October 22-25, 2008 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 backgroundGeneral background Evolution of Russian pension reform modelEvolution of Russian pension reform model Current design of Russian pension reformCurrent design of Russian pension reform Second order problems and further modifications of the legislationSecond order problems and further modifications of the legislation Future perspectivesFuture perspectives

October 22-25, 2008 General background: Russian population is ageing rapidly World Bank: Health, Nutrition and Population Summary Profile, Demographic Projections

October 22-25, 2008 General background: … but life expectancy remains very low Life expectancy at birth – MPIDR Human Mortality Database, Aug.-2007

October 22-25, 2008 General background: Peculiarities of Russia’s Economic Transition –Relatively stable employment (low unemployment) –But extremely low wage + wage arrears Statistics

October 22-25, 2008 General background: Economic situation on the eve of reform and now On the eve of reform Financial crisis of 1998Financial crisis of 1998 Economic growth from 1999Economic growth from 1999 Budget surplus from 2000Budget surplus from 2000 Declining inflation (18.6% in 2001)Declining inflation (18.6% in 2001) Increasing inequality: Gini coefficients – incomes = 0.397; wages = 0.508Increasing inequality: Gini coefficients – incomes = 0.397; wages = Declining unemployment (8.8% in 2001)Declining unemployment (8.8% in 2001) Pension arrears – paid back in 2000Pension arrears – paid back in 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

October 22-25, 2008 Starting point: Basic facts of Russian pension regulation Soviet era Soviet era DB PAYGDB PAYG Separate systems for state workers & clerks, and collective farmersSeparate systems for state workers & clerks, and collective farmers Inactive groups, self-employed and some special professional gr. – not coveredInactive groups, self-employed and some special professional gr. – not covered CR = 4-11%, employerCR = 4-11%, employer Age – 55 (f), 60 (m)Age – 55 (f), 60 (m) A lot of special rules for different occupations permitted to retire earlierA lot of special rules for different occupations permitted to retire earlier “Personal” pensions“Personal” pensions Benefit = 55% of ind.wage/salaryBenefit = 55% of ind.wage/salary No indexation + maximum limitedNo indexation + maximum limited 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 The same rules for benefit formula Price indexation

October 22-25, 2008 Changes and challenges of 1990s Expansion of early retirement provisionsExpansion of early retirement provisions Difficult schemes of pension benefit indexation/compensationDifficult schemes of pension benefit indexation/compensation Two benefit formulas since 1998Two 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? – the concept of the reform of the pension system (“rationalization”, continental Europe fancy)  New: voluntary occupational and individual private pensions – proposal of the pension reform developed by the Ministry of Labor and Social Development (Chilean pension reform inspiration)  New: mandatory fully-funded system + means-tested for not-insured – the program of the pension reform – a compromise between 1 & 2 (lesson-drawing from Polish and Swedish pension reforms)  New: notional accounts – ongoing pension reform – a set of laws of  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 3 rd pillar Voluntary pensions 2 nd pillar: Labor pensions – PAYG (NDC) + funded (FDC) Mandatory occupational pensions – not yet! 1 st pillar Basic pensions for all differentiated by the level of disability & number of dependants + “public” pensions financed from general taxes Coverage Eligibility Sources of financing

October 22-25, 2008 Declared aims of the pension reform DirectDirect –To strengthen of link between contributions and pensions –To increase real pension benefits –To sustain financial balance of the pension system IndirectIndirect –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 49,026,028,8 Single pensioner of pension age (55/60 and over) 34,48,117,3 Households of pensioners of pension ages 25,26,612,8 Households of pensioners, including pensioners below pension age 51,325,723,8 Households of pensioners and non- pensioners, including people of pension ages 52,931,426,8 Households of pensioners and non- pensioners, all below pension ages 60,036,430,9 Households without pensioners 57,233,631,1 NOBUS data, 2003

October 22-25, 2008 Second-order problems: … but average pension decreases relative to average wage Statistics

October 22-25, 2008 Second-order problems: … and benefits become more flat and less dependent on the wage history Structure of average old- age labor pension 2007? Statistics

October 22-25, 2008 Second-order problems: working-able people do not know about pension reform … and absolute majority prefers to keep pension savings in the default state company… and absolute majority prefers to keep pension savings in the default state company Special pension module of Rus-GGS-2007

October 22-25, 2008 Second-order problems: current deficit of Pension Fund budget because of … Tax reform – Unified Social Tax reductionTax reform – Unified Social Tax reduction –Maximum rate – 20% instead of 28% –Regressive scale with fixed thresholds Additional indexation of basic parts of pensions – a response to social benefits reform and electionsAdditional 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 Development of funded component of pension system: –3-6% of wages of people born after 1966 – now: about % of total contributors Immediate solutions: Federal budget transfer to the Pension fund People born in 1952/ 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 povertyFocus – on the current pensioners  to prevent poverty State support of voluntary pension savings added to the mandatory onesState support of voluntary pension savings added to the mandatory ones Long-term sustainability of the pension system?Long-term sustainability of the pension system? Looking-for new sources of financing the transition periodLooking-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?Any goal of the pension reform has not been achieved yet. Economic growth as an obstacle to the pension reform? Difficulties in implementing “unpopular” stepsDifficulties in implementing “unpopular” steps Current pensioners lost but will the future pensioners win? Effect of the international financial crisisCurrent 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 modelsHow to learn by other countries’ mistakes? Details matter in transferring other models

October 22-25, 2008 Thank you for your attention!