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. Last Updated: 07/27/2016

Bank Plays Safe on Pension Reforms




When one of Russia's ardent reformers set out to convert the nation's state-run pension system into a program of private individual retirement accounts, he never imagined that the unabashedly capitalist idea would be rebuffed by the World Bank.


The idea was to give Russians more control over their financial future and spur economic growth. The billions of rubles deposited in the accounts would find their way into investments at home.


But the World Bank saw things differently. Declaring the plan too risky, it lobbied for an incremental approach that would preserve a major role for a state-financed pension system similar to the U.S. Social Security program.


And when the cash-rich World Bank speaks, the cash-poor Russian government listens. In the end, the government settled on a far more modest reform.


"When the World Bank joined the chorus of criticism from the left, this was really fantastic," said Mikhail Dmitriyev, the proponent of the reform plan and a top Russian Labor Ministry official.


World Bank officials say they opposed the idea because they feared that Russia was moving too hastily to a fully privatized system, which could falter or even collapse.


"This is not a theological issue, but a technical issue of the assessment of risks," said Marcelo Selowsky, the World Bank's chief economist for Europe and Central Asia. "In a country in which the legal framework governing property rights is still evolving, there is some merit in moving more slowly on pension reform than in countries where property rights have been established for a long time."


Russia has what economists call a pay-as-you-go approach. That means that the benefits of current retirees are paid by the current work force. But decades of Soviet planning have led to a financially strapped system, which gives too little to too many.


The problems are legion, one of the biggest being early retirement age. Russian men customarily retire at 60 and women at 55. But almost one-fifth of Russia's workers retire at even younger ages. They include coal miners, who have endured a lifetime of dangerous labor, as well as workers whose jobs are neither stressful nor hazardous.


Even allowing for lower-than-average life spans, Russia's retirement policies have created an immense army of pensioners. Roughly 38 million Russians receive pensions -- about one for every two in the work force.


Dmitriyev, 36, was fascinated by Chile, which had converted its state pension system into a system of individual retirement accounts. He proposed that each Russian should have a retirement account. Instead of paying taxes to the State Pension Fund, employers would contribute to the new accounts based on the amount of each worker's pay. The more a worker made, the more money would go toward his or her retirement.


The money in the retirement accounts would be invested in the economy, specifically treasury bills, securities and interest-bearing bank accounts. A portion could also be invested abroad.


It would take decades to phase in the program completely. But Dmitriyev argued that it would help build a work ethic in Russia and channel billions of dollars in pension investments into the economy.


"What we wanted most of all was higher economic growth," he said.


But not everybody appreciated the idea. The State Pension Fund officials were not eager to be phased out of business, and most officials in Dmitriyev's own Labor Ministry found it hard to accept the state's ceding responsibility for administering social benefits.


And then the World Bank entered the fray to oppose it.


World Bank specialists reflect a range of economic philosophies. But by their own account, some of them have been more concerned with shoring up Russia's social safety net than with radical steps to overhaul the economy.


"We just come from different points of view," said Hjalte Sederlof, a World Bank official on social protection in Russia. "Dmitriyev was free market in the extreme. We think there are some limits to the free market and are driven more by the Social Democratic model, which is the mode I am in."


As the specialists broke out their calculators, Russian reformers and the World Bank clashed on a number of issues.


The cost of introducing the new system for younger workers while continuing to pay benefits of current retirees would have hit $5 billion a year. While Dmitriyev argued that the gains outweighed the price, the World Bank worried that the Russian government would not be able to come up with the money. The bank was also concerned that it would aggravate the income gap between the rich and the poor.


The two sides were at odds over plans to invest pension funds in the Russian economy. Dmitriyev contended that there was little risk, because the investments would be diversified and managed by regulated pension funds.


World Bank officials, however, were worried that the Russian investments would not be profitable enough to cover pensions, or that the money might even be lost.


"You have to be careful you are not overloading the regulatory framework. The worst thing is to start too fast and make a mess," Selowsky said.


Under the revised plan now, a young Russian worker who retires 30 years from now will receive half his or her pension from the state-managed fund, Dmitriyev explained.


The rest will be provided by the worker's new individual retirement account. It will be invested in a varied Russian portfolio, as in Dmitriyev's original plan.