Putin's Pension Talk Scares Businesses

The social security taxes paid by businesses will rise by as much as 8 percent at the beginning of 2010 in an effort to strengthen the country's pension system, Prime Minister Vladimir Putin announced Wednesday.

The measure, which generated a negative review from business groups, drew more positive reviews from market watchers.

The current Unified Social Tax of up to 26 percent will be replaced by separate tax payments, including a pension insurance fund charge of 26 percent on employee salaries up to 415,000 rubles ($16,210) per year.

When other payroll taxes for medical and social insurance are added in, "the [total] tax will not exceed 34 percent of salary payments," Putin said at a meeting of the government.

The other payments will be for mandatory medical insurance, at 5.1 percent, and social insurance, at 2.9 percent.

Under the current social security tax system, employers are responsible for one payment of 2 percent to 26 percent in payroll levies.

The current system sets 26 percent as the highest rate, and this is paid by companies whose average annual employee salaries are less than 280,000 rubles. The tax rate then falls as average salaries increase.

Delovaya Rossia, a lobby group for small and medium-sized businesses, reacted negatively to the measure Wednesday, describing the new plan as "unacceptable."

"It would kill most industrial enterprises," said Yekaterina Katz, a spokeswoman for Delovaya Rossia chairman Boris Titov, adding that most of the extra burden imposed by the changes would fall on small and medium-sized businesses.

She said the announcement had come out of the blue and that the group's senior management, including Titov, were still in discussions Wednesday night over proposals to be included in a petition they planned to file with the government, Katz said.

In making the announcement, Putin himself acknowledged that "for business these new measures will mean added expenses."

But he emphasized that that they would not increase the total tax burden on businesses, suggesting that the country's oil wealth fund could be tapped to make up the difference. He did not elaborate.

Putin also said at the meeting that the base pension in the country would be raised by 37.1 percent next year, while the paybacks from the insurance component would climb by 15.6 percent.

The average pension today is 4,188 rubles ($163.60) a month, Reuters reported.

Putin's pension plan announcements came on the same day as the opening of the third-annual Pension Fund Congress, where much of the talk had been about co-financing a new system of accumulated pension accounts for individuals.

"This mechanism, the basis for which is already established in the law, will be the first step for citizens to independently start saving for their retirements," said Alexander Popov, head of the trust management department of Vneshekonombank, also known as the Development Bank.

Since Wednesday, Russian citizens have been able to opt into a government personal-savings program that will match voluntary pension contributions up to 12,000 rubles annually. Those who enroll before Oct. 1, 2013, can expect the government to match their contributions for a period of up to 10 years.

The news drew positive reviews from market analysts, who said pension reform was desperately needed to help form a long-term capital base in the country.

"One of the causes of the recent stock decline is the absence of long-term capital in Russia," said Kingsmill Bond, a strategist at Troika Dialog, "If the government is able to restructure the pension system so that capital from every worker flows into domestic funds, they will be better off."

Chris Weafer, chief strategist at UralSib, said the global liquidity squeeze likely acted as a "major wake-up call," triggering the pension reform.

"Pension funds are by their nature long term and a big source of funding, often forming the biggest portion of domestically available investment capital," Weafer said.

"The positive side of the financial crisis is that the government has been forced to look long and hard at some difficult decisions that they have been avoiding and take action."

Staff writer Anna Smolchenko contributed to this report.