Does
pension reform benefit workers?
Kazakhstan’s proposal to raise the retirement age for women, from 58 to 63,
has resulted in a culinary event, reported Silk Road Intelligencer. A week
or two ago, a protester pelted the labor minister, Serik Abdenov, with rotten
eggs as he tried to explain the reform.
Will it endow the nation’s economy with rot as well?
One point of the proposal, of course, is to
cut government spending, thus averting a later tax increase. Kazakhstan restructured its pension
program in 1998, but the reform won’t take full effect until perhaps 2038. Meanwhile, lingering features of the old
program are costing the government.
Here are details. Before 1998, Kazakhstan had the traditional
pay-as-you-go program for retirees, in which current workers effectively paid for current
pensions through taxes. (Ostensibly, employers financed pensions via a payroll
tax of 30%, Lim notes. But they were
likely to pass on much of this expense to workers in the form of lower wages.) As the
population continued to age, the number of retirees per worker would continue
to rise, increasing the tax burden on labor.
To avoid this political catastrophe, the government notionally replaced
the pay-as-you-go structure with one in which each worker would save for his
own retirement.
At the time, Kazakhstan
was hailed as a pioneer in pension reform (which it had adapted from Chile). Overlooked was the fact that the reform
couldn’t take full effect immediately, since workers who would retire soon had
not yet saved enough money to provide themselves with much of a pension. Instead, Kazakhstan would implement the
reform gradually, continuing to pay pensions but at a diminishing rate over
time. For example, a worker retiring in
2018 will receive half of his pension from the pay-as-you-go plan and half from
his own pension account, since he will have worked for half of his career (assuming
a 40-year career) since 1998. A worker
retiring in 2038 will have worked his full career since 1998, when the reform
was announced, so he will be expected to pay for his entire pension
himself. At that point, the
pay-as-you-go plan will cease to exist. But
until then, the government must continue to pay some part of the pensions, since it must finance shortfalls in private payments.
To
save or to slave
Saving the government money is not the only
purpose of the pension reform. Another
is to encourage people to save. Under
the pay-as-you-go program, a worker’s pension would not depend on his own
savings, since future workers would pay for him; so he might not save. Under the new program, the worker must save
for his own pension. He would put his
savings in a bank that subsequently could lend the funds (until he needed them)
to firms for expanding their capacity to produce. Thus the pension reform could engender
economic growth. That, at least, was the
idea.
There is another possibility. Perhaps people don’t save for retirement;
instead, they save in order to pay future tax increases. The reform avoids an increase in payroll
taxes by shifting the burden of the pension from current workers and to the
future pensioner. Since taxes wouldn’t
increase, the worker wouldn’t have to save more for them. In this case, the household savings rate (the
share of after-tax household income that is not spent) would fall.
A final possibility is that people save for
both retirement and taxes. In that
event, the pension reform would have no net impact on the personal savings
rate. One would save $1,000 more for the
pension but $1,000 less for tax increases.
But set these complications aside. The immediate problem for the government is
to explain intelligibly one of its most significant reforms to the people who would benefit
by it. The penalty for failure is a
short order of flying eggs. --Leon Taylor, tayloralmaty@gmail.com
Good
reading
Jiunjen Lim. Pension reform in Russia
and Kazakhstan. 2005.
Online. An overview.
References
Silk Road Intelligencer. Women’s
retirement age. April 29, 2013. www.silkroadintelligencer.com
World Bank.
Paying pensions in Kazakhstan. web.worldbank.org
