Russia Badly Needs Pension Reform

In Russia pension transfers accounted for about 5.5 percent of GDP in 1999 (compared to 6.9 percent of a larger GDP in 1992) and supported 37 million pensioners. The pension system has the following defects:

· High contribution rates and weak compliance. The pension system, like its Soviet predecessor, is funded by a 29 percent payroll tax and is replenished from the budget if it falls short. Employees’ direct contributions are either zero or minimal, placing the burden almost entirely on the employer, formerly state-owned but now commonly private. This encourages managers to evade tax by under-reporting their payroll. The gap between official and actual contribution rates, coupled with other budgetary problems, explains the current shortfall in pensions.

· Unfavorable demographic trends. The share of pensioners in the overall population is 19 percent and rising. Between 1959 and 1990 the population over 60 doubled. The system dependency ratio is high, with just under two workers to every pensioner.

· Growing fiscal imbalances. Falling output, tax evasion, and tax offsets at the enterprise level have repeatedly forced the centrally managed Pension Fund to cut or even suspend pension payments. The fund has been in deepening financial crisis since 1995. In late 1998 pension arrears were 30.5 billion rubles.

· Low retirement age. The retirement age is 55 for women and 60 for men.

· Serious inequalities between and within generations.

· Strengthening the Pension Fund’s revenue base by encouraging better collection practices and enforcing compliance by larger companies.

· Introducing a minimum pension floor of not less than 80 percent of the minimum subsistence level and adjusting it according to inflation. The World Bank expects that 12 million pensioners would receive minimum pensions and about 4 million would experience an improvement in living standards.

Russia’s transition has been politically contested, if in an unorganized way. Between 1992 and 1995 the percentage of Russians polled who had a negative view of the market economy rose from 7 percent to 44 percent. In a poll taken in December 1996, five years after transition began, 43 percent of Russians said they "would like the Communists to govern our country." In April 1999, a poll found that Yeltsin’s popularity was falling rapidly. Only 6 percent of those questioned approved of his work, while 92 percent did not approve of it. It can be inferred that these views are highly correlated with the country’s economic performance.