-None-: Citing economic downturn, Armenia postpones pension reform
Published: Saturday October 31, 2009
Yerevan - Vazgen Khachikian, head of the State Social Security Service, announced that proposed reforms to the country's pension system, which were supposed to come into force in January 2010, will be delayed for another year due to the economic crisis.
Under the current pay-as-you-go system, benefits are based on the number of years a person is employed, but not the wages earned during those years. The stated intention of the government's pension reform is to increase pension benefits and to link benefits to the amount a worker has contributed over the years.
However, in a governmental decision on November 13, 2008, the reforms also entailed privatizing the country's pension fund in order to help stimulate capital markets in the country. The Armenian government's decision came at a time when other countries like Argentina, Italy and Chile were moving away from private pension funds.
The current system, while flawed, still protects retirement funds from financial-market risks. The government is able to link benefits to the cost of living, protecting retirees from inflation. In comparison to a private pension fund system, the plan has significantly lower administrative costs than private accounts.
The proposed privatization requires a well-developed bond market, which doesn't exist in Armenia. It also requires the administrative capacity to record, manage, regulate and supervise the private pension accounts, a capacity that Armenia does not have.
In an interview with the Armenian Reporter in March 2009, Armenian-American economist Ara Khanjian stressed that the focus of any pension system should be the well-being of retirees, which the privatized system cannot guarantee. He pointed out that most industrialized countries like the United States and Canada, do not have mandatory private individual pension accounts.
A member of parliament and a member of the Standing Committee on Economic Affairs of Armenia's National Assembly, Ara Nranyan, had said that Armenian society is not sophisticated or market-savvy enough to be able to manage private pension accounts. With regard to the latest news that the implementation of a new privatized pension system will be delayed, Dr. Nranyan told the Armenian Reporter that this is only a temporary reprieve and that the government is still actively pursuing this policy. "They are only postponing the reform due to the ongoing economic crisis in the country," Dr. Nranyan said. "The government hopes to introduce the new policy to parliament for discussion in the spring."
While the average monthly pension in Armenia has grown steadily over the past decade, it still stands at a modest 26,000 drams ($68). The country is facing a serious demographic imbalance due to an aging population, a shrinking workforce due to emigration, and falling birth rates. According to Mr. Khachikian, this imbalance will deepen and become "deeply tragic" by 2030 unless there is marked improvement in the country's demographic situation.
It is clear that pension reform is necessary, including linking benefits to lifetime earnings and contributions to the pension system and taking into consideration the country's demographics. However a mandatory private pension fund is fraught with unknowns. Today, countries with mandatory individual pension accounts are in a precarious situation because their mandatory pension accounts have lost a significant part of their value. "This implies that these workers are either going to continue to work [if work is available] instead of retiring, or if they decide to retire, they will live in poverty," Mr. Khanjian noted.