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11/09/2018 | EconoMatters - Russia’s Plan to Raise Stalin-Era Pension Ages Draws Opposition

Michael Corbin

Russians worry that they will not live to collect their pension due to the proposed age increase. But to what extent is this true?.


While several different issues have come to the fore regarding Russia in the West, one has taken precedence in Russia itself: Legislation supporting a pension age increase for both men and women.

This subject is both more pertinent to the average Russian citizen and more worrisome to Russian leadership than anything that has played out domestically since the Bolotnaya protests in May of 2012, when hundreds of thousands of Russians protested parliamentary election results.

In May 2018, the Russian government decided to move forward with a Finance Ministry proposal to increase the retirement age from the Soviet-era levels of 60 years for men and 55 years for women to 65 for men and 63 for women.

Demographic timebomb

The demographic situation weighs heavily against continuing the current pension system, which is already facing a severe deficit.

The replacement ratio, the ratio of pensions to salaries, is extremely low by global standards. In 2016 it was 35%, and this figure is expected to fall to 32% by 2020 — below the global norm of 40% advocated by the OECD and well below the 70–80% ratio of developed economies.

By 2050, the number of retirees in Russia is forecast to be double the number of individuals in the workforce supporting them (UN, World Population Prospects 2017).

Moreover, the government expects to generate critical funding from the retirement age increase, nearly 20% of the savings required to support the program laid out in Putin’s May decree.

Failure to pass the legislation this fall would deny key funding required for implementing social reforms outlined in the May decree and undermine efforts to begin laying the groundwork for future, more extensive pension reforms that would eliminate mandatory retirement accounts and create voluntary individual retirement accounts.

Russian asset and pension managers and their foreign cohorts rightly support the increasing pension age and the creation of a new third pillar as the only way to salvage a pension system for Russia. The development of third pillar accounts are important for taking pressure off government social safety nets and generating more institutional capital inside Russia.

First draft bill passed by the Duma

The proposal to increase retirement ages for men and women, now a draft bill, passed a first reading in the Duma on July 19th and awaits a second reading this fall.

A Russian draft bill must clear three readings to become law. During the first reading, the leading political party United Russia, which comprises much of the Duma, supported the age increase, while the opposition Communists, Liberal Democratic Party, and A Just Russia all rejected the draft.

In the process, United Russia’s approval rating slipped to 37%, down from 53% at the beginning of 2018. President Vladimir Putin’s approval has dropped as well but remains safely in the upper 60% range.

Politically, the opposition appears to be organized on this issue, a rarity in recent memory, and maintains solid public backing. The widely accepted pollster, Levada Center, found that 89% of Russians viewed the pension age increase negatively while no more than 8% approved of it.

Opposition protests

Emboldened by such polls, opposition parties held protests on July 28th and 29th and claim that over 10,000 people attended demonstrations in various cities across Russia, although authorities quote the number at closer to 3,000.

For both President Putin and the government these protests raise memories of the unsuccessful effort in 2005 to overhaul the country’s social welfare system.

During that attempt, the government replaced some government-subsidized benefits with cash stipends. In response, hundreds of thousands of protesters, mostly retirees, blocked highways and thoroughfares and forced the government to step back from its proposed changes.

Earlier this month, Communists and other opposition leaders pushed for a national referendum. Russia’s Central Electoral Commission (CEC) recently gave approval on the wording of three questions proposed by different initiatives seeking a nationwide referendum on increasing the country’s retirement age.

The body announced its approval of all three proponents’ questions on August 8th, and the initiators now have 45 days to collect 2 million signatures to force a referendum using their respective question. No more than 50,000 signatures can come from any one of Russia’s constituent federal subjects, the country’s equivalent of states or provinces.

Old and young united

How did the situation turn on the government so quickly? Although the protests numbers are not overwhelming, their composition is important because it includes both elderly and youth components, who have traditionally been stalwart Putin supporters.

It also includes state workers, which account for 30% of Russia’s workforce. Many protestors appear to be driven by the dominant fear that they will not live to collect their pension due to the proposed age increase. But to what extent is this true?

While this is not an unreasonable estimate in some respects, the opposition has exaggerated by claiming that many men will not live past 67 years and in some cases not even until 60.

According to United Nations estimates, currently Russian men have a life expectancy of 67 years – relatively low by global standards but much improved from the 59-year life expectancy in the decade after the collapse of the Soviet Union. The life expectancy for women is better at 77.1 years.

There is enough cynicism regarding the life expectancy to make the exaggerations resonate among average Russian citizens. Life expectancy rates are noticeably higher in Russia’s major cities, where both men and women track at well over 70 years, which is higher by a good margin than current retirement ages.

Unfortunately, many other Russians live in regions where individuals only just exceed the proposed pension age increases. In fact, some have life expectancies that barely meet the current 60-year retirement age for men. This reality affects other policy issues such as health care and poverty reduction as well.

Incremental increases

The opposition also neglects to mention that there is long-term smoothing as part of the legislation, as the age increases are incremental. As a result, when the proposed ages are reached in 2028 for men and 2034 for women, life expectancies are projected to be closer to 73 years on average for Russians as a whole, and roughly 70 years for men and over 80 years for women.

While it is fair to question whether Russian authorities could have raised pension ages as part of the reforms of the mid-2000s, a time when the country was awash in cash from high commodity prices, this was not a viable option due to the impact of the economic shocks of the 1990s on life expectancy.

Nevertheless, the government must now move forward with this proposal, regardless of opposition criticism and despite the pain that comes with this kind of pension policy action.

Looking at the situation from a global perspective, now is the time to increase the retirement age for both men and women. Although dependency ratios in Russia are troubling they will only get worse under the current age requirements, which are no longer sustainable.

The government has time to implement the policy because the country is not expected to “gray” as quickly as other regions such as East Asia, for example.

The population over 65 in 2050 will be about 21% of all Russian citizens – about the same as in the United States. By contrast, up to 36% of Japan’s population in 2050 will be over 65. South Korea will have roughly 35% and China will reach nearly 30%.

The succession issue

Additionally, if the pension age issue is not addressed now it could be overwhelmed by the presidential succession issue in 2024, when Putin is expected to step down due to the completion of his second consecutive term.

Currently, there is political will from the government for reform and time to carry out Putin’s May decree to enhance social services through healthcare improvements and poverty reductions, which will have positive impacts on longevity in the country.

It is important to note that despite President Putin’s proposed ammendments to the draft bill during his televised appearance on August 29, he maintains that the reforms must go forward and are long overdue.

Although he suggests lowering the proposed age for women to 60 from the proposed 63, he still supports the proposed age of 65 for men.

Throughout all of his previous terms in office he has distanced himself from the leads on the reform, in this case, Alexei Kudrin, former Finance Minister and current head of the Audit Chamber. This public appearance marks a seismic move on Putin’s behalf and signals that he supports an age increase, albeit somewhat more palatable to the opposition and including some other proposed benefits for the public.

How will the saga play out?

How will this saga play out during the fall, when the pension age increase bill will go to a second reading in the Duma amid potential traction for a referendum?

For the long-term good of Russian pensioners the Duma must pass the reform in the next few months while there is time to reverse Russia’s negative pension course.

The government proposals are necessary to increase Russian retirement ages to the OECD average (65), raise current pensions levels for individuals from current low levels of $237 per month (currently about a quarter less than OECD countries like Germany and France) , and bring more people in the workforce to help stabilize and improve sliding dependency ratios.

***Michael Corbin has nearly twenty years of experience in the international financial services and trade arena. He has expertise in the asset management, insurance and private pension sectors and has presented on insurance and pension issues in Russia and worked with various governments and industry associations in the CEE region. Most notably, he has worked with the Russian, Georgian and other Eurasian governments providing advice and training on global best practices. His opinions expressed here are his own.

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