COMMENT: Raising Russia’s pension age won't be enough

COMMENT: Raising Russia’s pension age won't be enough
Russia's pensioners party fears a raise in the retirement age.
By Mark Adomanis in Philadelphia June 23, 2016

After some time spent in the hinterland of quasi-opposition, Alexei Kudrin appears to be back in Valdimir Putin’s good graces. He was named the head of an important-sounding (if relatively toothless) reform commission, and he’s been noticeably more prominent in the media. There was even a (tongue in cheek) graphic circulating on Twitter showing the number of Kudrin's panel appearances at the St Petersburg International Economic Forum; this year marked an all-time high.

While he is most well-known for his budget hawkishness and general fiscal rectitude, Kudrin has also long been something of a pessimist about the long-term health of Russia’s pension system. There is good reason for his pessimism. Due to the now-all-but-inevitable aging of the population, Russia’s ranks of pensioners are slated to grow while the ranks of workers who fund those pensions are set to shrink. Growing liabilities and decreasing cash flow make for an obvious problem.

But haven’t Russia’s demographics recently gotten better? Yes, they have. I have written repeatedly here that there have been significant improvements to Russia’s fundamental demographic trajectory over the past decade. Rosstat’s most recently updated 2030 population projections confirm this improvement. They show a country not in a “death spiral”, but one that will (in the most likely outcome) grow by about 0.2% between now and 2030.

However, while in combination with continued robust migration from other post-Soviet states the demographic improvements of recent years might prevent the population from shrinking, they will not be sufficient to prevent the Russian population from aging. The 1990’s fertility crash was simply far too severe to prevent the elderly share of the population from growing.

Fundamentally, there isn’t any way to “fix” the scenario outlined above. Like every other country in Europe, Russia’s population is aging, and this aging will put pressure on the financial health of the state pension system. However, there is a significant ability on the government’s part to limit the short-term financial pressures. Chief among the potential policies that could minimize (or even eliminate) the short-term shrinkage of the workforce is pension reform. Translated from the bureaucratese this means: “making people wait longer to start collecting their pensions”.

Given past experience, it seems unlikely that Kudrin’s “Plan K” or its proposals for a sweeping liberalization of the entire Russian economy (particularly the privatization of state-owned assets) will actually be implemented. However, there is a specific aspect of Kudrin’s plan that seems far more likely to be attempted: raising the official pension age to 63.

The chart above shows the likely impact on the Russian workforce of Kudrin’s proposal. As noted previously, while pension reform can’t do anything to change the fundamental problem, it can provide a significant infusion of workers into the workforce. If implemented as currently conceived, delays in retirement would allow the Russian workforce in 2030 to be roughly the same size as it is today. Given the size of the respective age cohorts and levels of fertility that were higher in the past than they are today, there are quite a few Russians in their mid to late 50s. If a reform can compel them to stay working for an additional four to five years, the impact would be significant on an economy-wide level.   

Implementation risk

What are the prospects of this reform, or a broadly similar one, actually being implemented? That’s a much tougher question. The political risks are obvious: there is a reason that, under Putin, the government has kept its hands off of the pension system almost entirely. Indeed, it’s pretty hard to exaggerate the extent to which reforms of the kind being contemplated by Kudrin are almost universally despised. If the government were primarily worried about its poll numbers, it would keep kicking the can down the road indefinitely.

Its practical ability to do so, however, is much more constrained in an environment of low-to-moderate oil prices. Given Putin’s demonstrated reluctance to increase Russia’s sovereign debt burden (like many who served in the KGB in the 1980s, he appears to have learned the lesson that the Soviet Union’s debts to the West constrained its ability to geopolitically maneuver), certain economies will be necessary to keep the pension system from turning into a budgetary black hole.

The government’s potential willingness to take a hit on the pension issue is suggested by recent actions in parliament. The Federation Council, the upper house of Russia’s parliament, has already taken the first tentative steps towards implementation. In mid-May it passed a law that, in stages, would raise the pension age for government workers to 65 for men and 63 for women. It seems likely that this last is a test case for a pending system-wide reform, so its implementation (and the reaction of government workers) bears watching.

The above-mentioned reform cannot, by itself, “fix” Russia’s pension system: it only impacts about 1.2mn municipal and federal bureaucrats, a tiny percentage of the total economy. But as a signal the law is very important. The Russian government has historically been very generous to the state sector, consistently boosting wages by more than inflation and paying above-market wages. That the Kremlin would start the process of pension reform with the bureaucracy suggests that the political will for large-scale reform is finally present.

A swift rebound in oil prices could, of course, alleviate the economic pressure on the pension system. But as things stand, meaningful reform of the pension system is more likely now than at any other point over the past decade.

Mark Adomanis is a Wharton MBA student by day, Russian analyst by night. Follow him on @MarkAdomanis