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Russia faces new pension concerns

The Pension Fund of the Russian Federation started last month with some good news for its beneficiaries: pensions will be raised by 12% and in the first quarter of the year pension arrears have been reduced from R30bn (E1.14bn) to R18bn.
On a closer look however, things are much less favourable for Russian pensioners than these figures might suggest. The new pension increase is the first since February 1998. Since August 17 1998, however, when the government had to announce its default on government debt, inflation has been running at more than 100%. In effect pensions have been halved since then and the May increase will do little more than briefly interrupt this slide in their real values.
Official statistics for March of this year show the average monthly pension to be R403. Pensioners in Moscow are marginally better off - not the least because of the involvement of Mayor Yuri Luzhkov who has presidential ambitions. Low pensions are topped up out of the city budget to a minimum of R500.
Even for Russian pensioners, who have lived through some hardship during the last eight years, the current situation is a new extreme. The average pension corresponds to just 65% of what is considered to be the subsistence level for a pensioner in Russia and is at the lowest level since the beginning of the country’s economic reforms.
The communist faction of the Duma, Russia’s parliament, would never have accepted, from one of the more liberal governments in the recent past, that one of their main constituencies, the country’s pensioners, pay a substantial part of the price for the relative stabilisation of the federal budget. Yet that has been the effect of policies adopted by the last government, in which the communist faction had much influence.
Important reform options are currently being pursued for the future of the state pension system: The Pension Fund of the Russian Federation is introducing unique personal social insurance numbers, which are to be the basis for individual pension accounts. They will permit the State Pension Fund to keep track of contributions and require their payment to be the basis for the calculation of pensions. Twenty two of the Federation’s 89 regions have already introduced the new system. For the first time, this will allow meaningful statistics about the pensioner population to be produced and will also be the backbone of any further reform, steps that might include changes in the pension formula or even the introduction of a partly funded scheme.
While the introduction of social insurance numbers finds widespread support, the proposal to unify the collection of taxes and contributions in the hands of the tax authorities has become an issue of political debate. The tax authorities point to possible gains in efficiency and a more focused leverage on evaders: the pension fund is not convinced that it will reap any benefits if it gives up its own collection mechanism. As the central government is habitually the fund’s biggest debtor, this attitude may not be surprising.
In Russian newspapers, this discussion and the selection of a successor to the fund’s recently resigned chairman, have been linked to the upcoming presidential elections. Control over the resources of the pension fund and the possibility influencing the regions where and when pensions will be paid is viewed by some as a potential to influence voter behaviour.
Looking to the medium and long-term, the state pension fund has begun to analyse the practice and consequence of privileged pensions within the state pension system. In the Soviet period, large wage differentials were not ideologically acceptable. The pension system was used to compensate workers employed under hazardous conditions, like the mining industry, or under harsh climatic conditions which are found in the northern regions. Other categories include defined professions like airline pilots, ballet dancers or teachers.
Under the special rules that continue to be applied for these categories of workers, early retirement is typically possible at an age of 45 after 25 years of employment in the profession. In other cases the retirement can be as early as age 40 or after 20 years of employment. There are also rules that allow individuals to draw a higher pension than that which applies under the standard old age pension arrangements.
Statistics concerning the number of pensioners in these categories are not good but estimates range between 2m and 8m, which would represent almost 20% of the pensioner population. Estimates of the additional cost compared to standard old age pensions are not as yet reliable.
The urgency of tackling the privileged pensions issue has recently been highlighted by a law that was initiated by a group of parliamentarians in favour of airline pilots and crews. The new legislation installed new rules for the calculation of pensions, which were estimated to increase pensions (including pensions in payment) by a factor of five, while the contributions to be paid by the companies would only be raised by 50%.
In another development, regional governments managed to effect a pay rise at the expense of the state pension fund. They resulted in lowering the minimum service requirement for the teachers on their budget and then encouraged them to take out their pension while continuing to work (which is possible under current Russian legislation).
A project team lead by Callund Consulting will assist the Russian Federation Pension Fund in researching the current arrangements and effects of privileged pension provision and develop options for their reform. The project is financed by the British Know-How Fund, an arm of the Department for International Development.
The future of Russia’s State pension scheme is still open to debate. Radical and ambitious plans have been voiced, discussed and shelved. The current system is complex and the political situation too volatile as to allow a quick, and clear change in the overall structure to be undertaken. The pension system’s administrators are moving ahead with a series of smaller steps, preparing the ground for systemic change.
Mattias Zeeb is an economist with Callund Consulting in Maidenhead and Moscow

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