PRINCIPLE OF JUSTICE

Reforms in the pension insurance system of Azerbaijan have allowed it to come as close as possible to international standards and the model of advanced states in a relatively short period of time. As of today, the programme for development in this area can be described as one of the most successful ones in the history of this country and international experts entirely agree with this. 

However, social and economic processes, both internal and external, are forcing agencies in charge of providing steady material assistance to the most vulnerable strata of the population, to work on new mechanisms for financial support. The plan for further reforms of the State Social Protection Fund (SSPF) is practically ready. Some of its items may become a subject for debate in society. However, given that their ultimate goal is to provide a guaranteed and stable system of pension insurance payments and their steady growth, the need for reforms becomes obvious. 

Evident progress

"Many countries faced with the effects of the world crisis have serious problems with funding their pension systems and implementing their social programmes. However, thanks to timely decisions, Azerbaijan has managed to provide stability for its pension insurance system," said SSPF Chairman Elman Mehdiyev. 

This statement is corroborated by statistics: in 2003-15 alone, revenues to the state budget of the country from insurance contributions increased more than nine times, while the size of retirement pensions increased by a factor of 9.5. At the same time, the share of pension payments in GDP also grew from 3.9 per cent in 2003 to 5.1 per cent in 2015. That was taking place against a backdrop of impressive economic growth in this country with wages growing in size, new jobs being created and strengthening control over social contributions. 

The SSPF chair sees the second major achievement in successfully managing the impact on the country's pension system of demographic trends against the backdrop of global aging, one of the most important challenges facing governments all over the world. So, by building a modern pension insurance system, Azerbaijan has managed to involve more than three million working people in the process of providing self-sufficiency in retirement. On the other hand, measures were taken to align a number of additional rights and benefits with demographic indicators; decisions were taken on regulation of requirements to retirement age and length of service. 

The third and most important achievement, he said, is the settlement of the issue of equitable distribution of financial resources among the country's pensioners who account for 13.5 per cent of Azerbaijan's population. "In general, the average size of monthly pensions is 1.7 times above the poverty line, while in 2003, this figure was twice below the poverty line. During the 2003-15 period, the average monthly pension was increased by a factor of 9.5," said E.Mehdiyev at a presentation on "Actuarial Valuation of Pension Reforms in Azerbaijan".

Note that, since 2006, in compliance with the law "On retirement pensions", the country has introduced a personalized (individual) social insurance record keeping system in which individual bank accounts are opened to accumulate contributions from persons involved in the system. The current rate of compulsory social insurance contributions in Azerbaijan is formed from two sources: 22 per cent contributions are made by the employer from the company's payroll and 3 per cent from the employee's pay.  

New pensioners' problems

However, despite obvious prog-ress, there are certain problems that may have a serious impact on the financial stability of the pension insurance system in the future. "We should not forget that citizens paying compulsory social insurance premiums will after a while come for their pensions. But we are channelling these funds, along with transfers from the state budget, into pensions for the population, for instance, the payment of pensions awarded to some privileged categories of the population before 1992. Despite the fact that such expenditures have nothing to do with social insurance, we pay all that from funds made from compulsory social insurance contributions," E.Mehdiyev explained. It appears that we are going to have a shortage of funds for new pensioners in the future.  

Another problem is that insurance charges from citizens paying larger premiums are used to provide for citizens paying smaller premiums. Only 50 per cent of insurance charges are registered in individual accounts. The rest of them are used to provide for citizens paying smaller premiums. Naturally enough, this has an impact on how much workers are interested in having legal wages and citizens paying larger contribution are interested in paying their premiums on time. So there is an obvious violation of the principle of social justice. 

At the same time, the very fact that the SSPF itself is pointing out and emphasizing these flaws gives hope for their speedy elimination. The State Fund has announced a new stage of pension reforms. The need for them has been emphasized by the Fund's long-standing partner - the World Bank. According to Larisa Leshchenko, director of the WB office in Azerbaijan, the pension system should be able to ensure the proper distribution of the elderly population's incomes, to create a system that will not allow the elderly population to live in distress after retirement. "If we do not change the rate of contributions to compulsory social insurance, the expenditures of the State Social Protection Fund may exceed its revenues in the future and the system will be unable to ensure stability. This issue must be settled without fail or else it may lead to financial problems in the future," L.Leshchenko said. 

PROST simulation

The World Bank's chief economist Zoran Anusic has also confirmed that 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 both in the fiscal and social spheres. He explained that the PROST model is used to forecast population's life expectancy, a country's future macroeconomic indicators, the size of pension obligations in a system, both based on insurance principles and without compulsory state social insurance contributions, and the number of future pensioners and insurers. 

Thus, according to Z.Anusic, delays in reforms could gradually decrease the relative size of pensions and give rise to a pension deficit. To avoid this, the WB economist proposed a number of measures. One group of them is designed to increase the revenues and the other to reduce the expenditures of the SSPF. 

The PROST-based research has helped identify three major areas for further development of the pension system in Azerbaijan. The first one is to strengthen insurance principles in the pension system and conduct reforms that ensure a balance between collected funds and pension obligations. Currently, half the size of social premiums is entered in individual bank accounts and this makes these reforms more relevant for those paying social premiums from higher wages. In this context, it is recommended for the future to enter the entire amount of social insurance payments in individual bank accounts. 

The second important area involves separation of sources of finance for state obligations and for those of the pension system. That will help provide additional spare funds and use them to strengthen social protection for pensioners. 

Point three in the reforms is to form mechanisms for additional social security through the use of voluntary social insurance. We are speaking about the development of non-state pension institutions that will help create additional opportunities to strengthen citizens' pension insurance. According to SSPF head E.Mehdiyev, this is the most complicated process in the forthcoming reforms. "The draft law to be adopted in this area should reflect mechanisms for collecting voluntary social insurance premiums, for individual record keeping on income from turnover, requirements to management companies, rules for investing, establishment of private pension funds and organizing their activity as well as other points," he explained. 

In addition, it is proposed to cancel minimum length of service for persons who have saved more than minimum pension capital by paying insurance contributions. Let it be recalled that, according to the current legislation, one is supposed to work a minimum number of years to become eligible for a retirement pension. This is a general requirement irrespective of the size of citizens' insurance contributions.  

"Only 50 per cent of contributions to compulsory social insurance are accumulated in individual accounts at present. After the reforms, this figure will increase to 100 per cent. 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," the State Fund director said. 

The reform package also includes suggestions on improving pension support for handicapped people who continue working. In addition to the basic part of their disability retirement pension, it is also planned to pay them the insurance part. The possibility is also being discussed of raising the minimum size of supplementary pension to members of the families of deceased military servicemen up to 80 per cent from today's 30-35 per cent (depending on the category of military servicemen). 

In addition to these obviously positive changes, the SSPF offers one more point: to increase the retirement age. The State Fund director gives reasons saying that it is necessary to align the retirement age and the upper age limit for employment. "Today, state employees are allowed to work until the age of 65 years, whilst the specified retirement age is low enough (63 for men and 60 for women). Of course, this creates a kind of inconsistency," E.Mehdiyev said. However, after his statement, experts called to be more careful with this sensitive issue in society and to conduct more in-depth studies considering demographic, economic and social trends before making public a final decision. 

At the same time, E.Mehdiyev's promise that pension reforms in Azerbaijan will serve to further strengthen social protection for pensioners give hope that expert opinion will be heard. It is fair to say though that the SSPF has so far been very careful about reactions from all interested parties. This is the reason why all new documents are submitted for public debate before their approval. This ensures maximum efficiency of the reforms.