The New Pensions in Kazakhstan: Challenges in Making the Transition

In June of 1997 Kazakhstan embarked on a dramatic reform of its pension system, replacing the inherited pay as you go regime with one based entirely on fully funded individual accounts. This paper provides projections of the effects of this reform on income replacement rates and considers some possible adjustments to the system design, including those enacted in early 2005, that could address the projected outcomes of the reform. The initial reform which did not include any minimum pension guarantee is projected to result in a significant reduction in the individual income replacement rates derived from the pension system, especially for women. When the reform was mature and the old system fully phased out, women are projected to have received pensions at level of less than 15 percent of their pre-retirement earnings. Various potential adjustments to the reform, including the recent introduction of a citizens pension or "demogrant", are found to have the capacity to significantly raise these income replacement rates. The fiscal costs of alternatives are found to vary considerably due significantly to the degree to which they would target expenditures to lower income groups. The analysis of the original reform design and possible adjustments provides some useful lessons about the design of individual account systems in transition economies.