Pensions in Armenia

Pensions in Armenia incorporate the following components: Pillar 0 or Social pension (benefit), Pillar 1 or Employment pension, Pillar 2 or Funded pension, Pillar 3 or Voluntary pension.

Analysis showing attempts to solve the pension problem in different countries has led to rise of income tax or pension age

Before the implementation of the Pension Reforms, the Pension security system of Armenia was characterized as a PAYE (pay-as-you-earn) pension system financed on the principle of the solidarity of generations. The system actually performed a distributive function; the payments were made by employees, employers and individual entrepreneurs to the State budget, of which the pensions payments were provided by the order defined by Law.

The pension amount in the PAYE system is calculated based on the basic pension amount, the number of years in service and the compensation amount for each ensured service year, as well as pensioner’s personal coefficient (the latter is also calculated based on the number of eligible years of service).

Over time, however, due to a number of factors (they will be discussed below) the pension system based on the principle of the solidarity of generations failed to meet the expectations of its beneficiaries. Evidently, the pension system of any country has to solve one problem: to ensure adequate living standards by guaranteeing their pensioners a dependable pension provision. That’s why many countries of the world, including Armenia, started looking for other ways to solve the problem, mainly putting forward the idea of developing the self-financing pension systems.

History

Pension Reforms Incentives

Actually, the pension system based on the principle of solidarity of generations known to the world as the “Bismarck’s system” has proved to be effective till the end of the 20th century. That efficiency was attributed to the rapid development of economics which resulted in increase in labor income among the population, as well as in the State tax revenues. Conditioned with the growth of the State budget revenue, the State was able to expand the number of social services provided to citizens by significantly changing their life quality. However, due to the above-mentioned factor, a series of processes took place which later on created a critical situation in the pension systems of those countries. Some of them were of paramount importance:

1. the average life expectancy increase which, of course, resulted from improvements of healthcare services and technologies,
2. birth rate decrease as a result of which the elderly began to outnumber in the world.

Thus, it was out of the question that this type of pension security system would certainly expire itself and it was necessary to find brand-new solutions. As a result of theoretical and practical steps of different countries undergoing the pension reforms, three main problem solution options were created:

• Tax burden increase among the working population;
• Retirement age increase;
• Development of self-financing pension systems.

The grounds for pension reforms in Armenia

Armenia faced the problem of pension provision after the collapse of the Soviet Union. This was promoted by a number of factors such as:

• the financial instability as a result of which the State budget was unable to provide pensioners with sufficient pensions,
• the demographic situation which the country had to face mainly after it regained Independence; i.e. fertility decline, migration of the working population.

The latter resulted in the violation of the digital balance among workers and pensioners and in the increase of tax burden (the ratio of employee to pensioner is 1 to 1 whereas it should be 3 to 1, i.e. three employees make social contributions of which pension is paid to one pensioner).

Starting from the 90’s, the Government of Armenia has put the pension issue at the top of its agenda. A number of resolutions and laws were adopted, aimed at the industry regulation:

1. Laws “On the RA Citizens’ State Pension Security" were adopted respectively in 1992 and 1995,
2. and RA Law “On State pensions” in 2003.

In the initial phase, the preference was given to the situational options such as raising the retirement age, increasing the tax burden which, in fact, proved to be temporary solutions and would not provide reasonable and satisfying results. The need for complete review and radical solution to the issue became more and more prominent.

Like numerous countries which have undergone the pension reforms, Armenia has finally decided to set up a new self-financing pension system as an already tested version. In 2005-2006, a new phase of pension reforms launched under which the RA Government adopted a series of regulatory decisions. The final reasoning was the Law “On Funded Pensions” made on December 22, 2010 by the RA National Assembly. Thus, the pension system in Armenia became a multi pillar one: 2 new voluntary and mandatory funded pension components have been introduced.

In 2014, due to some points the society used to discord with, Law was challenged in the RA Constitutional Court, and only after having met the requirements of the Supreme Court, it was again adopted by the RA National Assembly.

Pension system investment objectives

To minimize the risk of poverty at retirement by providing social welfare to the elderly.

1.to ensure long-term financial sustainability of the pension system, give a reasonable solution to the problem. 2.Create a direct, visible link between the individual’s income and his future pension amount, making him responsible for his future pension formation.

There are a number of other expectations from the long-run funded pension system which are visible in case of the countries that have already undergone the pension reforms. In particular, it is expected that the pension funds will bring long-term financial resources into the economy which will lead to:

1. financial market activation
2. long-run money formation
3. national savings formation
4. loan interest rate reduction
5. investments growth.

So, all of this will contribute to the stabilization of the economy in the country, and later on to its rapid development.

References