Publication: Monitor Volume: 4 Issue: 82

On January 1, Kazakhstan endorsed a sweeping reform of its pension system that will, when fully implemented, make it the first CIS member-country to shift responsibility for retirement pensions from the state to the individual. Not surprisingly, perhaps, the ambitious new system is experiencing a number of teething problems.

Unlike the Soviet-era or western Europe’s pay-as-you-earn systems–in which the employed support the retired–Kazakhstan’s new system entails a privately managed fund similar to that introduced in the 1980s in Chile. Kazakhstan’s adoption of a Chilean-style scheme was first mooted by the World Bank in 1994. Parliament adopted the relevant legislation in June 1996. The scheme aims to alleviate the acute pensions arrears experienced throughout Kazakhstan since marketization began. While the command economy could rely on compulsory payments from state-owned companies, today both state-owned and privatized companies find the 25.5 percent contribution too steep. By the end of last year, only 50 percent of pensions contributions had been paid.

Although the Chilean-style proposal favors transfer to a mostly non-state-pension system, the Kazakhstani government has shied away from ending state pensions altogether. Since the beginning of this year, pension deposits have accordingly been divided into two streams: Out of the mandatory 25.5 percent of the employee’s total income, 15.5 percent of all pension contributions are channeled to the State Pension Center to pay pensions to existing pensioners, while 10 percent go to private funds who manage the contributions. (Kazkommerts Securities Weekly News [Almaty], March 23). Those entering the work force must select their own private fund. The contributions are not voluntary, but collected from company payroll taxes (the employer, not the employee, being responsible for making the payments). The hope is that since some of the payroll tax revenues now directly finance current employees’ own retirement, workers–as well as retirees–have reason to get the government to crack down on firms that do not make their mandatory contributions.

In practice, the government’s ability to collect taxes is still weak. Also, salary details for many individuals, especially those in rural areas, have not yet been computerized. Many Kazakhstani workers are ignorant of the reforms or wary of private funds lest they go bankrupt. Moreover, private pension funds, of which there are currently eight, operate under strict state-imposed conditions. These specify, for example, that not less than 50 percent of their income must be invested in long-term treasury bills and up to 30 percent in government-designated “blue-chips.” (Panorama [Almaty], March 6) However, unlike Chile’s private pension funds, which made hefty profits on the back of privatizations, Kazakhstan’s “blue chips” sale to encourage such profits has yet to begin. –SC

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