Russia's finance ministry proposes continuing the pension funding practice of last years

Russia has planned for years to reform its chronically underfunded pension scheme. Pensions have accounted for over 20 % of public sector spending in Russia in recent years. Over 60 % of pension spending has been covered from the pension insurance contributions of the current workers. The rest (about 2.4 trillion rubles) has come mostly out of the federal budget.

Under the current model applying to most employees, a mandatory pension contribution of 22 % of the worker's pay is paid by the employer. Of that, 16 percentage points goes to the pay-as-you-go system, i.e. for pension payments to current retirees, while the remaining 6 percentage points is set aside to fund future pension obligations. With the tightening fiscal situation in recent years, however, the government has used the funded part for covering running costs (including pensions). The finance ministry recently gave the government a proposal that in principle formalises the practices of recent years. Under the proposal, the entire 22 % mandatory contribution would be channelled to the pay-as-you-go pension system. In addition, workers could choose their level of voluntary contribution for personal pension savings, which would range from 0 to 6 % of their wages. The voluntary pension savings would be encouraged with e.g. tax breaks.

The shift, which would relieve immediate budget pressures, is feared to further undermine the long-term sustainability of the pension scheme. Only 7 % of workers participated in voluntary pension savings plans last year. Funding the pensions entirely from the current contributions is becoming even more difficult with Russia's aging population and rising dependency ratio. The finance ministry has also proposed raising the retirement age, but no decisions are expected at least until next spring's presidential election.

Critics of the financing model reform fear that it will also gut the pension funds. One of the reasons for the shift to a partly funded scheme in 2002 was the ability of pension funds to provide long-term financing for the markets. Pension funds last year held a total of 5.2 trillion rubles (6 % of GDP). 40 % of that was under the control of state development bank VEB, with rest held by private pension funds.

Russia last year had about 45 million people receiving pension benefits. The average monthly pension payment was 12,400 rubles (185 dollars), or about a third of the average monthly wage. About a third of people receiving pensions were still working.