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. Last Updated: 07/27/2016

Tackling a Pending Pension Problem

Sergei, 75, is sitting in his apartment fretting about how President Vladimir Putin has changed his life. Or, more specifically, his income.

On the surface, it looks like Sergei should have nothing to complain about. Putin has ordered pensions raised six times and further increases are planned throughout this year.

But in his case, the math works out this way: "Before the [1998] crisis, I received a total of $200, then my pension fell to $60 and now it stands close to $80," said Sergei, who asked that his last name be withheld.

So in dollar terms, Sergei's pension, which includes a payment from the State Pension Fund topped with cash from City Hall, is about 2.5 times less than it was three years ago.

Pension reform is at the forefront of a government drive to improve the country's standard of living. Average pensions are expected to top 1,000 rubles by the end of 2001, up from 550 rubles at the start of 2000.

But the government knows that inflation and currency devaluations have weakened the buying power of all of the population, not just pensioners.

"It [pension reform] should change the fortunes of people who are now in their 30s or 40s," said Mikhail Dmitriyev, first deputy economic development and trade minister.

Dmitriyev is part of a liberal team spearheaded by Economic Development and Trade Minister German Gref, the architect of Putin's economic reform plans. The team is working on a revolutionary pension system that would award retirees based, in part, on how much they earned during their careers.

But the reforms are facing harsh criticism from the State Pension Fund, which says its less drastic version has already won the backing of parliament.

Pension reforms kicked off half-heartedly in 1994. Then in 1998, a law on private pension funds was approved, legitimizing the existence of corporate funds run by Gazprom, LUKoil, Surgutneftegaz and other industrial giants. But while in the United States and other developed countries contributions to private pension funds become tax deductible, no such incentives exist here.

Pension reforms never really gained any speed until Putin took office first as prime minister in 1999 and then president at the start of 2000.

In February, President Vladimir Putin told his economic team to draft a package of pension bills within two to three months, and he set up a pension reform council headed by Prime Minister Mikhail Kasyanov.

This year, the government has budgeted 550 billion rubles ($18.3 billion) for pension payments.

As it's laid out now, pensions are collected in a pay-as-you-go basis, in which monthly deductions from the working population's salaries are immediately handed out to pay of retired people. But as the population grays more rapidly and the birth rate drops, many fear that there simply will not be enough cash in the pension coffers to pay those on pensions. Then, of course, there is the matter of bringing pensions up to a level needed for a comfortable living.

The Economic Development and Trade Ministry says it has some answers to these problems. A first step that should be taken, it says, is to no longer give out the same amount for pensions to everybody regardless of their previous jobs and salaries. Instead, allow personal accounts to be set up at the State Pension Fund in which a portion of each worker's salary was deposited to supplement his pension after retirement.

Currently, employers pay a 28 percent pension tax on their employees' salaries, while employees contribute 1 percent out of their own paychecks.

The ministry presented a plan to take 2 percent from the 28 percent tax and plow it into the personal savings accounts in the State Pension Fund.

This percentage was supposed to grow to 8 percent to 10 percent in the future, but the pension fund stopped that part of the plan dead in its tracks.

"Finally, we agreed to limit the savings component to 2 percent," said Vladimir Viunitsky, adviser to State Pension Fund head Mikhail Zurabov. "It will not be raised as the ministry proposed."

Of the remaining cash from the 28 percent pension tax, 14 percent would be accumulated in a personal savings account with book entries showing how much an individual has the right to collect. "The idea is to introduce pension rights," said Viunitsky.

The remaining 12 percent will be used to fund base pensions for the entire population and will be collected and immediately disbursed under the pay-as-you-go system.

Dmitriyev acknowledged that the ministry and the State Pension Fund have reached a tentative agreement over pensions but said that any talk about the figures was preliminary.

However, he added, 2 percent out of 28 percent is not a large enough percentage to dump the pay-as-you-go scheme for a system built on new principles.

While the Economic Development and Trade Ministry struggles to iron out a final deal with the State Pension Fund, the fund itself is hawking a plan of its own to the State Duma. Lawmakers, who are closely watching the developments over pension reforms, have tended to side with the fund's alternative proposal, which preserves the essence of the existing pension system. They say that the aging population must be protected from any backlash a drastically revamped pension system may bring.

"A double burden would fall on the existing pension system during the transition period," said Oksana Dmitrieva, deputy head of the budget committee, referring to the fact that outlays to private pension plans would reduce available funds for pensions.

"Given that a large portion of the population is severely underpaid, they will be unable to earn pensions above subsistence levels," Oleg Shein of Russia's Regions said during recent parliamentary hearings about pension reform.

Meanwhile, 75-year-old Sergei is philosophical about both his low pension and government reform plans, saying matters could always be worse. "At least my pension is better than it was in 1992, when it amounted to about $10," he said.