A Retired Life

By Ekaterina Novozhilova, Russia Profile

August 1, 2008

Russia

The Russian pension system, once a strictly regulated state budget affair, now offers elderly and not so elderly Russians a wide array of ways to provide for themselves in their twilight years. Besides getting a guaranteed “basic” pension, upon reaching the age of 55 (for a woman) or 60 (for a man) one is supposed to get the so called “insurance” part of the pension, made up of the 14-percent monthly deductions from the working generation’s salaries, which are transferred to the Pension Fund. Beginning from 2002 people can also profit from the “savings” part, which is accumulated at future pensioners’ individual retirement accounts (IRAs). The money accumulated in these accounts can be invested by a trust management company chosen by the future pensioner himself and thus saved from inflation—an important innovation for Russia. 

“Few people understand that the hard destiny of the Russian pensioners of the 1990s was indeed sealed not by us, but by Soviet officials much earlier,” said Alexander Pochinok, Russia’s labor and social affairs minister in the late 1990s. “Their pension savings were not invested, they all went to the state budget. Even people’s savings in Sberbank were often used to finance the deficit of the state budget. So, when these people reached the retirement age in the 1990s, their money was simply not there. It was eaten by inflation or government spending.” 

In order to avoid repeating the plight of the retirees of the last Soviet generation, future pensioners are also encouraged to use non-state pension funds, which are usually run by big companies mostly for their own employees. Some of these non-state pension funds are very successful. For example, the Russian railway monopoly RZhD prides itself on its retired workers’ getting pensions which are worth 42 percent of the average salary in the company. This figure, called the replacement coefficient, is much lower in other industries, where it fell dramatically in the early 1990s and never fully recovered. 

According to the estimates of the Kommersant daily, the average replacement coefficient in the country is no more than 25 to 26 percent. Official statistics provide an even more worrying picture. In May 2008 the Federal Service of State Statistics estimated the amount of an average monthly pension in Russia at 4,044 rubles ($175)—less than the survival minimum in the country, which was set at 4,330 rubles ($185) at the end of 2007. This means that pensioners who do not have a job and do not get financial support from their children can barely make ends meet, having enough money only for food and clothing. Despite the state’s continued subsidizing of housing expenses for the old and the poor, having a roof over one’s head is also becoming increasingly difficult for pensioners. The utilities bill for a modest apartment in Moscow can run up to 2000-2500 rubles ($86-$107) per month. Unless you are some kind of a “special” pensioner (a World War II veteran, a Hero of Socialist Labor etc.) this bill can consume a lion’s share of your pension. 

One should also bear in mind that when the generation of today’s most active workers retires, the demographic structure of society will most likely get worse, with further decreases in the number of working persons per one pensioner expected. 

“If current trends persist, by the year 2025 we shall have 1.5 times more pensioners in the country,” said Anatoly Vishnevsky, director of Moscow-based Institute of Demography, speaking at the annual assembly of the Council on Foreign and Defense Policy, Russia’s most influential experts’ umbrella organization. “At the same time, we shall have eight million less women of childbearing age. If during the previous periods of our history high mortality sometimes brought demographic dividends—as old people died out the burden on the state budget and the pension system was lessened—now we can’t have even that. The losses which we have now because of high male mortality and mass emigration only increase the burden on the state budget.” 

In this situation, the state does not seem to be able to afford to make the lives of pensioners easier. In 2010 the “basic” pension provided by the state to any citizen of pension age, irrespective of this person’s employment history and contributions to pension funds, is expected to reach just 2,280 rubles (about $100) and in 2011 it is planned to grow to 3,300 rubles ($142). Bearing in mind that prices for basic foodstuffs in Russia soar even faster than average inflation rates, the perspective for the “passive” future pensioners putting their hopes on the state alone appears to be rather gloomy. As for the Pension Fund with its “insurance” part of pensions, for many years in a row it has been unable to make good on its obligations because of a deficit in its budget, asking the federal authorities to bail it out. In 2008 alone, the government had to spend 138 billion rubles from the National Subsistence Fund to make up for the gap in the Pension Fund’s finances. Russia’s new president Dmitry Medvedev in one of his speeches this spring recognized that pensions were intolerably low, but the old way of solving the problem by just begging for more money from the state budget wouldn’t work now. 

“Pensions should be high, but they should be different,” Medvedev told voters in Nizhny Novgorod. “We have had enough of equality in poverty.” 

Analysts note that Medvedev prefers “pro-market” solutions to social problems, admonishing people to take more responsibility for their own future. The pension problem is no exception. Medvedev seems to be supportive of the idea that people, preferably at a young age, should be given a chance to invest at least a part of their pension savings via trust management companies or non-state pension funds. In fact, people have had this opportunity since 2002, but so far, no more than ten percent have actually chosen a trust management company. This worries the authorities, even though the transition to this system, started in 2002 with a tiny bit of people’s annual pension deductions being transferred to their individual pension accounts instead of the Pension Fund, was supposed to be gradual. 

“We want our citizens to start the first year of their pension school studies now,” the Russian government’s Vice Premier on Social Issues Galina Karelova said, starting the project in 2002. “What you will be able to invest now is just three percent of your annual income. In the future, as you learn more, this share will be bigger.” 

In 2002-2004, people could transfer to a trust management company only three percent of the 14 percent taken out of their salary as a pension deduction as part of the Unified Social Tax (26 percent of salaries). In 2004-2007 that figure grew to four percent. Beginning from 2008, it is six percent. However, in 2003, as the Pension Fund faced an especially high deficit, the unpopular social protection minister Mikhail Zurabov managed to exclude from the savings experiment people who were born before the year 1966, transferring their money instead of to the savings account to their regular account in the Pension Fund. So now, only people who were born after 1967 have eight percent of their salaries transferred to the Pension Fund and six percent to the savings account. Despite a massive advertising campaign, 90 percent of future pensioners are still undecided on which trust management company they would trust with handling money from their savings account. By a government order, the money of those “silent ones” was invested by the state-owned bank Vnesheconombank. The problem is, however, that as a state institution, Vnesheconombank has a very conservative investment strategy, so the future pensioners’ savings in its coffers melt gradually, eaten by Russia’s nine to 11 percent annual inflation. 

The passivity of the “silent ones” irritated minister Mikhail Zurabov so much that in 2005 he suggested moving their accounts to the Pension Fund in order to help current pensioners at the expense of future ones. This idea, however, caused such an outcry that Zurabov ultimately had to back off and the floating of this unpopular idea is widely seen as one of the reasons for his resignation in 2007. However, in general Russia’s future pensioners remain remarkably quiet politically, probably preferring current expenses to pension savings. 

“The situation for retired people in Russia is so bad that, for example, in my country, France, one would expect people to increase electoral pressure on the government,” said Alain Blum, director of the Center for the Study of Russian World at the Paris-based Higher School for Social Studies. “However, the Russian government so far has not been very sensitive to this sort of pressure. Besides, Russian society traditionally reveals a remarkable combination of paternalist expectations from the state with distrust for institutions, including state ones.” 

In Russian reality, this attitude translates itself in a lack of enthusiasm for both protest action and non-government pension savings from the economically active part of the population. Myths about the “rogue” nature of non-government pension funds and difficulties of forming one’s own retirement plan are also very widespread (in reality, a short written statement is enough to have your savings account moved to a private company). These myths found their reflection in the results of an opinion poll conducted by the VTsIOM sociological center in 2008. Fifty-nine percent of those polled pinned their hopes on a “state pension” (in 2007—56 percent) and only 28 percent relied “on their own efforts” (in 2007—35 percent). This increase in paternalist expectations is hard to explain and could be an indirect consequence of the “propaganda of success” waged by the Russian electronic media. Reports about wage and pension increases became so widespread that they probably squeezed from public consciousness the officials’ admonitions for more responsibility in retirement plans. 

Despite falling behind its authors’ expectations, the pension reform still impresses by its pace. In the first months of 2008 alone, the number of people who transferred their savings accounts to private companies was 2.6 times more than last year. According to the data of Business&Financial Markets newsletter, trust management companies in 2008 already signed 1.8 million contracts with such investors and the number is expected to grow faster until the end of 2008. Thus, some Russians are not so paternalist, after all.

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