Speeches & Transcripts

New Social Policy

January 23, 2012

Michal Rutkowski Gaidar Forum Moscow, Russian Federation

As Prepared for Delivery

Economic growth without human development or benefits for the population at large does not make sense — thus a need for economic growth with a human face.

Moreover in countries like Russia and in Europe improving the QUALITY of life by improving the cities we live in, the housing we live in, reducing pollution and improving the cost and the quality of the food we buy and the water we drink are becoming integral parts of policies to improve human development and the quality of life. As Jeffrey Sachs mentioned we need to go beyond GDP in our evaluation of progress.

Giving changing demographics — from Japan, Russia to Iceland and the fiscal pressures on social welfare systems, there is a need to re-think social policies and thus the need for new social policies that will balance needs with fiscal resources. The potential impact of this change in demographics will be significant.

These changes — including a labor force in Russia that will be reduced by as much as 30% by the middle of the century — demand a re-thinking of our social polices:

So what does this entail — well 3 things:

Poverty: addressing poverty and disadvantaged groups: this is the core of World Bank business and from our global best practices we have good ideas about which tools and policies to apply — the kind of bread-and-butter of social policies. Furthermore if the marginalized groups can be activated and moved into the labor force, preferably in higher value added jobs it can mitigate some of the declines affected by the changing demographics

Social justice: the next is social justice — highly relevant in Russia and in the United States or any country for that matter — this is to ensure that your citizens get the help and support they need — a single mother — university students — orphans — or the elderly. This is to ensure that after a long life of working and contributing to society you can rest assured that you will be taken care off thus that you will have a pension and a health care system that will take care of you if you are sick — in social protection terms we talk about the 3 Ps: Promotion, Prevention and Protection.

And social justice means that you will receive good and affordable health care and medicine through-out your life.
Finally, we need to care about inequality which is growing in Russia (but still less than the USA and China (Russia’s Gini: 42: China: 57: USA: 45(Sweden is the most equitable at 23)).

Improving inequality means that we improve the lives of all citizens. This implies a progressive taxation system.

So what is the third element that could be considered a «New Social Policy» — let us call it «activation»: This is about changing the old European welfare model — as good as it may be — to active polices and make each and every citizen responsible for their own lives:

This means developing an education system that will educate our children for job that does not exist today and provide workers with the opportunities to acquire new skills and get training so new technologies can be adopted effectively — or as we say «life long learning» ----the days are gone when you had a job for life.

This also means helping the employed get employed and not just stay on unemployment benefits thus helping the unemployed acquire new skills and increasingly moving jobs from low-skills-low pay sector to higher value-added and high skilled jobs — an ambition of Russia

This also means helping the destitute and marginalized become part of society, including the increasing number of elderly — not all wish to retire

And it means helping businesses hire and yes — fire employees while protection these same employees (flexicurity). In Russia today there is an increasing number of unregulated or informal hiring of workers. This is not desirable — for once labor laws are there to protect workers and help business, but high level of informality makes it less likely that the business will invest the training and skills — the skills that is much needed in Russia today to boost productivity and adapt new technologies

This also means helping young innovators and entrepreneurs with funding and training and effective government services so they can build their businesses and the future of tomorrow

most important the re-thinking of social policies is the change from having the government take care of you for life to the government helping you take care of yourself (working, living healthy and safe and saving for retirement)

So what does this imply for Russia?

In Russia alone — despite a recent improvement in fertility rates — the population is likely to decline by 10 million people by the middle of the century (from 143 million to 131 million). At the same time the numbers of elderly will double from 12% to 23% by 2050.

The first implication is that the Russian labor force will become smaller — about a million workers less every year the next 5 years. By 2050 the Russian labor force is project to decline by 25 million — thus 25 million fewer working people. This in turn means that these fewer workers — all the young people in the auditorium — will have to pay for more of the elderly and for social services — the dependency ratio will change from every one person retired where there is now 5 working people to support them by 2050 there will only be 3.

The second implication is that pension expenditures will increase commensurately. However, in Russia the Pension System is based on a Notional Defined Contribution Scheme — thus if the number of contributing working people goes down (revenues), the number of pensioners goes up, well then the pension benefits are adjusted accordingly. It is estimated that the current pension benefit of about 40% of the average wage could fall to about 25% of the average wage — a shortfall which will be have to be made up from government funding thus with serious fiscal implications

The third implication is on the health care system. Today non-communicable diseases/chronic illness — heath attacks, stroke, and cancer — are among the leading causes of death in Russia. NCDs are also Russia’s highest-cost conditions. The four most expensive conditions, circulatory system diseases, chronic respiratory diseases, injuries, and digestive system diseases, account for more than 50% of the country’s total health expenditures, well above the level of 38% in the United States.

Although the aging population will put some pressure on health spending, international evidence suggests that non-age related factors like technology and social services for the elderly are more likely drivers of costs. What is critical however, is to maintain a healthy workforce, thus ensuring a greater urgency to improve the health status of the entire population

Poor health and premature and excess mortality among the working population has additional economic costs in the form of low productivity, early retirement, and high medical expenditures. On average, 10 days are lost per employee per year because of chronic illnesses in Russia, as compared to an average of 7.9 days in the EU15 countries, and while a hypothetical Russian male age fifty-five with median income and other average characteristics would normally retire at age fifty-nine, having a chronic illness would lower his expected retirement age by two years.

Let me summarize: Russia work force will decline, by as much as 30% by 2050 while the needs of elderly and retirees will increase. At the same time the general poor health status of the Russian population imposes loss of productivity and a further challenge for Russia to maintain its economic growth and improvements to quality of life.

The question is what can be done:
Well, two things:

  • curb and control spending
  • and, increase productivity of the labor force.

So how do you control spending and curb costs:

first of all Russia is currently spending 50% of its total fiscal envelope on health, education and social protection). This is not bad, but the outcomes are not equivalent to the money spend with huge variations across the 83 regions of Russia. A substantial part of social assistance is spent on privileges, while very little is spent on targeted programs. The spending on privileges (payments to specific categories of the population) accounts for 2.3 percent of GDP, or 90 percent of total social assistance. Privilege payments generally do not reach the poor, and hence achieve little in terms of poverty reduction. Targeted social assistance accounts for only 0.2 percent of GDP. There is a significant scope in Russia for expanding the means-tested component of social assistance through a gradual substitution of privileges with targeted programs and improving the targeting of programs, and hence for allocating social protection funds with fewer leakages and a higher poverty-reduction impact.

With more than 18 million Russians living in poverty and another 37 million Russian living with economic uncertainties or vulnerable to poverty as we say in the World Bank, they are sidelined in society or trapped in poverty. Furthermore, giving economic uncertainties these many families decide not to have children or postpone the decision. Thus bettering the targeting towards the poorest and lifting them out of poverty of economic uncertainty could impact both the economically active share of the population, but also boost population growth.

Thus improving the efficiency of spending is critical and important.

Controlling expenditures are equally important, especially in the area of pensions. Improving the health of the work force and extending the numbers of working years would be one effective way to control the ballooning pension expenditures. These is political sensitive — like in any country, but think about the alternative of having current pensions cut in half as mentioned earlier. There are clever ways to introduce changes — voluntary with monetary premiums or rewards for delayed retirement etc etc. and informing the public is a critical part of this.

Let me now finally turn to how Russia can improve productivity and economic growth — so prominently stated by the Minister of Economy, Ms. Nabiullina — because if Russia can boost productivity it mean more revenue. Many elements are critical for boosting productivity, but the most important is to change the education system or education «train» where you will enter once, to an education and training system that will support the renewal of skills throughout your entire life. Russia has attained some of the highest levels of education and is one of the few space nations. However, giving the rapid technological changes the days are gone when you could just sit back and have a job for life. And thus the need to internationalize degree programs and offer training for all workers at all level and teaching the students «transversal skills» — languages, problem solving, team working and so forth.

Let me now finish:

For old Europe changing what is already there is tough especially giving the financial crisis and shrinking government budgets, but Russia has the opportunity to get it right — but it requires bold steps and reforms — reforms that the Russian people will understand they see the benefits.

Europe and Russia share some of the similar demographic challenges, but most important they share the challenge of sustaining and improving the quality of life giving the increasing fiscal social costs and thus a need to rethink social policies to make them affordable — and fair. And this will require daring actions: to curb and improve spending and improve productivity through investment in skills development and education through-out your life.

Thank you.