LEGISLATION PAVES WAY FOR KAZAKH PENSION REFORMSPosted On: Jul. 6, 1997 12:00 AM CST
ALMATY, Kazakhstan-Pension reform legislation approved recently in the Republic of Kazakhstan would clear the way for privately funded pension plans and help reduce the massive debt of the nation's social security system.
Under a government bill passed by the Kazakh Parliament last month, employers would have to contribute portions of workers' salaries to the state fund as well as individual, privately managed pension funds.
But, much of the reform remains unclear, including whether workers would have to begin contributing to the pension funds and how much employers' costs would rise.
Kazakhstan's current pension system requires employers to contribute 25% of a worker's wages into the state social security system. Employees currently do not make any pension contribution.
"Even if the allocation is split between employee and employer, the result is that the cost would be paid by the employer. Employers here negotiate net take home pay, so they would have to pay a higher gross salary," said Jonathan Muir, senior tax consultant at Ernst & Young in Almaty, Kazakhstan.
Other provisions of the reform bill call for reducing benefits guaranteed under the former Soviet system, which kept the cost of living low, and extending the retirement age to 60. Most Kazakh workers retire in their 50s.
The legislation has provoked much opposition and public protest during the past year, and Kazakh President Nursultan Nazarbayev has not yet signed the bill. If signed, the bill would take effect in 1998.
Reform is necessary, however, because the Kazakh pension system is in arrears by nearly $500 million, observers say.
"In many former centrally planned economies in Central Asia, Mongolia and Indochina, social benefits inherited from previous governments cannot be met with current resources," says Peter Sullivan, vp at the Asia Development Bank, which is based in Manila, Philippines.
The ADB is planning to grant Kazakhstan a $100 million credit to implement pension reform, though details have yet to be worked out. The offer of this loan was made during a May visit to Kazakhstan by Mr. Sullivan and his team. In common with other multilateral institutions such as the World Bank and Interamerican Development Bank, the ADB is moving away from its previous policy of lending money to developing countries for capital-intensive infrastructure projects and concentrating more on social welfare, environmental matters and helping to reform capital markets.
"Our program focus is to meet some of the costs of an economic transition," Mr. Sullivan says. "We are in the early stages of discussing work with governments."
At present, Kazakh employers pay 25% of an employee's salary into the state pension fund. The pension law inherited from communist times, and that is still in force officially, stipulates that workers receive annually 25% of their final wages upon retirement. Pension benefits in the mining sector are more generous. Miners with at least 10 years' experience working underground may retire at age 50 and receive a pension up to 75% of their final wage.
Kazakh Prime Minister Akezhan Kazhegeldin has said the pension fund legislation would enable the state to pay off its pension debt within six months.
Says Michael Roberts, managing partner at KPMG Peat Marwick in Almaty: "The (state's) pension arrears go back at least two years. I really don't know how some people manage to live. They must rely on the family network."
Workers were angry at the proposal to raise the retirement age. "The average life span here is 61 years. People just don't live that long," said Mr. Muir.
Protests over the reform began last August when the Kazakh prosecutor general's office reported that retirees and the disabled had not been receiving social security benefits owed to them.
In 1992, President Nazarbayev increased pension benefits, but in August 1996, the Ministry of Social Maintenance ran short of money to pay the pensioners and cut the average 700 tenge ($10) monthly pension by half. At that time, the government's estimate of pensions owed to retirees and invalids was only 7 billion tenge, or $100 million.
The current pension debt is $450 million to $500 million, estimates Michael de Bruijn, deputy general manager of ABN-AMRO Bank Kazakhstan, a unit of the Netherlands-based ABM-AMRO Bank.
Mr. de Bruijn says the average salary for most workers in Kazakhstan is about $50 per month. However, average salaries are $100 per month for government employees and about $600 per month for employees of foreign companies investing in oil, mining and infrastructure projects in the country.
Kazakhstan lacks a capital market system, and Mr. de Bruijn said the government must draft regulations on how the new pension funds would be invested. "The only instrument here is local Treasury bills," he added.
According to ABN-AMRO Bank, Kazakhstan has the highest gross domestic product among the former Soviet republics in Central Asia. The Kazakh GDP is about $19 billion. There is a foreign debt of $4 billion and a current budget deficit of 3.5% of GDP. In April, Deputy Finance Minister Zhanat Yertlsova suggested that the government might allow the budget deficit to rise in an attempt to pay off the pension debt.
The Kazakh private sector accounts for only about 26% of total employment, making some foreign executives worry how successful the new pension plans might be. "Most of the private companies are those taken over by foreign firms," says Mr. de Bruijn.