Russian pension reform in a comparative perspective
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Russian pension reform in a comparative perspective. Oxana Sinyavskaya (Independent Institute for Social Policy, Moscow) Joint AARP – European Centre Conference “ Re-Inventing Retirement. Reshaping Health & Financial Security for the EU 27 and Eastern Europe ”. Outline of the presentation.

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Russian pension reform in a comparative perspective

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Russian pension reform in a comparative perspective

Oxana Sinyavskaya (Independent Institute for Social Policy, Moscow)

Joint AARP – European Centre Conference “Re-Inventing Retirement. Reshaping Health & Financial Security for the EU 27 and Eastern Europe”

October 22-25, 2008


Outline of the presentation

  • General background

  • Evolution of Russian pension reform model

  • Current design of Russian pension reform

  • Second order problems and further modifications of the legislation

  • Future perspectives

October 22-25, 2008


General background: Russian population is ageing rapidly

World Bank: Health, Nutrition and Population Summary Profile, Demographic Projections

October 22-25, 2008


General background: … but life expectancy remains very low

Life expectancy at birth – MPIDR Human Mortality Database, Aug.-2007

October 22-25, 2008


General background:Peculiarities of Russia’s Economic Transition

  • Relatively stable employment (low unemployment)

  • But extremely low wage + wage arrears

Statistics

October 22-25, 2008


On the eve of reform

Financial crisis of 1998

Economic growth from 1999

Budget surplus from 2000

Declining inflation (18.6% in 2001)

Increasing inequality: Gini coefficients – incomes = 0.397; wages = 0.508

Declining unemployment (8.8% in 2001)

Pension arrears – paid back in 2000

2007-2008

Economic growth - stable but – because of high energy prices

Budget surplus kept but promises are increasing

Rising inflation – 9% (2006), 11.9% (2007), 14-15% (expected in 2008)

Inequality – still high, growing?

Official poverty rates – 2 times less

Unemployment – moderate decline (5.3% in Aug.-2008)

High volatility of financial markets

General background: Economic situation on the eve of reform and now

October 22-25, 2008


Soviet era

DB PAYG

Separate systems for state workers & clerks, and collective farmers

Inactive groups, self-employed and some special professional gr. – not covered

CR = 4-11%, employer

Age – 55 (f), 60 (m)

A lot of special rules for different occupations permitted to retire earlier

“Personal” pensions

Benefit = 55% of ind.wage/salary

No indexation + maximum limited

Law 1990

DB PAYG

Coverage – all population

Social pensions for those ever not been employed

CR = 28% (employer)+1% (employee)

Age – 55 (f), 60 (m)

The same occupational privileges

Special system for federal employees

The same rules for benefit formula

Price indexation

Starting point: Basic facts of Russian pension regulation

October 22-25, 2008


Expansion of early retirement provisions

Difficult schemes of pension benefit indexation/compensation

Two benefit formulas since 1998

Low compliance

PFR deficit

Pension arrears

But: Wide coverage

High income inequality

High people expectations

Changes and challenges of 1990s

October 22-25, 2008


Evolution of Russian pension reform models – the role of international experience

“Multi-pillar” cover but what is inside?

  • 1995 – the concept of the reform of the pension system (“rationalization”, continental Europe fancy)

    • New: voluntary occupational and individual private pensions

  • 1997 – proposal of the pension reform developed by the Ministry of Labor and Social Development (Chilean pension reform inspiration)

    • New: mandatory fully-funded system + means-tested for not-insured

  • 1998 – the program of the pension reform – a compromise between 1 & 2 (lesson-drawing from Polish and Swedish pension reforms)

    • New: notional accounts

  • 2002 – ongoing pension reform – a set of laws of 2001-2002

    • New: state ownership on mandatory pension savings, state managing company by default, no employee contributions, fixed denominator (modification of NDC)

  • October 22-25, 2008


    “Pillars” of new Russian pension system

    Coverage

    Eligibility

    Sources of financing

    October 22-25, 2008


    Declared aims of the pension reform

    • Direct

      • To strengthen of link between contributions and pensions

      • To increase real pension benefits

      • To sustain financial balance of the pension system

    • Indirect

      • To involve people’s saving into investment process

    October 22-25, 2008


    Second order problems: poverty levels of pensioners – low…

    October 22-25, 2008

    NOBUS data, 2003


    Second-order problems: … but average pension decreases relative to average wage

    Statistics

    October 22-25, 2008


    Second-order problems: … and benefits become more flat and less dependent on the wage history

    Structure of average old-age labor pension

    2007?

    Statistics

    October 22-25, 2008


    Second-order problems: working-able people do not know about pension reform

    • … and absolute majority prefers to keep pension savings in the default state company

    Special pension module of Rus-GGS-2007

    October 22-25, 2008


    Tax reform – Unified Social Tax reduction

    Maximum rate – 20% instead of 28%

    Regressive scale with fixed thresholds

    Additional indexation of basic parts of pensions – a response to social benefits reform and elections

    Aim – social pension = pensioners’ poverty level by the end of 2009

    Development of funded component of pension system:

    3-6% of wages of people born after 1966– now: about 40-50% of total contributors

    Second-order problems: current deficit of Pension Fund budget because of …

    • Immediate solutions:

    • Federal budget transfer to the Pension fund

    • People born in 1952/1957-1966 excluded from the funded pillar from 2005

    October 22-25, 2008


    New attempts to “reform” the pension reform

    • Focus – on the current pensioners  to prevent poverty

    • State support of voluntary pension savings added to the mandatory ones

    • Long-term sustainability of the pension system?

    • Looking-for new sources of financing the transition period

    October 22-25, 2008


    Conclusions

    • Any goal of the pension reform has not been achieved yet. Economic growth as an obstacle to the pension reform?

    • Difficulties in implementing “unpopular” steps

    • Current pensioners lost but will the future pensioners win? Effect of the international financial crisis

    • How to learn by other countries’ mistakes? Details matter in transferring other models

    October 22-25, 2008


    Thank you for your attention!

    October 22-25, 2008


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