What will Russians live on when they stop working?
January 26, 2023
  • Maxim Blant
    Economic observer from Radio Liberty
Maxim Blant writes that the catastrophic consequences for Russia’s demographics brought on by the war leave the government no choice but to dismantle the pension system. The current pensions are set to be replaced by a social allowance for old age linked to the subsistence level.
In old age, Russians will have to live on what they have saved on their own, or work until they die. The current pensions are to be replaced by a social allowance for old age linked to the subsistence level.

At a plenary session on January 19, the Duma swiftly rejected several bills from different factions to index pensions for working pensioners. The fate of the bills had been a foregone conclusion: last year, the government gave them a negative review, as usual pointing to a lack of funding. In November 2022, Russia’s Pension Fund estimated the additional costs of indexing pensions for working pensioners at about RUB 0.5 trillion, which would have to be taken from the federal budget. This was far from the first time such a proposal was voted down: indexing pensions for working pensioners was stopped back in 2016, while since then the Duma has every year rejected bills to resume the practice.

Before the war, it was possible to attribute this to a lack of money. The country was falling into a “demographic hole,” as the small generation of the 1990s was entering the workforce while the relatively large generation born in the 1950s and 1960s was retiring, the burden on workers increasing every year. The government was putting away money to support accelerated modernization and “technological breakthroughs” in all spheres that could radically boost productivity and address the aging population. True, even then it was not entirely clear why people who had worked for 30-40 years, supported both the state and previous generations of pensioners, had to bear the brunt of this policy. They had honestly earned their pensions, and whether they continued working or retired was their own business.

Moreover, in previous years, the government has found money, for example, to distribute ahead of elections. In 2020, that was timed to coincide with the “referendum” on amending the Constitution, while in 2021 money was distrusted ahead of the latest Duma election. Now, at the beginning of 2023, the rhetoric about there being “no money” looks entirely unconvincing. If the Finance Ministry managed to spend RUB 7 trillion more than it had originally budgeted last year (mainly due to increased military spending) while Putin flaunts the fortress Russian economy, then it is not that there is no money, but that there is none specifically for working pensioners.
Age distribution in Russia. Blue shows men, red shows women. At the top is the total population of Russia. Source:
Moving toward a “socially unacceptable” level

The position of the government in general and the Finance Ministry in particular is easily explainable. Suddenly (for the government’s economic bloc) soaring military spending, Putin’s pre-election “attractions of unheard-of generosity,” the major army reform proposed by Defense Minister Sergei Shoigu – which will require billions and billions more – these are all decisions that were made not at the Finance Ministry or even in the prime minister’s office. A directive is sent from the Kremlin administration to the government to provide funds, and there is nothing that can be done. You salute and silently execute the order.

Meanwhile, even before the war the demographic situation in Russia had become perhaps the main break on economic growth. At the beginning of the current decade, the smallest generation of the late 1990s began to enter the workforce as many baby boomers of the 1960s began to retire. This “demographic hole“ has been known about for more than 20 years. And all that time, Russian officials have been looking for a way to solve the problem of an aging population and the growing burden on workers to fund the pension system, which has long ceased to be self-supporting and requires ever-growing subsidies from the federal budget.

If everything is left as it is, pensions will drop to a “socially unacceptable” level, warn scholars Yuri Gorlin and Viktor Lyashok from the Russian Academy of National Economy and Public Administration (RANEPA) in a study based on a mathematical model that was published in December 2022. The ratio of the average pension and the average salary was taken as the main criterion of “social acceptability.” In recent years, it has steadily declined. In 2018 in Russia, the average pension was 35% of the average salary. Even then, the government was criticized for it. Recall that Russia has joined the convention of the International Labor Organization recommending that a pension should replace at least 40% of lost earnings.
"However, as of September 2022 (the latest data from Rosstat), the average pension has fallen below 30% of the average salary."
Gorlin and Lyashok did not limit themselves to a simple analysis of demographic data – they also prescribed what they called “bitter medicine” for the country. Still, the proposals were not groundbreaking. They include getting rid of benefits that enable early retirement; doubling the minimum length that a person should work to entitle him to a pension; cancelling benefits for employers on pension insurance contributions; raising taxes; and linking the size of pensions of working pensioners to their salary (if you have a low salary, the state will be generous; if you have a high salary, then you can get on without a pension). The authors, of course, would also recommend raising the retirement age, though they admit that that is impossible. At least for men, whose average life expectancy (65.5 years) is almost equal to the target retirement age adopted in 2018 (65 years). Overall, Gorlin and Lyashok propose a set of extremely unpopular half-measures that can only patch up the facade of a building that is falling apart under its own weight.

Inside the government, if they are considering such an option, it is only as a backup one. At this point, a completely different conception of the “final solution” to the pension problem is prevailing.

Save up yourselves, and we will help

In December, the Finance Ministry unveiled a program to encourage long-term saving, which includes tax deductions and even cofinancing from the government. The draft plan was considered on December 9 by the ministry’s Public Council.

The phrase “pension savings” does not appear in the ministry’s press release, though there is no doubt that this is another incarnation of the long-suffering pension reform that the financial authorities have been trying to implement in one form or another since 2018. “Citizens get access to a tool that allows them to save additional funds for the future (not only for retirement, but also in the event of special life situations). In addition, people will receive the necessary protection to safeguard their accumulated funds, as well as additional financial support from the state,” the Finance Ministry stated. Thus, we are talking about something in between a voluntary pension scheme and endowment insurance.

People will accumulate the above mentioned long-term savings themselves, though besides voluntary contributions, so-called maternity capital and money accumulated on individual pension accounts before 2014 will also be added. For its part, the state promises to provide a tax deduction of up to RUB 52,000 per year (those who contribute RUB 400,000 to the savings scheme can apply for the maximum deduction) and cofinance long-term savings, chipping in up to RUB 36,000 per year. And that’s not all. The money will be invested. True, not by people themselves, but by the Central Bank, with direct management entrusted to “operators.” Apparently, these are management companies, which already manage the money of private pension funds. In addition, an insurance scheme similar to the bank deposit insurance system will operate for the long-term savings. Only the insured amount will be twice as high: RUB 2.8 million versus RUB 1.4 million for deposits.

At first glance, the offer looks tempting. Russians are getting the opportunity to invest RUB 400,000 without any risk and with a guaranteed return of 22% (13% is the tax deduction and 9% is cofinancing). Plus, they can restore their pension savings frozen in 2014, as well as invest maternity capital with some kind of return, as it was not always spent as intended on improving housing conditions and paying off mortgages.

But next to the Finance Ministry’s “carrots,” it is hard not to notice the “sticks.”
"The concept of a 'retirement pension' is becoming a thing of the past in favor of a 'social allowance' for old age."
In 2018, Russia saw mass protests against raising the retirement age. The photograph is from one in Moscow, September 2018. Source: Wiki Commons
Already, the Pension Fund is insisting on just such an approach, promoting the idea that “the intended purpose of insurance pensions is to provide livelihood to a citizen who, due to… old age and disability, is unable to work and has lost his earnings.” When pensions finally turn into allowances, their size will cease (or almost cease) to depend on how long a person worked and how much income taxes and social contributions he paid as a percentage of earnings. It is then that the long-term savings that the Finance Ministry is ready to cofinance will be needed.

There is no doubt that Finance Minister Anton Siluanov will make every effort to hurriedly push through the new pension reform. Whereas before the war it was a way to cut the “Gordian knot” that had growing more tangled over the years, now it is a vital necessity that will provide a chance to resolve, most importantly, present problems. Note that the voluntary pension savings can be spent only upon reaching retirement age. In addition, the lion’s share of the money set aside by people will likely be invested in government debt. If you transfer a “real” RUB 400,000 this year into your individual “box,” you are really extending a loan to the Finance Ministry, and in return will receive a RUB 52,000 tax deduction next year, plus a “virtual” RUB 36,000 of interest on your account balance.

To exchange RUB 400,000 that you can spend at any time for RUB 52,000 only in a year, together with an IOU for RUB 436,000 in 20-30 years (depending on how long you have before retirement), you must have optimism bordering on insanity. Especially now, given the war and international sanctions, when the political and economic risks in Russia have skyrocketed, and people have a planning horizon of months, if not days.

The war changed everything

The pension reform that the Finance Ministry and the Central Bank are trying to launch will not radically change anything. Time has been wasted. And the problem is not so much the unpredictable performance of even medium-term investments, without which the whole scheme does not make sense.

At the beginning of the year, Rosstat disclosed the last population census (experts have many questions about it, but it is the only data we have), which was carried out in 2021, before the war. According to the data, about 13% of the population – approximately 19 million people – refused to indicate the source of the income on which they live, in line with estimates of the size of the shadow economy. Another 45% (about 58 million) said they lived on their salaries. A third noted among their sources of income social payments from the state, i.e. pensions and benefits. This is more than 42 million people. Moreover, for 31 million of them, social payments were their main source of income. If you add about 30 million dependents here (including minors), the balance is no longer in favor of workers.

There is no official data on Russian military losses in Ukraine yet. Just as there are no statistics on how many Russians left the country after the start of the war and the announcement of the partial mobilization. However, there is no doubt that in both cases it was mostly working-age men, including from the smallest generation – men now 20-24 years old. Before the war, the demographic crisis was smoothed out by migrants. The flows, having slowed during the pandemic, swelled back last year. The influx of refugees from the occupied regions of Ukraine has not boosted the Russian labor market, however, since most of them are pensioners and women with children. The situation is the same with the population in the four Ukrainian regions annexed by Russia, where the able-bodied male population was either mobilized by one of the sides or fled westward by hook or by crook.

Recall that the previous attempt to switch from a pay-as-you-go to a capital-funded pension system – made by a team of reformers back in 2001, in a completely different demographic situation – failed. The authorities attributed the failure to an unbearable burden on the “transitional” generation, which would have to save for their own pensions while also providing for previous generations. Thus, people were not able to build real individual pension savings, despite the rapid growth of the economy in the 2000s.

In 2014, after the annexation of Crimea, the government urgently needed money, and individual pension savings for the year (as well as for all subsequent years) were essentially confiscated. This was the end of the reform. The chances of the current attempt at pension reform succeeding are much lower.

There is another serious problem that makes another reform attempt senseless: the current structure of the Russian economy. Workers are different: there are those who produce things and provide the budget with taxes have to support not only children and pensioners, and there are deputies, officials, the army, law enforcement and many more state employees, including spies and propagandists. According to the RANEPA Laboratory for the Analysis of Institutions and Financial Markets, the share of public administration in GDP in 2000-20 more than doubled, from 7.1% to 14.6%, while the public sector as a whole surpassed 50% of the Russian economy in 2018. The war has meant not only a multifold increase in military spending and defense orders, but also an acute shortage of labor in the economy. After the start of the mobilization, a number of Russia’s regions were forced to announce “labor mobilization,” sending college and university students to operate machines and run offices.
"It is not too early to state that a year of war has definitively brought back a much worse version of the Soviet 'national economic complex,' which was entirely dependent on global commodity prices."
The fundamental difference is that the current demographic situation is much worse than in the late Soviet period and the international restrictions much more serious. This is bringing Russia closer to the point beyond which lurks economic, social and political catastrophe.
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