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” October 22-25, 2008

2. 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

3. General background: Russian population is ageing rapidly World Bank: Health, Nutrition and Population Summary Profile, Demographic Projections October 22-25, 2008

4. General background: … but life expectancy remains very low Life expectancy at birth – MPIDR Human Mortality Database, Aug.-2007 October 22-25, 2008

5. General background:Peculiarities of Russia’s Economic Transition • Relatively stable employment (low unemployment) • But extremely low wage + wage arrears Statistics October 22-25, 2008

6. 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

7. 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

8. 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

9. 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

10. “Pillars” of new Russian pension system Coverage Eligibility Sources of financing October 22-25, 2008

11. 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

12. Second order problems: poverty levels of pensioners – low… October 22-25, 2008 NOBUS data, 2003

13. Second-order problems: … but average pension decreases relative to average wage Statistics October 22-25, 2008

14. 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

15. 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

16. 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

17. 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

18. 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

19. Thank you for your attention! October 22-25, 2008