RUSSIA
part 1
http://imrussia.org/en/analysis/econ...-zombie-part-1
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Like many national pension systems, Russia’s system is mostly “pay as you go,” meaning that working people pay for the pensions of retired people. But, unlike some systems (such as that in the U.S.), Russia also has the so-called accumulative portion. Pension contributions come from a 22 percent tax on people’s incomes, although employees don’t pay a single kopeck from their paychecks—instead it is all paid by the employer. Of this 22 percent tax, 16 percent goes into the pay-as-you-go system—meaning to current pensioners—while the other 6 percent goes into the accumulative system, or at least it did until 2013, when the moratorium was announced.
Russia’s 22 percent pension tax is near the median worldwide—it’s higher than the United States’ 12.4 percent and Germany’s 19.6 percent, but lower than Spain’s 28.3 percent or Hungary’s 34 percent. Over the last decade, the Russian government has raised payouts to pensioners significantly, spending about 8-9 percent of GDP each year from 2010 to 2014, up from 5-6 percent from 2001 to 2008. This makes sense—the economy grew significantly over the last 15 years and the government, flush with cash from energy exports, decided it would be politically expedient to redistribute some of its earnings, especially after pensioners revolted over changes made in 2005. The spending increase is also due to a rise in the pensioner population: after the number of retired people held steady at about 38.5 million from 2001-2008, it gradually increased to almost 41.5 million today.
The Russian government, and former Finance Minister Kudrin in particular, planned for these changes in the 2000s, knowing that the state would need a source of money to pay for pensions in the years when the price of oil fell. This source became the National Wealth Fund (NWF), created in 2008 along with the Reserve Fund, both of which were successors to the Stabilization Fund formed in 2004. The NWF grew to over $93 billion in early 2009 and held steady above $80 billion until 2014.
A Gaping Hole
At the moment, the NWF has about $74 billion left, or 4.9 trillion rubles—but its stated purpose has changed. After being opened up to infrastructure projects in 2012, the fund has become a piggy bank for state companies to raid for investment money. In the midst of Russia’s current recession, the total value of requests from the fund has exceeded the amount of cash it possesses, and new appeals from the likes of Gazprom and Rosneft roll in every month. This is despite the fact that in recent years, Gazprom has massively overinvested in new capacity, to the point that it can produce 617 billion cubic meters of gas while it has only needed 400-450 b.c.m. annually in recent years, due to a worldwide glut of hydrocarbons. In other words: state companies, led by the likes of Putin pals Alexei Miller and Igor Sechin, want money that was originally promised to pensioners in order to invest in capacity they probably don’t even need.
The bigger problem, however, is that the NWF doesn’t have enough money to feed the zombie pension system. Just as a bank is called a “zombie” if it has zero net worth but keeps functioning thanks to state bailouts, Russia’s pension system is an economic walking corpse. Russia’s 2015 budget projects pension expenditures of 7.77 trillion rubles, or well over $100 billion, and revenue of only 4.14 trillion rubles. The government has to make up that difference of 3.63 trillion rubles ($54 billion) with money from the budget, which itself is expected to have a deficit of 2.68 trillion rubles this year. The current draft budget for 2016-2018 predicts annual pension system shortfalls of about 3.7 trillion rubles, to be compensated from the budget. If the National Wealth Fund were used to pay for these shortfalls instead, it would be gone in 16 months.
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part 2
http://imrussia.org/en/analysis/econ...-zombie-part-2
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The most widely touted solution, one that a consensus of experts agrees on, is raising the retirement age. Currently set at 55 for women and 60 for men—with thousands of people, such as those who worked at so-called “harmful and dangerous” enterprises, able to receive a pension even earlier—the retirement age is low by international standards. Virtually all 34 OECD countries have a normal retirement age of at least 65; for almost half those nations, it is 67 or older. And Russians’ life expectancy has been on the rise, having reached 76 for women and 65 for men. Putin, after years of ignoring the idea of raising the retirement age, broached the issue during his annual call-in show in April, hinting that such a move could be on the horizon. The current draft budget for 2016-2018 would gradually raise the retirement age by increasing it six months every year until it reached 63 for both men and women. The Labor Ministry also recently wrote a bill under which state workers would start receiving special pension benefits only at age 65.
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No one has suggested raising the pension tax yet, but another measure is being seriously considered that would lower pension payouts. The 2016-2018 draft budget proposes indexing pensions at a rate lower than the predicted rate of inflation—meaning they would go up by 5.5 percent instead of 7 percent in 2016, by 4.5 percent instead of 6.3 percent in 2017, and by 4 percent instead of 5.1 percent in 2018. Keep in mind, annualized inflation is currently at a sky-high 15.6 percent, and while it is expected to drop next year to 6-8 percent, that would still deal a painful blow to pensioners’ real wages. This process has already begun: in July, the value of the average pension dropped 3.9 percent compared to a year ago, due to inflation. Pensioners by law cannot technically be below the poverty line, but their incomes put them very close. In the first quarter of 2015, the average monthly pension nationwide was about 12,000 rubles ($200), while the cost of an average “market basket” of essential food items for a single person was just under 10,000 rubles.
This problem is exacerbated by the fact that, unlike in many Western countries, in Russia the vast majority of retirees live almost exclusively on their state pensions. In a 2013 survey, 93 percent of retired Russians said they lived off their pensions, even though a majority of Russians believe a state pension is not enough to get by. (Compare that to retired Americans, for whom Social Security benefits make up just 38 percent of their income.) Contrary to popular belief, elderly Russians do not receive much financial support from their children or other relatives, either— only 8 percent of pensioners said they received additional income from family.
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In 2012, the International Monetary Fund published a working paper about reforming the Russian pension system. In the paper, the authors warned that by 2050, the government was on track to spend a whopping 16 percent of GDP on pensions, almost twice the current level. But looking that far into the future is a futile exercise in Russia. Thirty years ago, no one knew with any certainty that the Soviet Union would cease to exist just six years later. It is equally difficult to know what the coming decade holds for modern-day Russia. When it comes to the country’s pension system, the relevant timeline is shorter than 10 years, however, let alone 30. If the government does not act to make the system less of a millstone on the federal budget, it could quite simply bankrupt the country.
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08-09-2015, 09:48 AM
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