Pension Reform in Uzbekistan

On 15 November 2000 the Cabinet of Ministers of Uzbekistan issued a Resolution No. 444 "On Measures for the Improvement of the Pension Security System in the Republic of Uzbekistan" ("Narodnoe Slovo", November 16, 2000). The reform is aimed at changing the existing pension security system which has proved ineffective. From 1 January 2001 the pension fund of the Ministry of Social Security will be transformed into an off-budget Pension Fund to be sourced primarily from: (a) insurance fees paid by enterprises, institutions and organizations, individuals engaged in entrepreneurial activity without establishing a legal entity, and members of peasant farms contributing on a voluntary basis; (b) mandatory insurance fees paid by citizens; (c) mandatory levies paid by enterprises, institutions and organizations in percentage to their sales volume; (d) resources recovered for designating early and privilege pensions, as well as resources charged from employers and citizens on the basis of regressive claims (charges) in accordance with the Law of the Republic of Uzbekistan "On Public Pension Security for Citizens"; (e) fines and penalties charged for overdue payment of insurance fees and levies; and (f) voluntary contributions from legal and physical entities.

The amount of levies and fees to be paid to the newly established Pension Fund, as well as payment deadlines shall be fixed by the Cabinet of Ministers, and mandatory payments shall have the same status as state taxes and levies. Collection and control over the receipt of these resources into the Fund shall be the function of the State Tax Committee of Uzbekistan; starting 1 January 2001 all entities of the former pension fund of the Ministry of Social Security cease to exist. The only remaining responsibility of the Ministry of Social Security shall be to make sure that pensions and allowances are duly calculated and paid off, as well as to control the correctness of the procedure. At the same time, the resources of the new off-budget Pension Fund shall be managed by the Minister of Social Security and his subordinates from regional offices of the Ministry of Social Security.

For better understanding of the coming changes in pension security system it may be useful to compare it with former practices of using pension fund which had been created under the Ministry of Social Security in keeping with the Cabinet of Ministers' Resolution dated 27 December 1996. The following paragraphs describe key differences from how the former pension fund operated:

1) The Resolution about the new Pension Fund has specifically emphasized that insurance fees from enterprises, institutions and organizations, individuals engaged in entrepreneurial activity without establishing a legal entity, and members of peasant farms shall be paid voluntarily.

2) The amount of fees from various sources to be paid to the former pension fund was stipulated in the Cabinet of Ministers' Resolution. For instance, fees paid by enterprises, institutions and organizations, and individuals engaged in entrepreneurial activity (in the former reading: self-employed individuals) equaled 36 percent of the salary; mandatory insurance fees paid by citizens - 1.2 percent of the salary; mandatory levies from enterprises and institutions - 0.5 percent of the actual volume of sales.

3) Management of the former pension fund was performed by the board of 9 people chaired by the Minister of Social Security, with members of the board being ministers of finance, labor, public health, chairmen of Central Bank, Sate Tax Committee and the Council of the Trade Union Federation.

4) No particular government entity was charged with the function of collecting and accumulating resources of the former pension fund. However, since the former fund existed under the Ministry of Social Security, it was automatically assumed that the Ministry would be performing these functions.

The new principles which govern the formation of the Pension Fund differ significantly from those that existed before. First of all, whilst formerly the main source of revenues to the fund was insurance fees paid by enterprises, which constituted 36-37 percent of the salary fund, the new system proposes redistribution of fees. As the function of collecting funds shall be given to the State Tax Committee, it may be expected that from the year 2001 the bulk of these funds will be mandatory levies coming from enterprises, institutions and organizations in proportion to their actual volume of sales.

Secondly, the former system of collecting revenues for the pension fund was ineffective for two reasons: 1) the Ministry of Social Security did not have effective levers for collecting funds; 2) big burden on the salary fund compelled enterprises to use every thinkable method to reduce it, thus creating favorable environment for the growth of tax-evading shadow economy. New principles of raising money for pension fund are aimed at solving these problems. One aspect is that the State Tax Committee can employ more effective mechanisms to levy mandatory payments for the Pension Fund, which should, as the project authors planned, increase the total amount of revenues. Another aspect is that removing the burden of pension levies from salary fund should prompt company managers to increase salaries, thus increasing the income of their employees. Besides, shifting the burden onto mandatory fees to be paid by enterprises from their actual sales volume should boost the production growth.

These are largely the basic outlines of the pension reform in Uzbekistan which has been scheduled to start in January 2001. To what extent are the expectations of its authors plausible? Charging the tax police with the function of collecting fees for pension fund appears quite natural and logical, because since the organization was established in 1994, its authority and importance have been growing from year to year. The removal of the burden of mandatory fees from salary fund will definitely contribute to the increase in cash income of employees, however, without corresponding reform in the tax system no significant change can be expected.

Furthermore, the fact that the Resolution says nothing about the level of fees to be paid to the new pension fund allows the Cabinet of Ministers to fix it so that it will reduce to zero all efforts to increase revenues. For instance, if the level of mandatory insurance fees for citizens is too high, the salary fund can hardly be expected to increase. In other words, until there is no concrete value fixed for fees and levies, one can hardly say that the whole pension reform is well-considered. Apparently, the Cabinet of Ministers was urged to issue the Resolution mainly because the former system of collecting resources for pension fund arrived to a complete decay, and changing it in any way became an absolute must.

In addition, the coherence of the reform can be questioned also because the Resolution does not stipulate the procedure of providing pension security for each citizen category, and until any citizen can see that the new pension system allows him to save enough to secure his old age, all attempts to levy any significant amounts from people will inevitably end in failure. Factors such as high inflation rate, instability of the national currency and deficient banking system contribute to the lack of people's confidence in making any savings with the Uzbekistan banks.