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

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

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

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

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

General background:Peculiarities of Russia’s Economic Transition

  • Relatively stable employment (low unemployment)

  • But extremely low wage + wage arrears

Statistics

October 22-25, 2008


General background economic situation on the eve of reform and now

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


Starting point basic facts of russian pension regulation

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


Changes and challenges of 1990s

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

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

    “Pillars” of new Russian pension system

    Coverage

    Eligibility

    Sources of financing

    October 22-25, 2008


    Declared aims of the pension reform

    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

    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

    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

    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

    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


    Second order problems current deficit of pension fund budget because of

    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

    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

    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

    Thank you for your attention!

    October 22-25, 2008


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