Russian pension reform in a comparative perspective

1
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

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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

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General background Russian population is ageing
rapidly
World Bank Health, Nutrition and Population
Summary Profile, Demographic Projections
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General background but life expectancy
remains very low
Life expectancy at birth MPIDR Human Mortality
Database, Aug.-2007
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General backgroundPeculiarities of Russias
Economic Transition

• Relatively stable employment (low unemployment)
• But extremely low wage wage arrears

Statistics
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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

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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

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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

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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)

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Pillars of new Russian pension system
Coverage Eligibility
Sources of financing
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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 peoples saving into investment process

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Second order problems poverty levels of
pensioners low
NOBUS data, 2003
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Second-order problems but average pension
decreases relative to average wage
Statistics
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Second-order problems and benefits become more
flat and less dependent on the wage history
Structure of average old-age labor pension
2007?
Statistics
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Second-order problems working-able people do not
know about pension reform
Special pension module of Rus-GGS-2007

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

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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

• Immediate solutions
• Federal budget transfer to the Pension fund
• People born in 1952/1957-1966 excluded from the
  funded pillar from 2005

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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

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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

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Thank you for your attention!