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. Last Updated: 07/27/2016

Russians to Pay More To Fund for Pensions

The Russian government unveiled tough measures Wednesday that will hit the pockets of workers in an effort to close a growing deficit in the State Pension Fund which threatens social security for millions of retirees.

Starting Aug. 1, contributions to the pension fund will be increased from 1 percent of individuals' incomes to 3 percent, said Deputy Prime Minister Oleg Sysuyev.

Investment income will not be spared: Contributions must be paid on share dividends and interest on bank deposits. Another 1 billion rubles ($160 million) will be saved this year by cutting the fund's administrative expenses.

"The current state of the pension fund can be described as a deep systemic crisis," Sysuyev told reporters at a news conference.

The fund's arrears currently stand at 16 billion rubles -- a figure that Sysuyev said would grow to 30 billion rubles by the end of 1998 if immediate steps were not taken.

The government hopes the new measures, part of a decree signed Tuesday by President Boris Yeltsin, will balance the fund's monthly finances and narrow the deficit to 5 billion rubles by year-end.

The fund deficit has been a black eye for Russian reformers seeking money from international lenders. On Monday, the International Monetary Fund loaned Russia $4.8 billion, but raised the pension fund as one issue that must be resolved before September if Russia hopes to receive an additional $6.4 billion.

Sysuyev denied that the additional pension duty was influenced by the IMF, but later was quoted by Interfax as saying that if the plan does not yield results by September, "problems may appear" in regard to the second installment of IMF funds.

Arkady Solovyov, head of the pension fund's economics department, called the measure "positive," adding that including investment income will significantly widen the fund's contributor base.

"I cannot say for certain that all our problems will be solved," Solovyov said. "But the situation will definitely improve."

Presently, the country's 38 million pensioners receive on average 400 rubles each month, he said. Even these payments are often delayed.

Sysuyev acknowledged that the tax will pose an additional burden on average Russians. But the present rate is still lower than the original draft, a law submitted to the State Duma, or lower house of parliament, which set individual contributions to the fund at 5 percent. Enterprises' contributions were to be reduced by 4 percent.

"Yes, this is a hard decision, but it is perfectly justifiable at a time when retirees are not getting their pensions," Sysuyev said.

Glenn Geffner, senior tax manager at Deloitte & Touche in Moscow, noted that higher contributions are in line with international practice. For instance, U.S. taxpayers contribute 7.6 percent of their income to social security and Medicare, he said.

"This is all part of the Russian government's policy to transfer some of the tax burden from businesses to individuals," Geffner said.

He cautioned, however, that like other regressive taxes recently introduced by the government, the pension fund measure could cause considerable economic hardship.

Yeltsin is expected to sign a decree soon that will slash by 50 percent gas and electricity tariffs for enterprises that pay at least half their energy bills in cash. The draft decree will be presented to Yeltsin on Saturday.