BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/18
Russia fundamentally overhauled its pension system in 2002. At that time, Russia shifted to a two-pillar system that introduced the funded element. This required a part of the pension contributions paid in by employers for younger workers to be set aside in private pension funds or a state pension fund managed by state development bank VEB for covering their future pensions. Prior to 2002, Russia had a simple pay-as-you go scheme, whereby contributions paid by employers into the federal pension fund were paid out to meet existing obligations. The shift was justified on the basis that Russia needed to prepare for rising future pension costs from an aging population and a smaller workforce supporting a larger pensioner population.
The shift to including a self-funded component initially was a drag on the pension system as paid-in contributions no longer could be used in full amount to paying current pensions. Together with significant hikes in pensions, temporary reductions in pension contributions and several years of poor economic performance pushed the federal pension fund into deficit. The pension fund deficit has expanded especially rapidly since 2008.
The pension fund shortfall is funded out of the federal budget. In order to restrict the need for budget funding the government adopted an exceptional arrangement for 2014 and 2015, whereby pension contributions collected in these years would be used entirely on a pay-as-you-go basis.
The social ministry and the labour ministry have supported the suspension of the funded component, going so far as to suggest making the funded arrangement completely voluntary. The ministries have justified this by the so far poor returns of pension fund assets that has led to weaker pension security than the pay-as-you-go approach with indexed increases based on cost of living.
The finance ministry and the economy ministry opposed abandoning the funded component. One of the goals for the introduction of the funded component was to enhance the development of Russia’s financial markets. Pension savings funds could offer the long-term capital for investment that Russia’s financial markets are currently lacking.
Russia’s acute need for investment financing was the specific factor that led the government to continue the funded component. Prime minister Dmitri Medvedev has now tasked the government with finding more productive ways to invest pension assets. Experts have not warmed to the finance ministry’s proposal that private pension funds commit to investing part of their assets in high-priority state infrastructure projects.