Friday, 28 June 2013

Kazakhstan Adopts Controversial Pension Reform

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by Georgiy Voloshin (the 06/26/2013 issue of the CACI Analyst)

On June 21, Kazakhstan’s President Nursultan Nazarbayev signed into law a bill introducing a comprehensive reform of the country’s pension savings system. The main novelty of the bill is a provision increasing women’s retirement age from 58 to 63 years, thus ensuring full equality with the working male population. Earlier in April, the chairman of Kazakhstan’s National Bank, Grigory Marchenko, made public the results of an independent assessment made by international experts according to which the state budget might lose US$ 19.6 billion worth of potential tax revenue by 2023, should a similar reform not be adopted by the end of this year.

The initial draft law was developed by the country’s Ministry of Labor and Social Protection headed by Serik Abdenov, the youngest member of the government. According to this legislative proposal, women’s retirement age was to be progressively increased between 2014 and 2024, with every passing year within this timeframe accounting for an additional five months of seniority required by the law in order to obtain full access to future retirement benefits. While the principal argument used by both the Labor Ministry and the National Bank was that several embattled European economies had already resorted to similar measures for the purpose of reducing their budget deficits, the pension reform quickly led to a wave of protests.

Despite a few endorsements secured by state officials on behalf of the women’s business community whose representatives most often enjoy better working conditions that average Kazakhstani women working as low- or mid-level employees, the reform was heavily criticized by several public associations. Moreover, Labor Minister Abdenov became the target of a massive character assassination campaign organized via social networks, after a series of speeches conducted in the regions where he had tried to present the benefits of the proposed law. On one occasion, a supporter of the local communist party office even threw eggs at the minister while the latter was speaking at a press conference in Almaty.

Following the barrage of criticism directed against the government’s refurbished pension savings plan, Nazarbayev addressed the Nation on June 7, almost one month after both chambers of the Parliament had voted in favor of the draft and submitted it for the president’s approval. Commending the initial scope of the reform aimed at better coping with eventual budget deficit problems resulting from reduced tax revenues in the coming years, Nazarbayev however criticized the Labor Ministry for its poor performance in terms of providing a clear illustration of the intended benefits offered by the text. He therefore suggested amending the draft law so as to start implementing the reform as applied to women’s retirement age four years later than initially foreseen, on January 1, 2018.

On June 10, three days after his televised address, Nazarbayev dismissed Labor Minister Abdenov and replaced him with his deputy. This dismissal was swiftly followed by the adoption of an amended draft law incorporating Nazarbayev’s suggestion. Whereas this move still enabled Kazakhstani authorities to implement the necessary reform dictated by the current economic situation, it also once again revealed Nazarbayev’s favorite tactics of using junior ministers or members of parliament as mouthpieces of potentially controversial legislative proposals while staying above the fray and keeping his credibility intact. The same tactics were used in January 2011 when the Kazakhstani leader declined the proposal to hold a national referendum on the issue of extending his presidential powers up to 2020 without formal elections.

Even though women’s retirement age has become the central theme of public debates regarding Kazakhstan’s pension savings system, the reform includes other far-going changes. Both public and private employers will now have to pay an additional five percent of pension taxes for their employees who already contribute ten percent of their monthly salaries. Furthermore, another five percent of pension tax will be required for those who are involved in dangerous industrial fields, such as petrochemicals or metallurgy. However, the most significant change is the establishment of a single pension savings fund slated to become operational on July 1.

Since 1998, Kazakhstani citizens have had a possibility to transfer their pension payments to any of the privately-held pension funds existing alongside a state-controlled entity. The government now plans to pool all the pension money estimated by Nazarbayev at US$ 20.7 billion under state control. While private funds are expected to retain their right to manage pension assets in ways foreseen by their individual investment strategies, the government has promised to monitor such investments in order to mitigate excessive risk and ensure stable long-term yields. At the same time, most experts believe that the pension money could be used to finance large-scale investment projects whose cost is too high for the current budget. Therefore, this prospect has all the chances to make the reform even more unpopular.

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The Central Asia-Caucasus Analyst is a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with the American Foreign Policy Council, Washington DC., and the Institute for Security and Development Policy, Stockholm. For 15 years, the Analyst has brought cutting edge analysis of the region geared toward a practitioner audience.

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