BUILDING ON THE SAND
By Albert Khachatryan

news.am
Jan 22 2010
Armenia

According to official reports, full-scale measures for introducing a
new, multi-level pension system in 2011 will be implemented this year.

The new system will consist of both distribution and accumulation
funds. The reforms are planned with good intentions. Revenues of the
State Pension Fund, as well as private funds, will make it possible
to increase pensions and reduce shadow employment. Long money will
become available, which is necessary for normalizing investments in
the Armenian economy.

It would be difficult to say whether the idea will be realized
on schedule. In any case, the "experience" of instituting a
number of progressive systems, such as the statement of private
incomes, demonstrated long ago the ineffectiveness of the "rusty"
bureaucratic mechanisms. The "belated" pension reform in Armenia
was not an exception either. For example, Russia, which made an
identical transition to market economy, launched similar reforms
in 2002. In Armenia, the situation in this important social sector
has become rather strained over the last 20 years because of obvious
disproportions between the number of pensioners and employees, which
is the bases for compulsory social payments. Also, low pension rates
are an immediate result of low nominal wage rates in Armenia – U.S.

$265 a month by September 2009.

In Europe, four to five employees "support" one pensioner aged 65 and
over. Since the European population is "ageing", two employees per one
pensioner will be registered there by 2050. The European Governments’
are concerned over this gloomy forecast of Europe’s decline.

In Armenia, however, the situation is much worse than Europe’s fear of
remote future! According to the RA Social Security Service, 420,000
employees effecting compulsory social payments have to "sponsor"
540,000 pensioners. That is the current ratio in Armenia is worse
than that expected in Europe in the remote future — less than 0.8
of an employee per pensioner! The situation is expected to worsen
in the context of demographic trends in Armenia. How is it with over
1,000,000 officially registered employees in Armenia?

The point is that hundreds of thousands of Armenian farmers do not
pay social security taxes. Under the RA Law "On compulsory social
insurance payments", people employed in the agricultural sector were
to pay taxes. Later, however, they were exempted from taxation. It
was clear – how was a farmer that could hardly provide for himself
and his family to pay the social security tax?

Also, the number of employees includes the people that are not paid for
their work on legal grounds – for example, they are a businessman’s
family helping him in running business. Shadow employment – with its
scope remaining undetermined – plays its role as well. With shadow
economy estimated at 40% or even more, shadow employment may reach
a high level as well.

So which economic entities mainly have to carry the social security
tax burden? One can get an answer to this question after analyzing
the list of the 1,000 largest payers regularly published by the RA
State Revenue Committee. Last January-September, 57 economic entities
ensured more than 20% of all the revenues of the RA Pension Fund! So
imbalance is obvious in this field – all the other dozens of thousands
economic entities ensure the rest 80% of revenues of the Pension Fund.

The very title of the document "1,000 largest payers…" is far from
reflecting the real picture. For example, during the period under
review, the first ten companies paid around 7bn AMD to the Social
Security Fund (9.4% of all the revenues of the Fund!), whereas the
last ten companies paid only 88m AMD – 79 times as less! A similar
imbalance is typical of the other list, "1,000 largest taxpayers
of Armenia." The two lists are, however, different due to the
"peculiarities" of the Armenian economy.

A number of companies that show the leading figures in terms of taxes
paid to the Armenian state budget (VAT, profit tax, customs duties,
etc..), show modest amounts of social security tax and rank lower
in the other list. Specifically, the well-known importer company
Alex Grig, which ranks third in the list of the largest tax payers,
shows the 78th largest amount of social security payments. Another
taxpayer, no lesser known oil trader GorPetrolService, which is among
the ten largest taxpayers, ranks 281st in the list of social security
tax payers!

The reason is quite clear. Imports have increased enormously in the
Armenian economy, and the economic entities dominating individual
markets are able to work with large shipments with a relatively
small number of staff members. We have nothing to say about petrol
and sugar, but import dominance on the other markets is the direct
result of the Government’s economic policy.

The first ten of Armenia’s largest employers are natural monopolies
(Electric Network of Armenia, Armrosgazprom), leading telecommunication
companies (ArmenTel and K-Telecom), large industrial enterprises
(Nairit and Zangezur Copper and Molybdenum Plant), as well as South
Caucasus Railway, Armenian nuclear-power plant and two state-run higher
schools. Although the fact of the higher schools being among the top
ten can be welcomed, it clearly shows the employment situation in the
country. Other higher schools and commercial banks are ranking high
in the list as well. No doubt, it is the relatively high salaries –
2.7 times as high as the average monthly wages in Armenia — that
account for their high rankings.

On the other hand, the average monthly salary in the Armenian
education system is about ¼ lower than the average wage rate in the
country. So it is not the teaching staff’s meager salaries, but the
number of higher schools, that accounts for their high rankings. So,
in terms of personnel, higher schools and hospitals, turn out to be
ahead of many industrial enterprises. But it is not an unprecedented
increase of their staff, but the decline of the Armenian industry,
that accounts for this.

Over the last 25 years enterprises of metalworking and engineering
industries have lost their status of "largest enterprises", with their
198,000 employees. The light industry with over 118,000 employees
shared their lot. We do not have to explain the reasons. It should
be noted, however, that the light industry, which constitutes 1/3 of
Turkey’s industrial potential, is well developed in that country.

Turkish products successfully compete with their Chinese counterparts,
and one can easily see that after visiting Armenia’s fairs. The
Armenian Government recently approved a new concept of industrial
development – a belated idea as well. But was it right to wait for
a critical situation in the Armenian industry in order to improve it
later? Irreversible processes are typical of the hopeless situation
in a number of Armenian industries, which, in term has an adverse
impact on the pension system.

After the pension reforms, workers and individual businessmen
will effect payments to the pension accumulation fund. Not all the
prospective pensioners, but persons of under a certain age, will be
involved in the new system. Other age groups will be able to use the
voluntary accumulation system by effecting payments to private pension
funds. In different developed countries private pension insurance
constitutes 9% (in France) up to 42% (in Great Britain). It is not
yet clear what figures can be in Armenia in the foreseeable future,
as it depends on the national mentality and other objective factors.

One of the important factors is the difference between the retirement
age and life expectancy in the country. The longer is the "pension
lifetime" the stronger is the person’s desire to ensure his or her
"happy old age." For males, with their life expectancy being 70.4
years, this difference is less than 5 years. No comments… True,
the accumulated pension will not be lost – the pensioners’ relatives
have the right to it. But, in Armenia’s conditions, this fact is
hardly a convincing argument for accumulation.

So we have a lot of problems exacerbating the situation in the Armenian
pension system and challenging the relevant reforms. On top of all,
the burden of compulsory payments may force economic entities to
remain in the shadow rather than become transparent. A decent wage
is better than a pie in the sky, isn’t it? As regards the long money
in the accumulation funds, with a securities market actually lacking
in Armenia, the investments of the money is open to question as well.

The only opportunity is investing in government bonds. Well, the
coming reforms have many a rock ahead!