By Alexander Pick , Fiscal economist, OECD Development Centre
This blog is part of an ongoing series evaluating various facets of Development in Transition. The 2019 “Perspectives on Global Development” on “Rethinking Development Strategies” will add to this discussion
A voice in Svetlana Alexievich’s Secondhand time, a chronicle of post-Communist disillusion in the former Soviet Union, declares that “the future is… not where it ought to be.” This despair at what constitutes progress neatly captures something we increasingly appreciate – that development is neither a linear process nor one with a clear end goal. Few countries understand this better than the former republics of the Soviet Union, where the geopolitical and economic aftershocks of the USSR’s fall continue to be felt today.
Kyrgyzstan embraced the move to a market economy quicker than any of them. Nonetheless, gross national income per capita in 2015 was below its level in 1990, and industry’s contribution to output and employment has shrunk dramatically. Moreover, large holes have appeared in the social safety net that once covered the entire population. This might be a surprise given that Kyrgyzstan spent 10.7% of gross domestic product (GDP) — a high rate for a country at its income level — on social protection in 2015, more than on health and education combined. In 1990, however, social protection spending was equivalent to 17% of GDP.
The most important vestige of the Soviet-era system is the pension system, which today covers almost the entire elderly population. Pension spending consequently accounts for almost 70% of social protection expenditure; the allocations to social assistance and labour market programmes for vulnerable groups are tiny by comparison, limiting their scope to reduce poverty and unemployment.
However, the pension system’s long-term prospects appear bleak. The number of retirees is increasing much faster than the contributor base. This is due to pervasive informality, high rates of emigration and declining female labour force participation. Such a combination is fatal for an unfunded pension system like Kyrgyzstan’s, which already relies more and more on transfers from the state budget to meet its obligations. It will only worsen when Kyrgyzstan’s elderly population starts to grow rapidly from 2020 onwards. Individuals aged 60 and over were 7% of the population in 2015; this rate is projected to jump to 17% by 2050.
It is important to remember that pensions are seldom large and they are typically stretched across extended households without alternative sources of income. The pension system is also highly redistributive: workers with low incomes (often in rural areas) are eligible for a reasonable basic pension from the contributory system even if their contributions were very small. However, the distributive implications of the pension system might not be as laudable from an inter-generational perspective. Meanwhile, with a larger budget, the monthly benefit for poor families with children would be more effective at alleviating poverty, which is overwhelmingly concentrated in young families.
The European Union Social Protection Systems Programme (EU-SPS) has been working in Kyrgyzstan for three years to support the design of a social protection system. As part of the EU-SPS, the OECD Development Centre launched our Social Protection System Review of Kyrgyzstan this month. One of our proposals is to phase out the basic ‘contributory’ pension, which in reality is fully financed from general taxation, with a non-contributory social pension. The other pillars of the pension system, whose benefits are linked much more closely to the value of individuals’ contributions, will stay in place.
We think this reform would allow Kyrgyzstan to maintain universal pension coverage over the long term. It would also give the government greater flexibility in allocating resources between different social protection programmes. The fiscal impact is likely to be neutral in the short term, and pensions will still account for the majority of social protection spending, but the reform would render the financing of pension expenditure much more transparent.
Such a reform would be highly contentious in Kyrgyzstan. For a start, it would undermine a principle with broad acceptance across the government and the population as a whole, whereby to get something out, people must put something in (except where they cannot for reasons beyond their control). Simultaneously, it runs counter to the normal development of social protection, where countries that move up income levels expand their contributory programmes, reflecting individuals’ greater capacity to insure themselves and alleviating the state’s burden to protect them. In this context, replacing the basic pension might appear to be a step backwards and risks being perceived as a violation of the social contract.
Yet, for the reasons described above, Kyrgyzstan might not have a choice. Tinkering with the parameters of the contributory pension system will do little for its long-term viability, while attempts to move from an unfunded to a funded system are stymied by the shallowness of Kyrgyzstan’s capital markets. Fully funded individual savings accounts were introduced in 2010, but contribution rates are kept at 2% because money has nowhere to go.
The challenges confronting Kyrgyzstan – informality, emigration, economic exclusion – are not unique. Rather, these are obstacles facing every country’s contributory social protection arrangements in some form. The temptation remains to push the traditional social insurance model dating back to Bismarck and the second industrial revolution of the 19th century. However, we are presently staring at the fourth industrial revolution, automation and the gig economy.
While contributory programmes will continue to have an important role to play, demand for non-contributory schemes to fill the gaps in people’s working careers is likely to grow. This is the case even in OECD countries, many of which combine a social pension with public contributory schemes. The trajectory we envision for Kyrgyzstan’s pension system might be unusual but it is devised with the future firmly in mind.
 The EU-SPS is co-financed by the European Union, the OECD and the Government of Finland.
 Kyrgyzstan achieved middle-income status in 2014.