Pension Benefits during the Transition Period

Abstract

Shifting from a Solidarity PAYGO system to one based on individual accumulation accounts involves a long transition period. Those who already have many years of work history under the initial system cannot accumulate sufficient amounts under a new system, thereby necessitating a transition era during which those who contributed to the old system will continue to receive PAYGO support. This period is in principle a time of macroeconomic stress, since the state loses contributions (as individual payments are in large part directed to personal accounts) while continuing to have obligations. Consequently, the state’s natural inclination is to keep strict control over the levels of Solidarity benefits paid, especially if one of the underlying reasons for system reform is to reduce overall commitments. These motives still operate in Kazakhstan, although rapid economic growth and surging tax revenues in the recent years have loosened constraints, enabling large increases in Solidarity pension benefits to those who retired prior to 2003.¹