Georgia Public Expenditure Review 2012
International Practice and Georgia. In practice, most countries allow tax exempt contributions and instead tax withdrawals following retirement.14 In the case of Georgia, there is no preferential tax treatment of pension contributions. All contributions are made based on after-tax income. Furthermore, interest and other returns earned on pension funds are also subject to taxation, whereas interest earned on a savings account is only subject to 5 percent withholding. For this reason, there may in fact be a tax disincentive to saving through pension funds. Removing any such tax disincentive should be a first step in encouraging long term savings for retirement in Georgia.
2.4. Social Assistance
Social assistance to poor and vulnerable households in Georgia comprises targeted social assistance (TSA) and several categorical benefits. The latter include the household allowance, which monetizes past in-kind benefits to certain groups (mainly war veterans and their survivors), and the family allowance (for poor pensioners, orphans, disabled children, the blind, and large families). Most categorical benefits are being phased out and are expected to be gradually replaced by TSA (e.g., the family allowance cannot be received jointly with TSA).
Social assistance programs are common around the world and typically have multiple objectives. These are sometimes grouped into three categories, “prevention” (against income and expenditure shocks, such as through unemployment or disability insurance); “protection” (from destitution and catastrophic human capital loss, such as through cash or in-kind transfers or subsidies); and “promotion” (of improved opportunities, livelihoods, and better jobs, such as through skills-building programs and demand enhancement for education and/or nutrition programs via conditional cash transfers). This chapter assesses the performance of Georgia’s social assistance programs with reference to a range of indicators that reflect these objectives. These include adequacy (program coverage and generosity), equitability (targeting of intended groups), sustainability, and incentive compatibility (avoiding unintended behavior changes by beneficiary households).
Georgia’s TSA program: Design, Coverage, and Poverty Impact TSA is aimed at providing income support and consumption smoothing among the very poor households in Georgia. It was launched in July 2006, after 18 months of intense preparation, including developing and testing a proxy means targeting mechanism, designing implementation procedures, establishing an agency, hiring and training of staff, developing an automated management information system (MIS), and receiving applications and collecting and processing information on more than 200,000 applicant households from all over Georgia. The proxy means-testing mechanism was chosen as suitable for Georgia because income from formal sources is a less accurate indicator of household welfare. All households are entitled to apply for TSA.
14 Further details are available in Whitehouse, Tax Treatment of Funded Pensions, Social Protection Working Paper No. 9910, World Bank, 1999 and Holzmann and Guven, Adequacy of Retirement Income after Pension Reforms in Central, Eastern, and Southern Europe, World Bank, 2009.
32 | Chapter 2. Social Protection Expenditures