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Pension Savings in Kazakhstan: to Spend or to Leave Them

From 2021, the Kazakhstanis will be allowed to use a part of their pension savings to purchase residential accommodations, to pay for medical treatment, or to transfer for management to financial companies. However, not all will be able to use this option.

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According to the Ministry of Labour and Social Protection of Kazakhstan, the required limit, i.e. the minimum balance to be available on the pension account, is available only in 6 per cent of depositors. In other words, only about 721 thousand depositors will be able to use their pension savings to improve their housing conditions or for investment.

«Among them, there are about 530 thousand working citizens who have pension savings that exceed the minimum balance, over 178 thousand pensioners who have pension savings, and 13 thousand people who have entered into pension annuity contract with an insurance company,» said Birzhan Nurymbetov, minister of labour and social protection, at the briefing on October 9.

Threshold amounts vary depending on the age. For example, a person aged 20 must accumulate over 4 thousand dollars on the account of the Unified Accumulative Pension Fund (ENPF). This amount is the minimum amount that should be available on the pension account, the excess amount can be withdrawn and spent.

If there’s the amount exceeding the minimum amount for every age category available on the pension account, it can be withdrawn and used for medical treatment, investment to securities, or purchase of a house. Also, it can be used to buy a land plot, refinance the mortgage at any bank, or make renovations at your house or apartment.

But only few people can accumulate the minimum balance on the account. People complain that they cannot accumulate such amounts because of very low wages for 30+ years of length of service.

But why the country with nearly 18 million people has only 6 per cent of citizens who have already accumulated the required minimum balance? According to experts, the main reason is the black economy and self-employment.

«In Kazakhstan, there is a whole layer of people who have worked for a long time and keep working in the black economy or are self-employed and make pension contributions at minimum rates. As a result, they have a very low amount of pension savings. It’s no wonder here. Those people who did not make pension contributions or who made minimum contributions will have small pension amounts on their ENPF accounts,» Bota Zhumanova, the founder of the featured pension website enpi.kz, said.

Living here and now

According to the Ministry of Labour and Social Protection, today only seven 20-year-old Kazakhstanis have the amounts on their accounts in the Unified Accumulative Pension Fund that exceed the minimum balance for their age. CABAR.asia has managed to contact one of these seven Kazakhstanis:

My father has big business. When I turned 18, he hired me with salary over 700 thousand tenge (1,639 dollars). In two years, I happened to accumulate this amount.

I don’t want to irritate my fellow countrymen, but if someone hires you to a big company, you can accumulate this amount. But there are only few such people.

Yelaman Tursynkhanov. Photo: CABAR.asia

Another Kazakhstani got a job as a sales assistant in a shop on the day of his legal age.  Since that day, Yelaman Tursynkhanov worked every single day. But he could not accumulate even half of the minimum amount so far.

«I have worked since I was 18. My monthly salary is 75 thousand tenge (176 dollars), in average. For seven years of work and stable pension contributions, I could accumulate nearly 672 thousand tenge (1,574 dollars),» Tursynkhanov said.

If the people blame the national pension system, the representatives of ENPF think otherwise. According to the Fund, every second depositor prefers to live here and now, to receive envelope wages, and not to pay 10 per cent pension contributions.

An employee of a private medical centre who did not want to be identified because of fear to lose the job confirmed their opinion.

« I have worked at the medical centre for a long time. I receive the main portion of my wage in an envelope and only 25 per cent of my wage is shown officially. On the one hand, it is good as you receive money without any deductions; on the other hand, it is a problem as I cannot get a mortgage. I don’t have enough income, although my salary is rather high,» he said.

Short-term effect

The experts have a different opinion about it. Orken Dinasylov, the financial literacy and investment coach, said it is a useless idea to let people spend pension savings. He is convinced that the early withdrawal of money can lead to the collapse of the pension system.

Orken Dinasylov. Photo taken from the personal page on Facebook

«The president of the country has set a task to reform the Fund in order to improve its efficiency. However, it’s unclear how the withdrawal of funds will improve its performance,» Dinasylov said.

According to him, the more money the Fund has, the higher its performance. But because of fewer expenditures from bigger amounts, the results are less apparent.

«Say, the Fund pays 1,000 tenge as expenditures (wages of employees, rent of premises, office supplies, etc.). Which of the funds will be more affected by these expenditures: the fund with one million or 10 million? Compared to the similar funds in the world, the expenditures of ENPF are very high. And the level of yield is rather low. And in this situation, we want to give away 12 per cent of the capital,» Dinasylov said.

Arman Baiganov. Photo: 24.kz

According to experts, the efficiency of ENPF won’t improve by this action and its effect on economy and welfare of the people will be indistinct and short-term. Only banks, construction, insurance and other financial organisations will benefit from it.

«The pension money invested into the economy of Kazakhstan will flow out of the country. The pension fund can even have a solvency problem. ENPF must pay pension benefits and also make money available for early withdrawal. The assets of the pension fund will reduce sharply. If the money is taken from both sides, it would be a big stress,» economist Arman Baiganov said.

According to Orken Dinasylov, the investment policy of the ENPF should be amended based on birth and mortality rates, future stream of earnings, collection of contributions, refunds, etc.

«The current investment declaration of the fund is based on outdated standards. Before a personal computer was invented, in the late 70s, early 80s of the 20th century, the people had not seen that the potential of return on shared assets was much higher than the potential of debt-based assets, that the risk of shared assets in the long run is offset, whereas the risk of debt-based assets grows with time. However, more than 90 per cent of the ENPF money is invested into debt securities,» Dinasylov said.

What disturbs the Kazakhstanis the most is that the amounts of pension savings withdrawn early will be taxed at the rate of 10 per cent. According to the press service of the State Revenue Committee, payments made by ENPF from pension savings of taxpayers are considered as taxable income under the current tax regulations.

Meanwhile, Kazakhstan has already started to modernise the pension system until 2030. The draft decree is published on the website «Available laws and regulations». The draft initiates the move from the basic pension payment to the minimum guaranteed pension from 2028.  The ministry of labour suggests that it will optimise the procedure for granting state guarantees, improve the level of pension coverage of persons with limited participation in the pension system, raise the income replacement rate.

Main photo: Tengrinews

This article was prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project.

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