Sunday, July 22, 2007

Ageing Russia

From RIA Novosti

Russia: a nation of pensioners

12:56 | 02/ 07/ 2007

Print version

MOSCOW. (RIA Novosti economic commentator Mikhail Khmelev) -Russia's population is currently ageing faster than almost any other country in Europe.

The workforce/pensioner ratio has shrunk by a factor of 1.5 over the past 15 years. The idea of solidarity between generations no longer works in the Russian pension system, hence our big headache-old people living from hand to mouth and a snowballing Pension Fund deficit. Regular federal subsidies are not a long-term remedy. Russia faces a hard choice-either to go on paying token pensions or take drastic measures and risk a public outcry.

The Pension Fund deficit is growing quickly. How to replenish it? This will be one of Russia's most acute social questions in several years. The country is short of pension money even now. The problem is becoming all the worse as government obligations steadily increase. The average labor pension growth rate for 2006-2009 is not expected to go below 20% a year. It is impossible to avoid pension increases, with pensioners among the worst-off of Russia's population groups. The average accrued pension was 3,084 rubles a month in April 2007, compared with a living wage of 3,713 rubles and an average monthly wage of 12,744 rubles for May 2007. The income-replacement ratio (average pension vs. average wage) is at a miserly 24.2%. That is the most the Russian pension system can afford in the present economic and demographic situation.

According to the Economic Development and Trade Ministry, Russia presently has 47.9 million unified social tax payers versus 38.7 million pensioners. The latter's share is steadily increasing, while the population-in particular, its able-bodied share-is shrinking. The workforce dwindled by 3.6 million, while the number of pensioners grew by 200,000 in 2006. There are 1.24 employees per pensioner, and the ratio is rapidly sliding down-quicker than experts expected. It was 1.34 last year, compared with 2.2 in 1991. Reality is far more dramatic than the forecast made by the Moscow-based Independent Institute for Social Policy. In 2005, it predicted that the able-bodied population would gradually shrink to 51.5 million by 2012-too good to be true.

Tax revenues are not enough to pay decent pensions, because these revenues do not only go to current payments. A solid slice is being put away in an accumulation fund for the pensions of present-day employees born after 1967. The pension part of the unified social tax, which constitutes 20% of accrued wages, is divided. Citizens born before 1967 pay 6% of their earnings to finance the basic part of today's pensions and 14% to the insurance part. Younger employees have their tax payments divided in three: 6%-10%-4%, the latter 4% going toward increases in their future pension.

The Federal Pension Fund has a fat purse, with revenues of 1.85 trillion rubles and expenditures of 1.73 trillion rubles for 2007. However, the fund has been barely surviving for the last two years. Its surplus goes entirely to the accumulation fund, which had swollen to 345.3 billion rubles by the start of this year. Not a kopek can be withdrawn from it to pay pensions today.

The problem emerged when the government cut the unified social tax rate in 2005. It did not affect the accumulated pension part, but the Pension Fund can no longer afford to make basic and insurance payments to present-day pensioners. These shortages have to be covered by government subsidies to the fund. As much as 183.9 billion rubles came from the federal budget to finance basic pensions in 2006, and 191 billion is expected this year. The respective figures for insurance pensioning are 74.5 billion and 88.2 billion.

According to the Audit Chamber, federal allocations make up 53.3% of the Pension Fund budget for 2007. So Russian pensioners today depend for their survival on the federal purse. Shrinking government revenues will hit them first. That is why officials oppose increasing pension payments using funds from the budget. Hence, Russian pension expenditures make up 6% of the gross domestic product, compared with 7%-15% in other European countries, according to the World Bank. But further pension rises at the expense of the budget threaten to upset the entire pension system in 2010-2020, when the Pension Fund forecasts that the pension load on the national economy will reach its peak.

There are many ideas of how to considerably increase pensions. For the most part they do not promise to cope with the Pension Fund deficit. A 3% increase of the unified social tax rate was recently proposed. President Vladimir Putin mentioned another idea in his last state of the nation address. He proposed adding 1,000 rubles from the federal purse to every 1,000 rubles of voluntary private pension payments, encouraging every citizen to contribute to his or her own pension account. All that, however, will not help the Pension Fund with its deficit or increase present-day pensions.

There are only two evident ways to do so-increase either taxes or the number of taxpayers. This can be done by collecting back taxes, raising tax rates or increasing the retirement age. The Pension Fund estimates undeclared revenues at 40% of the wage bill, or 7.29 billion rubles in 2007. If all tax dodgers are forced out of the shadows, the fund will have surpluses for years ahead. But that is hard to do, and will take many years. A tax raise is far simpler-but then, the higher taxes are, the harder it is to collect them, and the entire national economy will suffer.

The World Bank and Russian pension experts strongly suggest increasing the average retirement age by five years, to 60 for women and 65 for men. This appears quite natural for Russia, with a large share of seniors in its population. After all, 60 and 65 is the retirement age in a majority of developed countries. In contrast, countries with lots of young people have a far lower retirement age. In Turkey, for one, it is 44 for women and 49 for men. East European countries have retirement ages of 53 and 58, respectively, and former-Soviet countries 58 and 63.

Russia has a reason for comparatively early retirements, with its short life expectancy. Men seldom live long after they retire; and if the retirement age is increased, too many will die on the job. So this is no cure-all. However effective the measure might be, it will certainly not meet with public approval, so the Russian government will never approve it, at least not before upcoming parliamentary and presidential polls. The pension system will for a long time yet need to strike a balance, as it does now, between minimal pensions and the necessity of taking unpopular steps.

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