Pension reform may spawn shadow economy in Kazakhstan: expert

The new coil in Kazakhstan's pension reform may lead to expansion of the shadow economy, Tengrinews reports citing a Tengri FM interview with a senior analyst of the Agency for Return on Investments Research Yerlen Badykhan.

The Ministry of Labour and Social Protection of Kazakhstan initiated a new provision for the pension reform that obliges companies to allocate additional 5 percent of the employee’s salary into so called "nominally saving" pension accounts. These new 5% will come as an addition to the regular 10%. However, unlike the 10% they are not going to be accumulated at the pension accounts, but will be used to pay pensions now to those who are already pensioners.  

The expert explained that to avoid escalation of expenses, companies would try to reduce their spendings, and there were two ways to do it.

"To meet the new requirements, private companies, will have to either proportionately reduce the income of their workers, so as to remain within the usual expenses, or to switch to so called 'gray wages',” Badykhan said. Gray wage is a term used to denote the transaction, in which the wage is paid in full or in part in an envelope, meaning that the officially declared wage is lower than it actually is.

In this case both the employers and the employees are going to be unhappy with the situation. “Kazakhstanis do not trust the pension system in general; they need the money not sometime in the future but here and now. Besides, the 5 percent to pay pensions to complete strangers will be perceived by many as a social burden,” Badykhan explain.

Badykhan called to Government to reduce other social payments and accruals, to limit the negative fallout of the pension reform. Since companies will simply lack enough money to pay all of the pension contributions, there is a “need to reduce other types of social payments,” he said.

Moreover, the analyst suggested using the available untapped budgetary funds. In 2013 alone the government did not use up 130 billion tenge ($708 million) from the budget. “So why not use them to pay the pensions?” Badykhan wondered. He continued by saying that with the availability of such large funds, there was no clear need to introduce the additional 5% pension contribution. It would be only logical to use the billions already available in the budget.

Writing by Dinara Urazova, editing by Tatyana Kuzmina