From Vol. 3 (4) -
Political Economy of old-age Pension Reforms in Georgia
is a PhD candidate at the Department of Political and Social
Sciences, European University Institute, Florence, Italy.
examines the factors that played a major role in
development of the old-age pension system in Georgia.
Based on data collected from 1991–2009, this analysis
centers on the system’s patterns of development and
identifies four main attempts to reform the old-age
pension system. Economic performance, demographic aging,
domestic political constellations, and external
influence are traditionally thought to be responsible
for the pension system reforms. Qualitative data
analyses and in-depth interviews have been used to test
these explanations. This analysis did not confirm the
hypotheses, but it revealed that fiscal constraints and
international technical assistance were the main factors
behind reforms during the first two chronological
attempts to change the system. Political factors and
liberal economic ideology influenced the patterns of
old-age pension policy development from 2004–2008, while
the negative outcomes of the Russian-Georgian War and
World Financial Crisis are currently the major obstacles
for comprehensive pension reforms. The limitations of
this study suggest that in order to clarify the exact
nature of old-age pension system, shorter time periods
and separate reform initiatives should be investigated.
transition, political economy, retirement, pension
reforms, Georgian government
In Soviet Georgia the old-age pension system had been
gradually developing as an integral part of the state
welfare policy. In accordance with the ideological and
political goals, the pension system was born entirely of the
state and retirement payments that were financed on a
pay-as-you-go (PAYG) basis through the transfer of funds
from state-owned enterprises to the USSR State Insurance
Company, Gosstrakh, which had a department in
Georgia. The Soviet retirement pension system consisted of
two parts, a public component and a voluntary component,
which together provided relatively generous old-age pension
To receive a pension, workers were required to have
participated in the labor force for a minimum of twenty
years for women and twenty-five for men.
According to Castel and Fox, the pre-transition Soviet
pension system was a complex and expensive mechanism,
“combining elements of a Western European 1960s PAYG system
with peculiar communist features.”
In the late 1980s old-age pension coverage nearly reached a
universal level, paying between 60 percent and 100 percent
of the average wage.
However, as almost all dimensions of economic and social
life, the public pension systems had been challenged by the
turmoil of the 1990s. After the first few years of
transition, institutions of representative democracy have
emerged, a new legal infrastructure has been installed, and
the private sector has developed; whereas the question of
fundamentally reforming the existing set of welfare
policies, including pension arrangements, had attracted
Although the problems facing Georgia were common to all
transition economies, they were aggravated by the specific
circumstances of the country. On the revenue side, shrinking
contribution bases and poor administration of
revenue-generating systems had destabilized resources for
pension expenditure. On the benefit side, demographic aging,
shrinking participation in the labor force, and growing
informal employment had led to a marked increase in the
number of pensioners compared to the number of contributors.
Old-age pensions became low, unfair, and were not sufficient
to protect the pensioners from falling into extreme poverty.
The inability of the new socioeconomic environment to
provide sustainable social security system was “one
of the reasons for the general mistrust of democratic and
After the Rose Revolution in 2003, the Georgian government
made an unequivocal choice for the liberalization of economy
with fundamental changes in existing social policies. These
tendencies inevitably affected the old-age pension system.
Therefore this paper seeks to answer what determined the
of the old-age pension system in Georgia, and whether policy
changes and unimplemented reforms can be explained by
economic and fiscal problems, by political limitations on
available reform choices, by a combination of these factors,
or by some other circumstances. To reach any conclusions
about the relative validity of the arguments surrounding
Georgia’s pension system reforms, it essential to establish
the nature of the development of pension system from a
specific starting point: the dissolution of the Soviet
Union. This study also intends to reveal the problems the
old-age pension system has faced and to evaluate the
achievability of the reform endeavors.
In order to answer the research questions, the methodology
of this study analyzes the scope of the changes that
occurred and reveals the factors determining the old-age
pension system’s development. In addition to the nature of
the research questions, the methodological approach was
defined by time and resource constraints. There are
substantial trade-offs between qualitative and quantitative
analysis, the dependent and independent variables, the
length and depth of the account, and the availability and
reliability of data sources. Nonetheless, to achieve the
research goals, this study consecutively applied the
evaluation of relevant academic scholarship, qualitative
data analysis, and in-depth interviews as complementary
approaches. As a result of the field data collection, much
of the information came directly from the Ministry of Labor,
Health and Social Affairs (MOLHSA), Social Subsides Agency (SSA),
and the Parliament of Georgia. In-depth interviews were
conducted with major stakeholders, including decision-makers
at the Ministry on Reforms Coordination, MOLHSA, SSA,
economic experts, and the representatives of private
insurance companies and relevant civil society
Hypothetical Explanations on Old-Age Pension Reforms
This section presents hypothetical explanations on both
old-age pension policy change and the system’s resistance to
reforms given by various authors and observations mainly
from the transition economies. On the one hand, economic
recession and demographic aging are assumed to destabilize
public pension finances and consequently create pressures
for policy reform; while on the other hand, political actors
and the environment can affect old-age pension system
Theories on the economic sustainability of old-age public
pension systems assume that pressures for change derive from
Chlon-Dominczak and Mora, through a survey of policymakers
and pension experts, found that the scope of fiscal problems
influences reform commitment and leads toward change.
Growing expenditure and decreasing revenues could create
opportunity for reformers who were previously prevented from
taking the initiative.
The recession, during the first years of transition, was
associated with enormous shifts in production structures and
a corresponding decrease in wages and increase in
As a response to this situation, governments often applied a
policy of substituting open unemployment with early
retirement programs at the expense of increased expenditure
of public pension systems.
The harsh recessions considerably deteriorated the revenue
base of the old-age pension system and created imminent
In line with the decline of the formal economy and
employment, transition countries saw rapid growth in
informal activity levels which was beyond the reach of
old-age social security contribution agencies, further
resulting in a loss of revenues for financing public pension
The economic stagnation and fiscal deficits represented the
immediate pressures on the consecutive governments in
transition economies to adjust the pension system, but the
intensifying long-term strains also resulted from the impact
of demographic aging, as the proportion of the elderly in
populations had been rapidly rising.
As benefits paid out were rising accordingly, outflow from
the old-age pension systems were exceeding contributions,
requiring increases in employees’ or employers’
contributions or budget transfers.
The old-age dependency ratio, measuring the share of the
population aged 65 years or over to the population aged
15–64, most noticeably increased in the Baltic States and
In turn, this rise could be explained by the changing life
expectancy and mortality patterns, the decreasing fertility
rates below the replacement rate,
and the intensifying trends of the negative net migration.
Despite the severe socioeconomic situation, life expectancy
had been increasing among the elderly during the 1990s,
creating a strain on old-age pension systems.
Simultaneously, mortality rates among the working-age
population, which had increased in the majority of
transition countries, might also have had an immediate
effect on old-age dependency ratios. Also, a pattern of
changes in fertility rates affects the old-age dependency
ratios and creates strong pressure for reforms within
several years because the current fertility rates are
typically employed for the extrapolation of future trends as
a rationale for changes.
In less than a decade after 1989, total fertility in
transition economies had fallen from a replacement rate to
about two-thirds of this level, making Eastern Europe the
region with the lowest fertility rate in the world.
In the short term the most important demographic factor
creating pressure for public pension policy reform could be
negative net migration, because it led to the outflow of a
predominantly working-age population.
An account of the political set of hypothesized
relationships is a more challenging task than considering
the effect of pressure factors on pension system
development. Most political economy theories consider the
political environment, such as the fragmentation of
and differences in governing bodies and institutions,
as a central explanation for policy development.
State-centered theories recognize the state and its policies
as more than neutral, influencing pension system development
as an autonomous agent;
while the new-pluralism assumes that public pension systems
are determined by patterns of democratic political
competition among different non-class based interest groups.
It is assumed that the politicians in the beginning of
transition enjoyed a “honeymoon” period and greater freedom
for maneuver in policies, as difficult decisions could
simply be blamed as being part of the outgoing government’s
According to Wagener, however, during the first years of
transition, social policy reform seldom deserved “[its] own
chapter either in reform literature of in reform policy
In addition to reformers, other domestic actors in pension
policy development were the political parties, the
ministries and other governmental agencies, the experts and
trade unions, public opinion, and representatives of
financial and capital markets. The impact of political
actors on pension system development may be illustrated by
the electoral competition among parties in the Czech
Republic for the 1996 elections, when five main political
forces designed their own approaches and included public
pension system development in their electoral programs,
while in Estonia trade unions successfully opposed
employers’ organizations which were suggesting taxing both
employers and employees.
According to Crepaz, parliamentarianism arguably creates
more opportunities for policy development because it
establishes stronger party discipline, greater legislative
power, and the centralization of accountability.
On the contrary, Brooks argues that presidential systems
generally mean lower incomes and smaller social security
system – two variables that simplify policy change.
Political environments in which these institutions function
also matter. In a democracy, parties which decrease old-age
benefits can expect to face the wrath of the old-age
population, while authoritarian governments are granted more
freedom to conduct policy adjustment.
Another explanation on pension policy reforms is the direct
and indirect influence of external economic, political, and
ideological factors in shaping the old-age pension policies.
According to Deacon and Hulse, the making of transitional
pension policy was a “testing ground for the future of
social policy elsewhere in the industrialized world.”
Throughout the 1990s the analysis of pension systems, the
design of recommendations and reform strategies, and
assistance in various forms for the reformer countries have
been the central issues on the agenda of the influential
international and regional organizations.
Since its main interest stemmed from the macroeconomic and
fiscal policy implications of public pension development,
the World Bank specifically addressed in its seminal report
the public pension systems in the transition economies.
Contrary to this position, an underlying assumption of the
European Union and the Council of Europe’s policy for
transition countries was the duty of the state to protect
the vulnerable regardless the concerns of the economic
The International financial institutions also frequently
discussed old-age security systems in the transition states
in connection to the financial sector, capital markets, and
domestically available sources for long-term investment.
First Stage of Development: Economics of Pensions
Reforms of the pension system are the changes in the
totality of institutions, procedures, and resources drawn on
to ensure a replacement income during retirement age. Four
attempts of initiating systemic changes in the old-age
pension system can be distinguished: the first two were made
consecutively in 1998–99 and 2002–03, while from 2004 the
reforms continued in two different directions.
Emergence of a Reform Agenda
The socioeconomic collapse associated with the dissolution
of the Soviet Union in Georgia was reinforced by the civil
wars, which sparked the national macroeconomic crisis,
precarious fiscal conditions and completely destroyed the
inherited old-age pension system. Simultaneously, Georgia
unsuccessfully tried to recover its share of the
Gosstrakh’s funds, approximately 550 million USD, which
had been seized by the Russian Federation.
Throughout the first half of 1990s the tax system
malfunctioned, and in 1994 the amount of pensions became
nominal. In 1995 the Government turned down the system of
differentiated pensions and replaced it with flat payments.
The pension benefits were determined by simple arithmetic:
the number of those formally employed in the population was
multiplied by the average salary and tax tariff, and then
revenues were divided by the number of pensioners.
This meant that equal pensions were granted to all retirees
regardless of their salaries during employment, length of
service, or differences in pension type. In 1996 the
parametric adjustments of the system resulted in the
retirement age being increased by five years for men and
women respectively, cancellation of the early retirement
provisions and introduction of a right on old-age pension
benefits only for those who previously contributed to the
The problems of the pension system were further aggravated
by a serious economic crisis at the end of the 1990s. This
critical situation created by the poor collection of tax
revenues was transformed into the large-scale financial
crisis, mainly as a result of the economic problems that
developed in the CIS countries.
The economic reforms, including privatization, were in their
early stages, and the inefficient public sector remained
large. At the same time, the country had one of the lowest
tax collection rates (9 percent of GDP) among the transition
economies, and the government had been reluctant to initiate
The non-compliance with the plan for the state budget
occurred, and was followed by the growth of arrears in state
liabilities. The National Bank, however, reported that the
final outcome only came to 68 percent of what had originally
Economic reform produced significant changes in the
employment structure, while the number of self-employed
significantly exceeded the number of those in formal
employment. The economic hardship also determined that many
Georgian citizens decided to leave the country. The
demographic burden was intensified by the growing mortality
and decreasing fertility rates. At the end of the 1990s the
population over age fifty-nine made up 18.6 percent, up from
only 14.4 percent in 1989.
The impact of fiscal constraints on the old-age pension
system was first recognized by the officials of the Ministry
of Labor and Social Security who initiated an initial agenda
on old-age pension reforms. It was assumed that the first
step for changes had to be part of a well-drafted
legislative framework to give to ultimate decision-makers a
clear picture what needed to be done. After the introduction
of a new state constitution in 1995, all Soviet laws,
including those on social security, were annulled.
Therefore, every reform attempt of the old-age pension
system was associated with changes in the broader concept of
social security in the country. The legislative package that
was developed in line with the Act on State Pensions
involved the Acts on State Social Insurance and Medical
Examination. Although the bills envisaged the
differentiation of old-age pensions according to amounts of
contributions and period of payments, they did not imply any
pension formula or other means to calculate differentiated
Ultimately, the bill was not approved, and in 1999 the
government established a working group with a more ambitious
initiative in which the influence of the World Bank, with
its retirement pension orthodoxy, became apparent. According
to this reform project, the three pillar old-age pension
system was considered as a suitable option for Georgia. The
proposed model envisaged the establishment of the mandatory
state pension fund, providing payment of minimal old-age
pensions, the mandatory non-state pension insurance, and the
voluntary private old-age pension insurance. The actors
behind the proposed scheme hoped that it would attract a
reputable international insurance company that would assume
repayment of the existing arrears and provision of old-age
pensions benefits by assigning to it the exclusive right to
administer 13.5 percent of social taxes.
However, the implementation of reforms was problematic
mainly because the government was still engaged in broad
political and economic reforms. The political environment
was fragile, with the president’s assassination attempt and
the hotly contested parliamentary elections. Other obstacles
were systemic corruption, poor administration of the pension
system, high social taxes, and ongoing underperformance by
the tax administration. In addition, there were no strong
leaders who would project the future benefits of pension
A new, ambitious initiative on reforming the state’s social
assistance schemes was declared in 2002–03. This period
turned out to be very hard on the pension system. At the end
of 2003 the ongoing pension arrears amounted 14 percent of
the central budget, while the average pension equaled 19
percent of the minimum subsistence level of an adult.
The beginning of the 2000s was characterized by the low
level of economic growth, moderate rates of inflation, and
permanent sequestering of the state budget. As a result, the
employment level, labor productivity, and real income of the
population remained unchanged. Internal demand failed to
become a stable factor of economic growth.
The vast majority of the population was forced to engage in
poorly paid, temporary jobs and was unable to secure minimum
living standards. The negative net migration remained high,
while fertility levels continued to decrease.
The government was unable to fulfill its core budget
parameters, mainly due to the fiscal authorities’
ineffectiveness, and deficiencies in the tax legislation. In
addition, after the suspension of financing under the IMF-supported
financial program, external sources became unavailable.
In 2003 expenditures constituted only 77 percent of the
initial plan, leading to growing pension arrears. The
precarious condition of the budget sector drove the country
to the real threat of default.
These developments had a twofold impact on the old-age
pension system. On the one hand, it generated the
understanding that the old-age pension policy had to be
amended, but, on the other hand, the stakeholders realized
that in order to implement paradigmatic reforms, the
administrative and parametric mechanisms of the system had
to be fixed. These constraints created a vicious circle,
the light of upcoming parliamentary elections, the
government announced the systemic pension reforms to
establish a new multi-pillar and financially sustainable
old-age pension system.
At the same time, the World Bank actively engaged in the
process, trying to advocate its own vision of pension
reforms, and helped the government to draft new bills and
design tax incentives for voluntary pension accounts. The
authorities believed that their initiative was a compromised
model of pension reforms; however, virtually no parties
lobbied for these amendments through formal or informal
consultations. The stakeholders only agreed on the necessity
of repayment of pension arrears and on the introduction of
the three-pillar pension model in principle, while a unified
approach could not be reached on a transition to the
mandatory private schemes, reduction of taxes for pension
savings, and differentiation of public pension benefits.
Nevertheless, the pension reforms had become one of the
mainstream policy issues for the government. In particular,
a package of draft bills was drawn up by the State United
Social Insurance Fund together with the MOLHSA and the World
Bank. It included bills on Mandatory Social Insurance,
Mandatory Pension Insurance, and Introducing Individual
Registrations and Individual Accounts for Mandatory Social
Old-age pensions were comprised of two components: a minimal
base part, which would be warranted and common for everybody
who satisfied the requirements for retiring, and an
insurance part, the amount of which would be differentiated
and dependent upon the insurance service length and the
amount of individual payments put into the account.
The main characteristic of the
2003 initiative was that the mandatory second pillar had to
be nominal in nature, which meant that the contributions
would not be invested through real funded accounts.
The retirement age for both men and women had to be changed
and minimum insurance longevity to fifteen years. The
pensions granted had to be increased on an annual basis in
accordance with the consumer price index.
This package of bills was passed by the Parliament and had
to enter into force on January 1, 2004.
However, the implementation of
this reform was canceled due to the fundamental political
changes in late 2003 when a new government came to power.
Initially, the introduction of the draft bills was postponed
until the beginning of 2005, and later the proposal was
completely rejected. The
opponents of this reform initiative criticized its economic
rationality. Their own financial projections showed
that individuals had to save all their working lives and
then it would be reflected in extremely low replacement
These calculations were based
on the existing socioeconomic variables, including economic
growth rates, employment levels and dependency ratios.
The model did not consider potential external shocks of an
economic, a political, or a military nature. Furthermore,
the central justification of the reforms – that people would
be interested in legalization of their incomes –was
criticized on the grounds that individuals would not be
motivated to participate in a system which was ineffective
from an economic point of view.
Second Stage of Development: Politics of Pensions
From 2004 two dimensions of the pension system development
can be distinguished. On the one hand, the changes sought to
fight poverty among the elderly, while the government also
aimed to create an environment for consumption smoothing
during the retirement.
Retirement without Poverty
The new government improved the welfare of elderly by
improving the public pension system and developing a general
means-tested social assistance program. The old-age pension
system was greatly affected by the measures to establish
economic and financial order in the country. In 2004 the
total revenues of the state budget grew by 91.3 percent,
while the share of tax revenues of GDP increased to 18.5
percent. It became possible to redeem salary and pension
arrears from previous years.
The authorities also largely managed to eradicate
corruption, identify database falsifications, and dismantle
the special preferences among and within the different
groups of pensioners. In December 2005 a new Act on State
Pensions was adopted. All citizens of Georgia were granted a
right to receive the old-age pension benefits any time after
the age of sixty for women and sixty-five for men. The
legislative changes were accompanied by the administrative
amendments on which the SSA was founded.
At first sight, the introduction of the new legislative
framework had to be considered as a major change in the
old-age pension system, but in reality, the fundamental
elements were not amended. The system was still based on the
principles of solidarity payments and equal pension
benefits, and did not anticipate the differentiation of
On the revenue side, the old-age pension system was also
affected by new changes to the tax code. With regard to
social policies, a decision was made to abolish the
personified social insurance contributions and introduce a
common social tax at a rate of 20 percent of all salaries
After this consolidation, the maintenance of records on
individual employees and their taxable incomes was
abolished, which meant that the possible future
differentiation of old-age pension became technically
unfeasible. From 2008 further major changes to the Tax Code
were introduced. The social tax was annulled, and
individuals became responsible for the payment of income
tax, at a rate of 25 percent of their gross earnings.
Moreover, pension benefits were financed by the general
revenues line of the state budget. Previously, these
contributions were separately accounted for in the state
budget, and the Tax Department paid less attention to
administrating these collections. After their inclusion in
the central budget, there was an increased incentive for the
Tax Department to enhance the collection performance of the
On the benefit side, from 2004 the amount of minimal flat
old-age pension was initially increased by GEL 28 per month,
and then by GEL 38 in 2006. After the social unrest in
the government increased the old-age pensions by GEL 55.
Before this political stalemate, however, the increase
initially applied only to those pensioners who qualified as
being extremely poor in the unified social assistance
During the 2008 presidential campaign,
the opposition coalition proposed designing an old-age
social security system in which pensions would be calculated
based on the years of service and individual
Nonetheless, the existing government remained in office,
with a consequential announcement that the parametric
pension reforms would be one of the central elements of its
Since March 2008 minimum pensions have increased by GEL 70.
The pension replacement rate, however, remained at a very
low level, which further highlighted the inadequacy of the
existing old-age pension system.
In 2009 the authorities planned to increase pensions by USD
which, for the first time in recent history, would be more
than the minimum subsistence level of an average consumer.
After effectively dealing with the main technical problems
of the public pensions, the government realized there were
still many obstacles that would burden the system. Senior
government officials believed that the PAYG scheme was not
sustainable in a country which had a shrinking and aging
population, a negative net migration, and high life
Negative trends in the labor market, such as high
unemployment and informal employment rates, were also
weighing the system down. At the same time, high levels of
poverty in the population required “increasing the
efficiency and effectiveness of state measures against
According to prevailing logic, growing pension expenditure
and anti-poverty social assistance had to be financed from
the same source of revenues, which meant that prioritizing
one would come at the expense of the other. Concentrating on
the increasing universal pension benefits would mean that
the government was oriented toward segments of the
population with medium income, while the most poor would
still remain in precarious conditions. The trade-off for the
government was clear, and the political decision was made to
prioritize the general means-tested poverty reduction
measures over the pension policy.
From 2004 to 2006 intensive work was performed to introduce
properly functioning means-tested social assistance system,
and in 2008 its database included 41 percent of Georgian
households and 38 percent of the population of Georgia. The
idea was that the government, based on proxy means-tested
mechanisms, had to spend tax-payers money on those unable to
care for themselves by giving them cash and different
in-kind benefits, such as compensations for communal
services, health care, and education scholarships.
Simultaneously, the program has also included about 240,000
of the poorest old-age pensioners, almost a third of all
retirees. The scheme had potential, if accordingly financed
and developed, to drastically reduce extreme poverty in the
general population. The government also presumed that it
could maintain the old-age pension system without
substantially increasing of the universal pension benefits.
Nevertheless, after the November 2007 unrest, a political
decision was made that the scarce resources had to be
devoted to increasing the general pension benefits for the
entire aged population, which in turn reduced resources for
the effective implementation of the means-tested social
Achieving a Decent Retirement
From 2004 the authorities started to consider a transition
to private pension schemes in order to create an environment
in which people would be able to independently secure a
decent retirement. The old-age pension reforms were
originally at the centre of the political agenda,
but, in fact, there was no sound policy framework developed,
and no special task force or working group was engaged in
pension issues on a full-time basis. The government began to
argue, however, that within the existing environment,
current consumption might be more effective than depositing
savings for retirement.
In defense of this argument, three main points were
emphasized: first, if individuals would deposit savings into
pension funds, their real benefits from pension annuities
would be roughly five times less than their pre-retirement
incomes due to the existing high economic growth and
second, the government was reluctant to bear the costs of
any guarantees of protecting workers’ savings if a mandatory
system was introduced;
and third, the introduction of an obligatory system would
mean, as in the Soviet era, that individuals would not know
what was in their best interest.
Based on these notions, the government preferred to withhold
the final pension reform decisions and simultaneously worked
on tax incentives to stimulate general savings.
In early 2008 the parliament approved the government’s
package of draft bills, which implied the gradual reduction
of income tax and the introduction of tax reliefs for
incomes stemming from various types of deposits.
The authorities considered this decision as a step toward
pension reform because it made all investments, including
pension savings, more profitable,
though it did not imply any special treatment of retirement
accounts. This decision was partially justified by the
earlier experience in 2004 when the introduction of special
tax incentives for private insurance failed to generate a
boom in pension accounts, although the licensing of the
voluntary pension funds substantially increased.
The size of annual old-age public pension payments for 2007
was roughly 300 times larger than the size of combined
private old-age pension savings since 2001.
Despite the argument by those who supported the tax reliefs
that the initiative required a longer time-span before the
financial institutions, insurance companies and the
population would adjust to the new environment: from 2005
the amendments in the Tax Code eliminated all tax
preferences and depreciated the positive prospects in the
private pension schemes.
To counterbalance the government’s approach toward the
old-age pension reforms, an initiative was taken by
parliament in 2006 to establish the Pension Task Force,
which was facilitated by the EU delegation in Georgia.
The Pension Task Force saw that the worst option was merely
retaining the existing pension structure and enabling the
increase of pension benefits as the government resources
After the extensive public consultations, the Pension Task
Force proposed the introduction of a contributory funded
pension system in which currently workers would have the
option to join such a system. Future pensions would have two
components: a monthly pension for life, from age sixty-five,
equivalent to a capital reserve which would have been built
up in a contributor’s personal pension account; and second,
a transfer to the contributor’s personal pension account of
the value of the proportion of the current state pension.
The pension account would be administered in an autonomous
pension fund, the assets of which would be managed by
private-sector investment managers.
The calculations indicated that with the contribution of 10
percent of earnings, annuities in constant GEL 2007 would
grow from GEL 38 to GEL 100 in some twenty years’ time,
and in forty years would exceed GEL 250.
In spite of being the most elaborate and up-to-date pension
reform plan, the executive government disregarded the
proposal based on the abovementioned arguments. Among
others, the Ministry of Finance strongly opposed this
initiative due to the projected reduction of current
revenues during the transition period. It was also argued
that the statistical calculations employed in the model were
This confrontation indicated that senior executive officials
had not only a better understanding of the political economy
of pensions but also more leverage on the final
decision-making process, which meant that the Pension Task
Force reform initiative could hardly succeed even if its
approach had been completely credible.
After the government effectively blocked the proposed
initiative, the Pension Task Force was forced to adjust its
agenda to the government’s line. The idea on partially
mandatory pension insurance was dismissed, and the work
continued just on the development of voluntary pension
schemes. The new model intended to enhance and formalize
private pension mechanisms and create incentives for people
to save in these schemes.
Was Momentum Lost or Gained?
The implementation of systemic pension reforms, as commonly
agreed upon, would have been most plausible between 2004 and
2007 when the country had excellent fiscal standing. But the
reforms still would have required substantial financial
resources since the government would lose the portion of tax
revenues redirected to mandatory private pension funds.
These transition costs could then be financed through grants
from international organizations and privatization of public
The systemic reforms most likely would also have worsened
the government’s political stance by affecting the
well-being of those cohorts who would not have had the
opportunity to save accordingly for their retirement.
Instead, the government preferred to increase the flat-rate
pension benefits regularly and, as such, contributed to the
transformation of the old-age pension expectations into the
old-age pension liabilities, which not only assumed
sustainable provision of benefits but also their
ever-increasing nature. Furthermore, during the last
presidential campaign, the increase of old-age pensions
system became a way to win the votes of pensioners, a large
and politically active group of the population. Taking into
account the projected demographic and employment
characteristics, it will gradually become even more
difficult to increase pension benefits, whereas subsequent
governments might occasionally experience heavy pressure
from the elderly requiring a decent increase of pension
The military confrontation with Russia in August 2008 and
the intense effects of the international financial crisis
had their consequences on old-age pension reform prospects.
The slowing economic growth rates and shrinking budgetary
revenues substantially affected the country’s fiscal health.
The crisis made it much more difficult not only to implement
comprehensive pension reforms with an introduction of any
kind of mandatory private pension provision,
but it also, at least for several years, disrupted
accomplishing the promised increase of the flat-rate general
pensions benefit by USD 100.
However, the recent developments could be also viewed from a
different perspective. The crisis can boost the position of
those who think that a completely privatized pension system
is the only feasible solution to the problem. Indeed, in the
beginning of 2009 the government announced that the country
needs the promotion of voluntary private pension schemes in
which individuals will be able to independently secure their
best possible retirement prospects.
The only threatening aspect, though, in this development is
the potential for a final decision that is made abruptly,
without adequate consideration of other policy alternatives.
The purpose of this account was to clarify what factors have
been affecting the old-age pension system’s development in
Georgia after the dissolution of the Soviet Union. Through
the method of evaluation of the selected scholarly
literature mainly on the transition economies, there are
specific hypothetical determinants – economic, demographic,
political and international factors – that explain pension
system development. In order to examine these theoretical
explanations, an assessment of the changes in old-age
pension provision, and two consecutive and chorological
attempts of systemic amendments as well as two simultaneous
and ongoing reform agendas are identifiable. In the first
stage of development, the bottom-up reform initiative
stemming from the Ministry of Labor and Social Security was
blocked by the political indifference in the upper echelons
of executive power; and when the fiscal problems
intensified, the government became interested in gaining
political dividends through the top-down reform initiative
mediated by the World Bank. Demographic aging worsened the
scope of the pension problem and, therefore, affected reform
initiatives, but not in such an illustrative manner as did
the international influence that played a significant role
in all major reform preparations.
Since 2004, old-age pension reforms have been upgraded to a
more mature policymaking level, though the government was
not able to exploit the post-election “honeymoon” period to
conduct systemic pension reforms. Thereafter, the state’s
priority deviated from the universal old-age pension system
to the development of universal means-tested social
assistance program and presented the general tax reduction
trend as a component of broader pension reforms,
successfully blocking parliamentary attempts to introduce
mandatory pension savings. On this reform stage, the
unbalanced fragmentation of political power played a
decisive role for the reform outcome. This specific event
can also be seen in light of the confrontation between the
EU-backed reform approach, endorsed by the parliament, and
the executive government’s position, which was more closely
associated with the World Bank’s ideology. The military
conflict with Russia and the world financial crisis,
contrary to expectations, might facilitate rather than
postpone reforms, though not within the best possible
Old-age pension reforms in Georgia were only marginally
determined by the pluralistic style of democratic
competition among stakeholders. The reforms were almost
exclusively shaped by the ministerial, legislative, and
government agencies. The political economy of this approach
is more in line with a state-centered logic of pension
policy development, which is mostly shaped by the structures
that the state imposes. In addition, it is difficult to
evaluate a role of democracy in Georgia’s old-age pension
reform process; however, the government’s drive to introduce
a new pension model before the 2003 parliamentary elections
and the new government’s promise to almost double flat-rate
old-age pensions during the last presidential campaign may
have some implications for committing to a policy option
preferred by the average voter. Overall, one general
observation from this paper is the contradictory fact that
despite creating political justification for reform, the
radical fiscal crisis did not lead to the systemic old-age
pension changes, while the conducive fiscal environment
dampened political aspirations toward important paradigmatic
Clearly, these findings are preliminary and deserve further
examination. In spite of an attempt to access the most
comprehensive data sources, apparently this paper considers
a very broad time span, with some incomplete sources of
information that we unavailable at the time of writing.
Further, many key stakeholders did not have full information
on up-to-date developments. Even the parliamentary Task
Force and the team at the Ministry on Reform Coordination
could not fully coordinate complementary activities.
Therefore, it is important to promote debate on pension
policy through sound research practices. Although definitive
answers as to what factors determined pension reforms are
difficult to pin down, all economic, demographic, political,
and international factors matter. The question is still how
their constellations determine policies in different time
periods. Considering this constraint, future efficient
research designs should ideally concentrate on the analysis
of a single reform attempt within a shorter research
Monika Ambrishevska-Khechinashvili – Employee of the
Parliamentary Committee on Health and Social Affairs; member
of the Parliamentary Pension Task Force;
Vakhtang Baramidze – Employee of the State Ministry on
Kakha Bendukidze, Former State Minister and Head of State
Chancellery of Georgia;
Soso Bregvadze – Deputy Head of Social Subsidies Agency;
David Gelashvili – Former Actuary of GPI Holding; member the
Parliamentary Pension Task Force;
Gia Jandieri – Vice-President of the New Economic School of
Khatuna Jishiashvili – One of the founders of the
Association of Actuaries and Financial Analysts (AAFA);
Member of the Parliamentary Pension Task Force;
Devi Khechinashvili – Head of the Insurance Association of
Vakhtan Megrelishvili – Former Deputy Head of the Ministry
of Labor, Health and Social Affairs,
Guram Mirzashvili – Chief Actuary of the Aldagi-BCI; member
of the Parliamentary Pension Task Force;
Nika Rijamadze – Head of the GPI’s sales department.
The author wishes to thank the Norwegian Institute
for International Affairs for its
support during the
preparation of this study and all interviewees for
devoting their valuable time to this research.
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The Task Force functioned within the framework of
the Policy Advice on Pension Reform in Georgia
project which was funded by the European Union.
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