Georgia’s new pension scheme challenged in constitutional court

17 January 2019
A retirement home in Tbilisi (Tamuna Chkareuli /OC Media)

Tbilisi-based rights group the Georgian Democracy Initiative (GDI) have challenged country’s new pension system in the Constitutional Court. The group argues that the new private saving scheme contradicts Articles 11 (right to equality) and 19 (right to property) of the Georgian Constitution.

The new, cumulative pension scheme stipulates a 6% investment of a person’s income into a personal pension account, with 2% contributed each by employees, employers, and the state.

The scheme is mandatory for those under 40 living and working in Georgia.

The plaintiffs in the case are Eduard Marikashvili, a lawyer from GDI, as an employee, as well as the organisation itself as an employer.

According Marikashvili, forcing employees to participate in the scheme constitutes an intrusion into a citizen’s right to control their own property.

The group voiced similar objections based on property rights to the obligation for employers to contribute 2%.

The private pension scheme commissions co-contributions with 2% from the employer and the state each in case an employee annually earns less than ₾24,000 ($9,000); the state will credit 1% of the worker’s monthly gross salary if it is more than ₾24,000 but does not exceed ₾60,000 ($22,500).

‘The state is violating the principle of personal autonomy as it does not have the right to decide for us how to manage our property. Today, the state is limiting this right for our own personal welfare, but the constitution has no such provision. It stipulates that restrictions on the right to property can only be imposed “for the public interest” ’, Marikashvili told OC Media.

Marikashvili said they were additionally challenging the rationale for the new pensions system.

According to them, the system was supposed to reduce elderly poverty by improving the pension replacement rate — average pensions as a percentage of the average pre-retirement income in the country, which currently stands at 18% in Georgia.

Citing calculations from an as yet unpublished study from an unnamed German think-tank that they are using in Court, Marikashvili argued that with the new scheme, the rate will stagnate in 30 years time.

‘Decent retirement’

Within the new pension scheme, those who retire after having been enrolled for less than five years and those who become disabled will be eligible to withdraw the entire amount in a lump sum. For others, the payout will be distributed at a rate adjusted for the current life expectancy.

From April–May, the law will allow those who were 40 or above at the time the law entered into the force in August 2018 to opt out of the scheme entirely.

In early January, the government launched an online platform for the Pension Agency, giving workers access to their individual accounts where they can keep track of their savings. It also includes a pension scheme calculator to estimate their likely income upon retirement.

The cumulative pension scheme is supplementary and is not intended to replace the current fixed state pensions, which amounts to ₾200 ($75) per month. The retirement age in Georgia is 65 for men and 60 for women.

The Georgian government has insisted that the new system will provide pensioners with a ‘decent retirement’, alleviate elderly poverty, and will also boost the domestic capital market, as the pension funds will be invested within Georgia.

‘Unconstitutional taxation’

GDI also criticised the new pension system for making Georgians invest their money into a fund without ensuring against the risk of losing it in future.

The group, together with Transparency International — Georgia, the Economic Policy Research Centre, a local economically liberal think-tank, and several other Tbilisi-based organisations criticised the draft law as early as March 2018.

The groups argued the requirement for workers to pay 2% of the income qualified as taxation, and thus contradicted the constitution.

Constitutional amendments in 2010 and the subsequent Economic Liberty Act permit the introduction of new taxes or tax increases only through a referendum.

In their 2017 constitutional changes, the Georgian Dream government left these provisions untouched, but introduced a 12-year expiration date on the rules.

Under Georgian law, a tax is defined as a contribution to the state budget, hence the pension scheme, which puts contributions in an independently managed pension fund, would appear not to qualify.

Nevertheless, GDI said they hoped the Constitutional Court would come up with a broader definition in their consideration of the new pension scheme.

‘We consider the 2% requirement clearly a tax burden for the employer’, Marikashvili told OC Media.

According to him, while employees are meant to get their money back upon retirement, the mandatory contributions for employers will never be restituted, and hence amount to ‘property expropriation’.

The plaintiffs filed a motion earlier this months asking the court to suspend implementation of the law, considering that, according to them, employers already face a burden that would not be compensated.

The opposition European Georgian Party also came out against the new pension law, criticising its mandatory nature and laying doubt on its effectiveness in alleviating poverty.

Talking to Radio Palitra, Shalva Tskhakaia from the the Georgian Employer’s Association described the GDI’s legal action against the new pension law as an opportunity to ‘at least temporarily halt the reform’s’ implementation.

‘Employers are not getting answers from either the Pension Agency or, on many occasions, from the Revenue Service […] Tens of thousands of companies have failed to register to be in line with the law’, said Tskhakaia.

Alternative schemes

The new pension scheme has also faced criticism for leaving thousands of Georgians uncovered.

According to 2017 data from the National Statistics Office, 52% of workers are self-employed, and would have little stimulus to voluntarily formalise their activities to join the scheme and cut their income by 4%.

With the new private saving pension scheme, self-employed people are expected to credit 4% of their income with state’s additional 2% input.

The Social-Democratic faction of the ruling Georgian Dream party criticised the lack of a ‘redistributive’ element to the new pension system and forwarded an alternative version to parliament in March but it failed to pass its first reading.

They have continued to advocate for a merit and experience-based ‘pay-as-you-go’ alternative which, according to them, has an element of ‘intergenerational solidarity’ and would offer increased pensions after two years of being implemented.

[Read Tornike Chivadze's opinion and more on Social-Democratic alternative on OC Media: Georgia's pension reforms do nothing for most Georgians]

The government has also initiated an amendment to the administrative code that would issue ₾500 ($190) fines for employers who fail to credit the pension fund both from their side and from employees’ salaries.

Independent Georgian trade union the Solidarity Network sees the reform as a financial scheme meant to increase Georgia’s global credit rating and attract investors.

Sopo Japaridze, head of the Solidarity Network, told OC Media that ‘in order for the pension reform to work for the people it professes to help, it must change into a defined benefit scheme — according to specific needs of retirees’.

This, she said, should come ‘alongside a generous basic pension and not the current defined contribution, which will punish those with low salaries or the unemployed — the majority — during their most vulnerable time, retirement’.

Japaridze criticised the reform as the new law fails to take into account unemployment insurance, long term illnesses, and does not give options for earlier retirement to those working in hazardous and strenuous workplaces.

She also said she expected that many employers would avoid making payments.

‘Many employers will and have already switched labour contracts to service contracts that will free them from payments. In addition, people will be laid off and their salaries will be lowered’, Japaridze said.

‘The government has no effective mechanisms for holding employers accountable and avoiding shifting the burden of pension payments on to the workers. We are going to see many companies discarding labour contracts, either employing service contracts or illegally hiring workers’.

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