Thursday, January 16, 2014

Pension reform in Armenia

Armenia's new pension system took effect this month, on schedule as part of legislation enacted in 2010. It consists of three pillars, with Pillar II calling for a mandatory private pension contribution scheme for those age 40 and under. By doing so Armenia joins a number of developed economies that have mandatory private pension plans in effect. Below is a snapshot from an OECD report on the prevalence of mandatory private pensions in 2010; countries with such plans include Australia, Chile, Denmark, Estonia, Finland, Hungary, Iceland, Israel, Mexico, Netherlands, Norway, Poland (recently switched to public), Slovakia, Sweden, and Switzerland. Even in countries that have "voluntary" private coverage, the plans are not strictly voluntary. Voluntary plans available by virtue of one's occupation (e.g. unionized shops) are not truly voluntary except for the choice of employment. Some of the countries listed in the table below may also have public plans. In the US, the social security system, a public plan, mandates a contribution rate of about 12 percent.
A short background and description of the challenges is provided by Delloitte. And everything you ever wanted to know about the new pension plan are provided by PALM. Despite the very wide publicity, seminars, and conferences, over a span of several years, only recently some opposition to the plan was expressed by some groups. Of course, there is widespread support for the provision of pension benefits to the elderly. All along I had expected some opposition, on ideological or philosophical grounds, to the proposed plan by those who support a public over a private plan. In other words, whether the government should tax workers and use the proceeds to fund retirees (PAYGO or otherwise). But the current debates have little to do with this, and I really do not see the merit of the arguments presented. The questions at hand are: do you want to provide the elderly with pension benefits, and if so, how do you fund it? These are very simple questions but yet not simple to address.

Note: This survey refers only to the experience of 34 OECD countries. A number of other countries have Pillar 2 type pensions in place. [Added January 18th]



Raffi Elliott said...

I agree that in theory the private pension reform is necessary, I think what most people are protesting against is lack of government trasparency on the matter

David said...

The government and international organizations have been working on this for some 6 years. There were many presentations, seminars, and conferences on the subject. And so it is not transparency, as much as you have a dysfunctional political system where the two sides don't talk and ignore each other.

Raffi Elliott said...

Yes you're right. I should have specified. What I mean to say that the widespread opposition to this reform by Armenian society is not necessarily directed at the reform itself, rather as a vote of non-confidence against the government as a whole.

I participated in a study on the issue with the AUA, and in our focus groups, many of those present said that they were ready to accept these reforms if they had been enacted by a government which they trust.