Ben Aris in Moscow -
Russia will make the long overdue decision to increase retirement ages after the 2018 presidential elections, according to former finance minister Alexei Kudrin.
As a result of Russia’s “workers paradise” legacy from the Soviet period, retirement ages in Russia are very low: 55 years old for women and 60 years for men. But up to now the government has been loath to raise the topic of increasing retirement ages for obvious political reasons.
Now plans for pension reform are rapidly gathering momentum as the government casts around for a new form of long-term cheap financing to fund domestic investment. The government appears to be increasingly taking the view that financial sanctions imposed by the US and EU earlier this year are here for the long term. Cut off from international capital markets and with domestic interest rates sky high, Russian companies have few places to turn to raise cheap money other than the Central Bank of Russia (CBR) and the state reserves.
In a sobering piece of news the finance ministry predicted that the money in the Reserve Fund will halve over the next year from RUB3.38 trillion ($54bn) to RUB1.25 trillion, while other commentators believe the fund could be exhausted entirely. The National Welfare fund, a second reserve fund dedicated to supporting pensions and social payments, will fall less, dropping from RUB 4.9 trillion ($78.4bn) to RUB4.69 trillion. Both funds have already fallen since the beginning of the year when they contained RUB5.347 trillion and RUB4.388 trillion respectively.
The state has already been dipping into the National Welfare Fund to meet its pension obligations but obviously is keen to maintain a cushion as long as it can. To reduce this pressure the finance ministry has already decided to de-link pension payments from inflation – currently 15.8% – and increase it by only 4% this year, in a move that will save the exchequer more than RUB2.5 trillion ($46bn) over three years.
Eventually the state will have to grasp the nettle of the retirement age itself. It was Kudrin himself who first floated that balloon while still finance minister during a speech at a Renaissance Capital conference before the 2008 crisis broke.
More recently the topic has started to come up more often and the suggestions are becoming more concrete. Russian Finance Minister Anton Siluanov brought the issue up in a long interview with Russian daily Vedomosti in June, saying: “It is obvious that [raising retirement ages] is necessary and it is clear that we will have to do it. The only question is when? … Implementing solutions should be gradual. If you raise the retirement age by six months per year, to reach the [European norm of] 65 years for men will be possible only in 10 years.”
Siluanov suggested raising the threshold topic again only a few weeks ago, but with more urgency in his voice: "We need to urgently address the issue of raising the retirement age. This will allow a better balance of the pension system without an increase in premiums," he said during a speech to the State Duma on September 23.
And now Kudrin, speaking at a conference on October 8, has introduced a deadline: ages will go up shortly after the next presidential elections in 2018, which are widely expected to be give President Vladimir Putin a fourth term. "I think that in three years, after the presidential election, after all, the retirement age will be increased. This is the best balance for the pension system," Kudrin said.
Even moving up the increase to 2018 means that the state will burn through a lot of money in the meantime, money it can ill afford to spend given that the budget is expected to be in deficit this year and for several years thereafter, thanks to a deep recession. The deficit of the pension system today is already 50% subsidized by the federal budget, according to Kudrin. The government is already subsidising a RUB3.3 trillion ($60bn) hole in the pension fund, according to Pavel Kudyukin, an associate professor at Moscow's Higher School of Economics.
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