Armenia: Should Workers Be Forced to Save for Retirement?

A US-supported pension-reform project has ground to a halt in Armenia amid a popular outcry over whether the state can compel taxpayers to plan for retirement.

Pensioners account for roughly 18 percent of Armenia’s population of 2.8 million, according to the National Statistical Service. Currently, retirees receive monthly state pensions of 25,000-40,000 drams ($61-$100) -- amounts generally not deemed adequate to meet basic living expenses. Already struggling with a relatively weak economy, many Armenian families don’t have enough income to help out elderly relatives.

Citing the current economic environment, officials in Yerevan are arguing, with backing from the US Agency for International Development (USAID), that working Armenians should start saving for their own retirement. Under a plan the government hopes to launch later this year, wage earners born after January 1, 1974, would have 5 percent of their monthly salaries withheld by the government. The withholdings would be placed in an interest-earning pension fund that could be tapped by individuals only after they turned 63. The state would guarantee 80 percent of the deposited monies.

Many taxpayers are objecting to the forced-savings plan. In response to a motion from civil-society activists and the country’s four main opposition parties (the Heritage Party, Armenian National Congress, Armenian Revolutionary Federation and the Prosperous Armenia Party), the Constitutional Court, Armenia’s highest judicial body, ruled on January 24 to postpone the reform’s introduction pending a March 28 review of its constitutionality.

Memories of lost savings in the state-run Sberbank after the 1991 collapse of the Soviet Union drive much of the current misgivings about the pension plan initiative. “They deceived us back then!” shouted 85-year-old pensioner Greta Shahumian, holding high two Soviet-era bank account books at a well-attended January 18 rally in Yerevan against the reform. “Now again they are trying to pocket your money -- don’t trust them!”

Meanwhile, economist Artsvik Minasian, an MP for the Armenian Revolutionary Federation (ARF), contended the reform would be “economically disastrous” by “increasing both taxes and the shadow economy, reducing the number of jobs, decreasing GDP . . . [and] triggering another wave of migration.”

President Serzh Sargsyan’s administration remains committed to the reform. On January 24, Sargsyan predicted that the pension plan would “later be called historic,” the president’s office reported. The Central Bank has licensed C-QUADRAT Ampega Asset Management Armenia, a joint-venture involving an Austrian and a German investment firm (C-QUADRAT Investment AG and Talanx Asset Management GmbH respectively), to manage the fund. USAID has pledged to help “ensure the successful roll-out of the new pension system.”

A determinedly upbeat Labor and Social Welfare Minister Artem Asatrian, whose ministry would oversee the program, asserted on January 21 that the change would bring “tangible results.”

That’s just what worries some critics.

Armenians now pay an income tax amounting to 24.4 percent of their monthly salaries over 45,000 drams ($110) and 26 percent for salaries over 120,000 drams ($300).

Under the social-security plan, they would have another 5 percent of their salaries withheld. Deductions would be taken out of the individual worker’s gross salary, compounding the shrinkage of take-home pay, said accountant Maneh Tandilian, a member of the “I Object” anti-pension-reform movement.

Concerns about shrinking take-home pay resonate in the country’s relatively well-paid IT sector, an emerging economic field that the government is eager to develop. “Many among my friends are discussing options for leaving the country,” commented programmer Gevorg Gorgisian. “Why do we have to lose 40 to 45 percent of our salaries, which hardly suffice for covering our family expenses [and] looking after our parents, because the state does not provide decent pensions?”

Harutiun Mesrobian, a professor of economics at Slavonic University in Yerevan, said the idea has merit that the social security plan may stimulate emigration. The size of Armenia’s shadow-economy, widely believed to account for a large share of the Armenian job market, could expand as well. Taxpayers “cannot pay such big taxes . . . and survive at the same time,” said Mesrobian.

Given the prevalence of corruption, some opposition politicians are suspicious about Sargsyan administration’s motives. One, Naira Zohrabian, secretary for the Prosperous Armenia Party’s parliamentary faction, went so far as to call the withholding plan a “state racket.”

Minasian, the ARF MP, questioned whether taxpayers would see any benefits from the fund. He asserted that the government, by law, cannot guanatee 80-percent of its deposits since budgetary regulations require that such guarantees do “not exceed 10 percent of each year’s tax revenues.” If the pension fund, as forecast, increases by 100-billion drams ($245 million) each year, that amount would outstrip the government’s guarantee by the second year of the fund’s existence, he claimed.

Galust Sahakian, leader of the governing Republican Party of Armenia’s parliamentary faction, brushed off speculation about the government’s ability fulfill its pledges. “If the law says that the government will guarantee [deposited pension funds], so it will,” he said.

Representatives of the Ministry of Labor and Social Welfare declined to respond to questions about the reform, referring EurasiaNet.org instead to Prime Minister Tigran Sarkisian’s remarks. In his end-of-the-year news conference, the prime minister on December 27 called opposition to the reform “understandable” since “any reform meets resistance.” But ultimately, he underlined, “there is no alternative to the compulsory accumulative pension system.”
Editor's note:
ane Abrahamyan is a freelance reporter and editor in Yerevan.