pension at least once in the year, dependent on inflation, is factored into the State Social Protection Fund's budget for the coming year. 

New method of calculating pensions

The State Social Protection Fund has medium and long-term plans which are set out in detail in the draft State Programme to Develop the Pension and Insurance System, submitted for approval to the Azerbaijani president at the end of 2008. "In the past five years the main aim was to bring the minimum pension closer to the subsistence minimum and through this to bring down the poverty level, but today the objective is to bring the pension and insurance system up to European standards," Salim Muslumov said. "All the necessary resources are in place for this to be achieved over the next five years."

He said that the state programme aims to complete the third, final stage in the reform of Azerbaijan's pension system. In line with this, the programme envisages many innovations which will be beneficial for the public. The draft programme envisages, in particular, introducing a system of cumulative pension insurance and introducing private pension funds. This point was to have been implemented in 2009, but the head of the State Social Protection Fund thinks that the process has been delayed in light of the world crisis. 

In addition, the programme will allow the State Social Protection Fund to introduce the practice of long-term actuarial accounting and forecast the development of the pension system. This will be done by simplifying as much as possible the system of making pension contributions. Under the new method, the size of salary before 1 January 2006 does not influence the calculation of pensions. "We are drawing a line under the old method," Salim Muslumov said. "It makes it very difficult for us to make actuarial calculations and forecasts for the future. We are proposing a completely new and simplified system of calculating pensions, which, if approved, will be published on the State Social Protection Fund's website and will allow whoever wants to to calculate their own pension." 

At present pension calculations for people who are about to retire are made using two components: the sum of pension entitlement up to 1 January 2006 and the sum based on contributions under the private accounting system after that date. If, after 1 January 2006 a new pensioner received an annual salary of 28,000 manats, 25 per cent of that sum is calculated - 7,000 manats - then the sum is index-linked to inflation that year (8.3 per cent), and we end up with 7,600 manats. After this, salary figures for 2007 are taken, let's say they are the same, this makes a sum of 14,600 manats, which, index-linked to inflation for 2007 (16.7 per cent) makes 17,000 manats. If the salary did not change in 2009 either, then another 7,000 manats would be added - 24,000 manats - and index-linked to inflation, say 20 per cent. This makes an accrual of 28,845 manats over three years. If a person starts to claim their pension in 2009, under the new system, these accruals will apply only to the insurance part. Dividing them over 144 months makes 200 manats a month in the insurance part of this person's pension.

The calculation here is simple and transparent, which cannot be said for the period before 2006. In order to calculate a pension before this period, a certificate on the size of salary for 2004-05 has to be submitted, on the basis of which the average monthly salary will be calculated. For men, pensions are envisaged at 60 per cent of this figure for 25 years of work with an additional 2 per cent for every year, but with the proviso that the final sum cannot exceed 85 per cent of the average monthly salary. Plus 75 manats - the basic pension today - and contributions made since 1 January 2006.

"These calculations did not allow us to make long-term forecasts and created the grounds for manipulation," Salim Muslumov said. "Now we are proposing the following: to determine the working life of people who are registered with the State Social Protection Fund on the basis of work record books - we need three to four months for this. The next step is that if someone worked for five years before 1 January 2006, then we give them 25 manats for this. Anything above this length of employment we will insure at 8 per cent for every year of work. So, if we take five years off my 27 years of employment, multiply 22 by two manats (8 per cent - 25 manats), we get 44 manats. We multiply by inflation for 2006, 2007, 2008 etc. and add the sum to the basic pension at the time of retirement."

The system really is simple, but not entirely fair, especially for people who had large salaries before 2006. There were such people, if you bear in mind that from the start of the 1990s the leading oil and gas companies, foreign firms and embassies had offices in Azerbaijan. Of course, their former and current employees immediately expressed their dissatisfaction after the publication of the State Social Protection Fund's plans, which was taken into account at the Finance Ministry and State Fund. "The Finance Ministry made the entirely fair comment that our new proposal might seem unfair to those who had received a high salary," Salim Muslumov said. "So as an addition to the draft law, we proposed a point about a choice: if someone wants their pension to be calculated on the basis of their salary, then they must submit a certificate about their salary throughout their period of employment up to 1 January 2006. We will put them together and calculate the average monthly wage for the entire employment period. And future calculations will be made according to the old system."

The alternative is not easy, but future pensioners can today begin to collect the necessary certificates. As they say, you should start saving for your pension when you're young.