By Albert Khachatryan

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!

T.P.