Russian Economic Reform

Past Articles on the work of each of the 21 Expert Groups can be accessed here:

Addressing the Pension Fund deficit

Published on July 02 2011
Posted by: jeff

The current so-called 34% “insurance contribution” is paid by employers on wages of up to 463,000 rubles. It consists of 26% to the Pension Fund of the Russian Federation; 2.9% to the Social Insurance Fund (compulsory social insurance for temporary incapacity to work and for maternity); 2.1% to the Federal Compulsory Medical Insurance Fund; and 3% to territorial compulsory medical insurance funds. The Pension Funds is in large deficit.

Jeff says that ….

(There are no easily solutions for Group 3. The deficit in the Pension Fund is expected to continue to grow. In my view, transferring the proceeds of privatization, or simply transferring the assets to be privatized would appear to be the most logical solution to the deficiency. But would this solve the problem in the long-term? There would appear to be a need to lift the pension age. And finally, there has been a presentation on pension systems, in English, to a joint meeting of Groups 1,2,3,6,10. It is here, at the bottom: http://2020strategy.ru/news/30618057.html )

A report prepared for this Group says that in principle there are two parts to the 26% contribution – base and insurance – and they are directed to resolving different problems. The goal of the universal base component (reflecting 10% contribution) is to struggle with poverty of pensioners and reduce inequality. The goal of insurance part of pension (reflecting 16% contribution) is to compensate for loss of earnings, providing a connection between the size of pension with previous insurance contributions; and to a small degree it addresses the problem of redistribution, but in the main responds to the interests of the middle stratum of the population. The high inequality in earnings forces the Russian pension system to maintain a universal component which is not dependent on the work contributions of people.

In the last three years official pensions have been significantly increased and this has been reflected in the finances of the Pension Fund. According to the report, the transfers from the Federal budget to the Pension Fund have only just covered its deficit.

Pension Fund expenses in 2010 were equal to 10% of GDP, up from a little more than 7% in 2009.

The deficit in budget of Pension Fund of Russia in 2010 was about 2.9% of GDP, in 2011 – according to the Pension Fund – it will fall to 1.8% of GDP. Nevertheless, the “real dependence” of the pension fund is higher: cumulative transfers from the federal budget to the pension fund rose from 1.6% of GDP in 2008 to 5.2% of GDP in 2010.

Furthermore, according to some estimates, transfers from the federal budget will need to increase by 1% percentage point of GDP every five years between 2010 and 2050 – or, increase the rate of pension contributions by 1 percentage point every year. 

The basic causes of the current deficit in Pension Fund are:

(1) the initial construction did not establish a financial source to cover pension payments;

(2) the goals of the pension system have run counter to taxation reform – lowering the rate of the UST (the “united social tax” which was later replaced by the “insurance contribution”), particularly from 2005, led to a reduction in funds coming into the system;

(3) the decisions to sharply increase the size of pensions in the last few years.

Long-term risks to financial stability include aging population. 

Apart from budget transfers, one solution would be to increase the size of pension contributions with the aim of compensating for the reduction in the base for these payments. But, the report says, this would threaten competitiveness of economy and lead to widening of informal and “shadow” economy.

While pensions are not considered to be high, the system is quite generous in a number of areas. The retirement age for men is 60, and for women it is 55. Workers in some occupations can retire even earlier.  

It is obvious that state must more actively support formation of voluntary pension provision.