November 6th, 2012

The Russian government doesn’t plan to pay pensions after 2020

The Russian government sacrifices savings for future pensions in order to make payments to current retirees.

After the 2002 pension reform, Russia adopted a hybrid pension system. Employers’ contributions are split between individual saving accounts of employees and the State Pension Fund, which pays pensions to current retirees. However, the compulsory pension contributions are not enough to sustain two pillars of the pension system. The federal government finances the huge State Pension Fund deficit. As the share of elderly in the population increases, the need for the government support of the pension system grows. Vladimir Putin’s pre election populism increased the pension fund deficit even further.

Former finance minister Alexei Kudrin warns about the consequences of the new pension reform

To ease the burden on the federal budget, the Russian government plans to divert compulsory pension contributions from the funded pension system to the State Pension Fund. The share of the payroll tax allocated to the individual accounts will be cut from 6% to 4% of salary, while the share that goes to current retirees will be raised by 4% correspondingly. As a result, current employees won’t be able to accumulate enough savings for future pensions.

This decision provides an insight on the government’s plans. After 2020 pensions will dramatically drop comparing to the current level and the ruling party might loose support from the key electoral group – pensioners. This will happen after 2018 – the year of the last elections in which Vladimir Putin can participate. Those, who will come to power after him, will deal with the full-scale pension crisis.

Reuters

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