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Analysis & Opinion
22.06.10 Baiting The Endangered Species
By Tai Adelaja

There’s a Huge Hole in the State Pension Fund, and Kudrin Wants to Plug the Leak with Elderly Workers

In an off-the-cuff remark last week, Finance Minister Alexei Kudrin hinted at increases in the retirement age for Russians, in what experts now say is another government ploy to test the waters before plunging head-on into potentially complex and controversial pension reforms. But while there’s no doubt that the pension fund is in crisis, Kudrin’s remedy will be deeply unpopular.

Kudrin, who dropped the hint while answering a question at the St. Petersburg International Economic Forum, said the State Pension Fund of Russia is incurring a huge debt, which in turn is putting a massive burden on the state budget. The situation, he said, would create an unbearable deficit burden in the next few years, leaving the government no option but to raise the retirement age. “It’s not clear when a decision is going to be made – in one, two or five years – that’s not the main issue now, but it must be done,” Kudrin said.

President Dmitry Medvedev's top Economic Aide Arkady Dvorkovich said the issue has not yet been brought up for discussion in government circles, the Vedomosti business daily reported on Monday. He said there can be no agreement on the issue until the number of employed pensioners outnumbers the number of the unemployed ones. Currently, about a third of Russia's pensioners are employed.

Russian men currently retire at the age of 60, while women are eligible to retire five years earlier at the age of 55. However, a social security system put in place since 1992 also allows a wide range of risk-prone professionals – miners, lumberjacks, pilots, cosmonauts as well as a dozen other specialists – to retire still earlier, further bringing down the average retirement age.

Valery Fadeyev, the head of economic development at the Public Chamber, a Kremlin-friendly civil society watchdog, said the country’s economic and demographic tendencies make an increase in the retirement age necessary. He said pension reforms are “inevitable,” adding that "the major decisions should be made now." The Public Chamber held a hearing on the issue on Monday.

Russia currently has one of the lowest retirement ages in all of Europe, while facing the same pressures of an ageing population and ballooning budget deficit. Even so, many European countries are preparing for a gradual increase in retirement age. Early this year Spain announced an increase in pension strips up to 67 years. The Netherlands plans to raise its retirement age to 65 years in 2025, while Germany is on course for pension reforms that could increase the retirement age to 67 between 2012 to 2019. The UK, Greece, Austria and France have all announced plans for pension reforms. In France, President Nicolas Sarkozy’s plans to increase the retirement age by two years by 2018 have already sparked nationwide protests.

Experts say, however, that there are very few satisfactory yardsticks for comparison between Russia and Europe. “Unlike in most Western European countries – which supporters of the measure love to cite – life expectancy in Russia is very low,” Marina Krasilnikova, a sociologist at the Levada Center, said. “At the moment life expectancy for men in Russia is around 60 years, which is the same age they are expected to retire.” Further raising the retirement age, she said, simply means that many do no live to receive their pension. “Working people are going to kick against this,” Krasilnikova said. “In any case, this is going to be hard to swallow for most Russians.”

Russian women, however, are not as endangered a species as the men. With around 75 years of average lifespan, some economists have suggested that the retirement age for Russian women could be increased to compensate for the shortfall in the pension fund. The problem, Krasilnikova said, is that the state childcare program for mothers is very weakly developed in Russia. “Up to this day, women of pensionable age spend their time taking care of their grandchildren, therefore any increase in the retirement age for women will cause tensions in families across the nation,” Krasilnikova said. “At any rate, the state pension is so meager that those who can work, health permitting, continue to work.”

According to a recent nationwide survey by the Levada Center, 83 percent of respondents were against the idea of increasing the statutory retirement age for men to 65 years, and 85 percent were against raising the retirement age for women to 60 years. About 50 percent of working Russians hoped to work till retirement age, while about 55 percent said a pension would be their main source of income after retirement. A significant number of Russians expressed dissatisfaction with the minimum pension, which currently stands at 7,300 rubles ($237) a month, with 75 percent saying that the minimum pension should be at least 12,000 rubles.

Kudrin said that the main aim of the impending reform is to stop ballooning budgetary expenses created by the deficit in pension funds. Despite recent increases in contribution rates to the state pension funds, the shortfall could still top about 1 trillion rubles within the next few years. The situation, he said, has forced the government to approve an additional 150 billion rubles to cover part of the deficit in the 2010 budget.

Russia’s problems are complicated by the fact that the number of pensioners is set to rise, as life expectancy increases and the workforce is expected to contract further, wrote on Monday. While there are presently 128 working Russians to every 100 pensioners, by 2012 there will be 112 active workers to a 100, and by 2030 the ratio will be one-to-one, according to the paper. “Starting from 2008, Russia’s working population will contract at the rate of 800,000 to 1.5 million annually every 15 years,” said Mikhail Dmitriev, the president of the Center for Strategic Research. With such an unglamorous perspective, experts have suggested that Russia needs to dump the present distributive system and adopt a more progressive accumulative system, in which working people save for their pensions.

“People should be made aware that they need to take care of their pension while the state, at a certain stage, provides benefits to those whose pension incomes fall far short of subsistence,” said Alexander Pochinok, the former minister of Labor and Social Affairs. “That means that instead of setting the retirement age, the government should determine at what point it should step in to provide relief for the poor."

However, other experts, including Russian Pension Fund Director Anton Drozdov, warned that the accumulative pension system is not a panacea, as it excludes certain social groups from state protection. “There is no credible alternative to the distributive system yet,” Drozdov said. “What do we do to those who receive disability allowance and those who lost their breadwinners? The experience of other countries shows that no one system is foolproof. Everything looks fine until it’s time to pay. When that time comes there are always problems with guarantees or the effectiveness of investment.” Drozdov said it is important for both systems – distribution and cumulative – to co-exist. Raising the retirement age, he said, cannot provide a long-term solution, as it could only yield about 70 billion rubles up to 2020, when new pension debt would start accumulating.

Krasilnikova said that after years of studying standards of living in the country, it is apparent that there are few places that can absorb an ageing workforce. “When employers talk about a lack of workers, they mean a lack of middle-aged workers,” Krasilnikova said. “There is little demand for aged workers even at the current retirement age. In any case, about 50 percent of Russians continue to work for three to five years after reaching retirement age.”

The problem with the whole pension system in Russia is the country’s poor investment climate, which negatively impacts the savings habit of the people, Krasilnikova said. “The poor investment climate means that working people cannot effectively save for old age, and the State Pension Fund of Russia also fails to make effective use of the funds in their charge. In this situation the whole pension reform boils down to an attempt by the government to pay fewer pensions.”
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