Marchenko names reasons behind insufficiency of pensions in Kazakhstan

Gregory Marchenko, an ex-Governor of the Kazakhstan’s central bank, in an interview for Delovoi Kazakhstan (“Business Kazakhstan”) explained why it is so hard to secure a sufficiently high yield of Kazakhstan citizens’ pension savings. “The larger the pension savings pool is, the more investment tools are needed to secure a sufficiently high yield. Currently, the internal market of financial instruments is narrow and far from being varied. Much more so after the major players of the market - privately-owned pension funds - have been removed. External markets will not offer any solutions, either, at least in the nearest years. It will be rather hard to secure a sufficient yield against the backdrop of stagnating economies and overall uncertainty of the global economy,” Mr. Marchenko believes. The ex-Governor also emphasized that not all individuals make due pension deductions [that make up 10% of salaries in Kazakhstan] and not all individuals pay due income tax: “out of all pension savings depositors, only ¼ make pension deductions to a pension fund every month of the year. Many companies practice envelope salary; therefore, pension deductions and taxes are only paid based on the payroll salary,” Mr. Marchenko said. “A person working in the shadow economy and evading regular pension deductions should have no right for a decent pension allowance upon retirement”, he added. “Upon retirement such people will turn to the Government for financial support. In this case their pension allowance will be provided out of taxes duly paid by those working in the formal economy. This means that a rise of pensions deductions will result in an even more disproportional and unfair load. A mere hike of the pension deductions rate for everyone will not guarantee sufficiency of pension savings and will be viewed as a part of a broader campaign to raise taxes,” Mr. Marchenko said. Mr. Marchenko elaborated that low coverage of the population with saving schemes is a threat to the long-term stability of the country’s budget. According to him, as of the end of 2012 the average monthly salary in Kazakhstan stood at 101.2 thousand tenge ($660); with that in mind, the average yearly pension deductions should stand at 121.5 thousand tenge ($790). “Combined pension deductions made up 506.7 billion tenge ($3.3 billion) in 2012, which means only 4.1 million people made due pension deductions. That is only half of the country’s economically active people,” Mr. Marchenko said. According to him, the situation with individual income tax is similar. The 2012 combined figure only made up 438.5 billion tenge ($2.8 billion), "which means that a sizable part of the country’s population still work in the shadow. Nowadays, each retired person is supported by 2.5 working people,” he elaborated. Mr. Marchenko emphasized that global practice shows that the optimum ratio would be one retired person per every five working people. “The situation in Kazakhstan will be only aggravating given the aging population,” he believes. According to him, if all the country’s citizens are covered with saving schemes, the average savings by 2031 for people who started their working life in 1998 would be at least 10 million tenge ($65 thousand). "If the Government keeps on paying retirement allowance to all citizens that reach a certain age, without paying due attention to the length of every individual’s working life, all the principles of fairness will be trampled. There will be much more recipients of retirement allowances than there are decent taxpayers. The rights of those working in the formal sector and those evading taxes will be unfairly equaled. A retirement allowance is a recognition of people’s efforts and contribution to the country’s development. If there was no contribution or the contribution was insignificant, people should be getting a minimum allowance upon reaching a certain age, rather than a retirement allowance in its current full sense of the term”, he said.