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Russian pension reform in a comparative perspective Oxana Sinyavskaya (Independent Institute for Social Policy, Moscow) Joint AARP – European Centre Conference “Re-Inventing Retirement. Reshaping Health & Financial Security for the EU 27 and Eastern Europe” October 22-25, 2008 Outline of the presentation • • • • General background Evolution of Russian pension reform model Current design of Russian pension reform Second order problems and further modifications of the legislation • Future perspectives October 22-25, 2008 General background: 600 500 Russia Urkaine 400 Poland France 300 Germany Sweden 200 Kazakhstan Turkey 100 20 90 20 80 20 70 20 60 20 50 20 40 20 30 20 20 20 10 0 20 00 people aged 65+ per 1000 people of 15-64 years old Russian population is ageing rapidly mid of the year World Bank: Health, Nutrition and Population Summary Profile, Demographic Projections October 22-25, 2008 General background: … but life expectancy remains very low 85 80 75 years Russia, males Russia, females 70 Ukraine, m Ukraine, f 65 France, m France, f 60 55 1960 1965 1970 1980 1990 1995 2000 2005 Life expectancy at birth – MPIDR Human Mortality Database, Aug.-2007 October 22-25, 2008 General background: Peculiarities of Russia’s Economic Transition 100% 90% 80% 70% 60% 50% 40% 30% 20% 1990 1991 1992 1993 1994 1995 1996 1997 1998 index of real GDP (1990=100%) 1999 2000 2001 2002 2003 2004 2005 index of real w age (1990=100%) index of changes in employment (1990=100%) Statistics – Relatively stable employment (low unemployment) – But extremely low wage + wage arrears October 22-25, 2008 General background: Economic situation on the eve of reform and now On the eve of reform 2007-2008 • Financial crisis of 1998 • Economic growth - stable but – because of high energy prices • Budget surplus kept but promises are increasing • Rising inflation – 9% (2006), 11.9% (2007), 14-15% (expected in 2008) • Inequality – still high, growing? • Official poverty rates – 2 times less • Unemployment – moderate decline (5.3% in Aug.-2008) • High volatility of financial markets • • • • Economic growth from 1999 Budget surplus from 2000 Declining inflation (18.6% in 2001) Increasing inequality: Gini coefficients – incomes = 0.397; wages = 0.508 • Declining unemployment (8.8% in 2001) • Pension arrears – paid back in 2000 October 22-25, 2008 Starting point: Basic facts of Russian pension regulation Soviet era • • Law 1990 • • • DB PAYG Coverage – all population Social pensions for those ever not been employed • • • • CR = 28% (employer)+1% (employee) Age – 55 (f), 60 (m) The same occupational privileges Special system for federal employees • DB PAYG Separate systems for state workers & clerks, and collective farmers Inactive groups, self-employed and some special professional gr. – not covered CR = 4-11%, employer Age – 55 (f), 60 (m) A lot of special rules for different occupations permitted to retire earlier “Personal” pensions • • Benefit = 55% of ind.wage/salary No indexation + maximum limited • • The same rules for benefit formula Price indexation • • • • October 22-25, 2008 Changes and challenges of 1990s • Expansion of early retirement provisions • Difficult schemes of pension benefit indexation/compensation • Two benefit formulas since 1998 • Low compliance • PFR deficit • Pension arrears • But: Wide coverage • High income inequality • High people expectations October 22-25, 2008 Evolution of Russian pension reform models – the role of international experience “Multi-pillar” cover but what is inside? 1. 1995 – the concept of the reform of the pension system (“rationalization”, continental Europe fancy) 2. 1997 – proposal of the pension reform developed by the Ministry of Labor and Social Development (Chilean pension reform inspiration) 3. New: mandatory fully-funded system + means-tested for not-insured 1998 – the program of the pension reform – a compromise between 1 & 2 (lesson-drawing from Polish and Swedish pension reforms) 4. New: voluntary occupational and individual private pensions New: notional accounts 2002 – ongoing pension reform – a set of laws of 2001-2002 New: state ownership on mandatory pension savings, state managing company by default, no employee contributions, fixed denominator (modification of NDC) October 22-25, 2008 “Pillars” of new Russian pension system Coverage Eligibility Sources of financing 3rd pillar Voluntary pensions 2nd pillar: Labor pensions – PAYG (NDC) + funded (FDC) Mandatory occupational pensions – not yet! 1st pillar Basic pensions for all differentiated by the level of disability & number of dependants + “public” pensions financed from general taxes October 22-25, 2008 Declared aims of the pension reform • Direct – To strengthen of link between contributions and pensions – To increase real pension benefits – To sustain financial balance of the pension system • Indirect – To involve people’s saving into investment process October 22-25, 2008 Second order problems: poverty levels of pensioners – low… Household Type Poverty level (monetary income p/c) Poverty level (disposable resources (maximum of incomes and expenditures), excluding families with secondary liquid housing Deficit of disposable resources for poor (by disposable resources) households All households 49,0 26,0 28,8 Single pensioner of pension age (55/60 and over) 34,4 8,1 17,3 Households of pensioners of pension ages 25,2 6,6 12,8 Households of pensioners, including pensioners below pension age 51,3 25,7 23,8 Households of pensioners and nonpensioners, including people of pension ages 52,9 31,4 26,8 Households of pensioners and nonpensioners, all below pension ages 60,0 36,4 30,9 Households without pensioners 57,2 33,6 31,1 NOBUS data, 2003 October 22-25, 2008 Second-order problems: … but average pension decreases relative to average wage 140 45 100 35 80 30 % 40 % 120 left axis: real pension benefits (1990=100) 60 25 40 20 20 15 2006 2007 2003 2004 2005 1999 2000 2001 2002 1995 1996 1997 1998 1992 1993 1994 10 1990 1991 0 left: pens.benefits to poverty line right axis: average pension to average wage Statistics October 22-25, 2008 Second-order problems: … and benefits become more flat and less dependent on the wage history 100% Structure of average oldage labor pension 4 3 3 60 62 63 3 3 57 58 90% 80% share of total benefit 70% "public pension" 60% "insurance" part (NDC) 50% basic part 40% 30% 20% 36 35 34 2002 2003 2004 40 39 2005 2006 10% 0% 2007? Statistics October 22-25, 2008 Second-order problems: working-able people do not know about pension reform 53 24 39 30 30 12 8 yes some things no 1 = nothing 2 3 4 Does a respondent understand the rules of pension system? 4 5 = wellinformed Has a respondent heard something about ongoing pension reform? Special pension module of Rus-GGS-2007 • … and absolute majority prefers to keep pension savings in the default state company October 22-25, 2008 Second-order problems: current deficit of Pension Fund budget because of … • Tax reform – Unified Social Tax reduction • Development of funded component of pension system: – Maximum rate – 20% instead of 28% – Regressive scale with fixed thresholds – 3-6% of wages of people born after 1966 – now: about 4050% of total contributors • Additional indexation of basic parts of pensions – a response to social benefits reform and elections – Aim – social pension = pensioners’ poverty level by the end of 2009 Immediate solutions: • Federal budget transfer to the Pension fund •People born in 1952/1957-1966 excluded from the funded pillar from 2005 October 22-25, 2008 New attempts to “reform” the pension reform • Focus – on the current pensioners to prevent poverty • State support of voluntary pension savings added to the mandatory ones • Long-term sustainability of the pension system? • Looking-for new sources of financing the transition period October 22-25, 2008 Conclusions • Any goal of the pension reform has not been achieved yet. Economic growth as an obstacle to the pension reform? • Difficulties in implementing “unpopular” steps • Current pensioners lost but will the future pensioners win? Effect of the international financial crisis • How to learn by other countries’ mistakes? Details matter in transferring other models October 22-25, 2008 Thank you for your attention! October 22-25, 2008