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. Last Updated: 07/27/2016

Fixing the Pension Mess

As the entire country listened to president Yeltsin's address to the Federal Assembly, many observers had a strong feeling of d?j? vu. The problem is that the president's address to parliament in February of last year set precisely the same goals and made the same promises to the same people. That feeling reached its peak when the president started talking about pensions and the arrears in their payment. Liquidation of wage and pension arrears was declared "the first and the most important of the five problems that have to be solved in the next two years." One year has passed, but the debt of the state and the Russian Pension Fund to pensioners has only increased and now reaches 17 trillion rubles, which, averages out to 500,000 rubles (approximately $87) per pensioner. And that figure includes only the arrears on the meager official pensions whose average amount in Russia is just 311,000 rubles. The real debts to the people who built AvtoVAZ, Norilsk Nickel and other lucrative enterprises, which the banks are so eager to privatize, now are certainly much bigger. Liberal economist Vitaly Naishul, who drafted retired general Alexander Lebed's economic program during the elections, estimates the real debts of the Soviet and Russian state to the retired at approximately $30 billion.


But even with these meager amounts, the president's promise not to cut existing pensions, to pay pension arrears by July 1, 1997, and to retain the retirement age at the present level of 55 years for women and 60 years for men reflects wishful thinking and not reality. Right now the federal budget owes the Russian Pension Fund 14 trillion rubles and businesses owe it 60 trillion more. With such a deficit the state simply can't afford to run the old pension system. This system has always operated according to the old socialist concept of a "common pot," when the younger generation made monthly payments for old people's pensions. Until recently all of this money had to go through the state budget. Now, one-third of payments goes through the state budget, and two-thirds of the payments are made directly to the pension fund. But the "taxable incomes" of Russian businesses and citizens have been shrinking dramatically in the last few years and have finally ceased to provide enough money for the pension fund. According to the deputy head of the Labor and Welfare Ministry, Yury Lyublin, about half of salaries in Russia are paid out "under the table," and for this reason necessary salary deductions for the pension fund are simply impossible to make. Many businesses, including the auto giant AvtoVAZ, run up huge debts to the pension fund and at the same time create private pension funds for their own workers. It is from these businesses as well as from individual tax evaders that the government should obtain money for the pension fund and not from the working pensioners as pension fund head Vasily Barchuk recently suggested.


But there was one thing in the president's address which was really new and which is very important to fulfill. The president suggested reforming the pensions by replacing the old "distributive" pension system by a new system of pension savings. According to the new system, every citizen will have his own social security number and his own pension account. Right now the amount of your pension is tied to the minimum pension of 219,000 rubles and can't be more than three times that amount. The pension reform is going to lift this limitation, which is a good thing.


This reform has been long overdue, because the state and the pension fund are clearly unable to provide for the retired. "If you ask me whether the pension fund can go bankrupt, I will say yes," Lyublin told me in an interview. The International Monetary Fund and World Bank have recently made allocations of new loans to Russia, dependent on the pension reform. The president and the government simply did not have any other choice but to go forward with it. Old administrative methods, including threats of criminal prosecution for holding back payments to the pension fund, have been widely employed since the beginning of Yeltsin's presidential campaign in spring 1996, but did not yield the expected results. The sale of government bonds to finance the deficit of the pension funds's budget is also just a temporary measure which can't solve the problem.


Unfortunately, it is quite clear now that the reform won't be limited to changing the system. Urgent measures are needed to save the pension fund from going bankrupt. According to the concept of pension reform elaborated by the government in 1995, the retirement age is going to be raised. In Ukraine and other countries of the former Soviet Union it has already been raised, and there is no reason why Russia should be an exception. The new reform also envisages liquidation of extra pension payments to people who have worked at plants in unhealthy conditions. The authors of the reform plans are right to say the old system encouraged preservation of the old plants and hindered technological reforms, but why should the people who risked their health for the state pay for this? In his address to the parliament, the president did not conceal the fact that the reform "will affect young people, who are just beginning to work now." But no one asked the younger generation if it wants to clean up the mess the state has made of our pension system. It is quite possible that the younger generation will have to pay twice: first to sustain the old system and second to create the new one.


So, as usual in Russia, the reform is going to be conducted at the expense of the population. And the best the government can do is to make it less painful than the market reforms of 1992.





Dmitry Babich is a correspondent for the weekly "Obozrevatel" program on TV-6.