March 11th, 2015

Untouchable Pensioners: At Whose Expense?

497243779Russian authorities are very reluctant to talk about the state’s financial problems. The most topical systemic issues connected with budgetary policy or long-term planning are discussed privately in the halls of Russian Cabinet of Ministers, which degraded to the level of an “expert panel”, while only Putin and his closer circle of “siloviki” wield real power. Russian Pension Fund’s deficit represents an acute problem since the Kremlin is about to exhaust all possibilities to avoid unpopular decisions with regard to pensioners.
In recent years, the deficit of the Pension Fund has been steadily growing, which resulted in the necessity to sharply increase its replenishment from the federal budget. In 2014, budget transfers amounted to 1.7 trillion rubles, and in 2015 they are expected to reach 1.93 trillion rubles. Moreover, according to Russia’s Finance Ministry, budget revenue of the Russian Federation in 2015 will amount to 12.46 trillion rubles, which, as a share of Russia’s GDP, may be the lowest in the last 15 years at 17 percent. Last year, contrary to advice from the government’s economic bloc, Kremlin decided to freeze the savings portion of pensions. It seems that this decision will inevitably be renewed this year. Consequently, instead of saving money for retirement, employees will be financing current pensioners.
The situation with the Pension Fund is critical. It is not possible to entirely avoid the risk of not having enough money to pay pensions even by cutting budget spending by 10 percent, which the Finance Ministry seeks to do, and by freezing deductions from employees’ payrolls made toward their future pensions. After all, it is not only important to make pension payments on time but also to index pensions to inflation that has amounted to 6 percent in the last two months, which is a record high for many years. The government was already forced to call off the April indexation of pensions since there are no funds, whereas pensioners are used to it getting small but stable pension raises twice a year.
In order to find a solution, the authorities consider even the most radical propositions. Ministries compete with each other in submitting new ideas to Putin. The most cautious party in this competition is the social bloc of the government that is responsible for social stability and is consequently reluctant to take risks. This bloc came up with an idea to raise the statutory minimum length of employment that entitles a person to a pension. Another initiative that evoked the widest public 140510_nalogi_bremjaresponse consists in not paying pensions to those working pensioners who earn more than one million rubles (US$16,800) a year. There are about 220,000 such pensioners in Russia. Kremlin supported this idea. One more solution that the Finance Ministry has been advocating for years consists in increasing the retirement age. After meeting with “systemic economists”, Putin did not rule out the possibility to recur to this solution. However, it is very hard for the Kremlin to venture upon such a politically risky step. In a recent interview, the head of the Pension Fund, Anton Drozdov, said that “we need to take into consideration the state of health of the population which in Russia, by the time people reach 60 to 65 years of age, is worse than in [the rest of] Europe. After the age of 60, many people will have a disability”. It is worth reminding that in Russia, the retirement age is 55 years for women and 60 for men. It was introduced by Stalin in 1932 and has remained unchanged since. In most countries, the retirement age is 65 years.
Putin’s regime is based on the support of socially unprotected population groups, that are, pensioners and state employees. Thus, there is no doubt that Putin will find a way to procure pension funding. However, the cost of supporting the regime’s stability will inevitably grow and those whose interests the regime deems possible to neglect will have to pay the price. First of all, this will affect private sector employers and employees who will suffer from a greater fiscal burden. Redistribution of wealth produced by some citizens to the advantage of the obedient electorate reduces the existing tolerance of the active part of Russian society toward the corrupt government that has already discredited itself a long time ago. Putin is in a stalemate situation and has to choose between adopting unpopular measures by reducing pensions and increasing the retirement age, or putting more pressure on business. In either case there is no way to avoid public anger.

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