Pension system transformation in the South Caucasus: A comparative analysis of Georgia, Armenia and Azerbaijan

This study examines the evolving pension systems of Georgia, Armenia and Azerbaijan within the broader context of post-Soviet welfare transformation and the pursuit of financial sustainability. Following the collapse of the Soviet Union, all three countries inherited a pay-as-you-go (PAYG) pension system, the transformation of which proceeded at varying rates and in different directions. Georgia introduced a mandatory funded pension scheme in 2019, Armenia adopted a mixed (PAYG and funded) system in 2014, while Azerbaijan continues to rely predominantly on the PAYG model. Using a comparative analytical framework considering institutional and fiscal aspects, the paper evaluates the structure, coverage, adequacy and sustainability of the pension schemes in the three South Caucasus countries. Pension coverage currently stands at approximately 47% in Georgia, 52% in Armenia and 58% in Azerbaijan. The average monthly pension amounts to US$135, US$130 and US$289, respectively, with income replacement rates of 18%, 19% and 47%, highlighting significant differences in income levels and contribution capacities. Projections based on demographic and macroeconomic indicators suggest that, without further reforms, population aging will intensify fiscal pressures, increasing pension expenditure from the current 7–9% to 11–13% of GDP by 2040. In Georgia and Armenia, the gradual accumulation of funded-pension assets could partially mitigate this burden, whereas Azerbaijan's system may face sustainability challenges unless diversification and partial capitalization measures are introduced. The findings indicate that, although all three countries have made notable progress in expanding coverage and institutional development, systemic weaknesses persist, particularly in relation to informal employment, limited contribution compliance, and weak governance of pension assets. The paper concludes that ensuring long-term financial sustainability requires a balanced mix of parametric reforms, investment diversification, stronger compliance mechanisms and targeted policies to reduce labor informality.