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Reform In Russia: A New Stage ,
July 30, 2003
In the summer of 2003, Russia took another step in implementing its
pension reform. Part of the pension contributions paid by employers into
the Pension Fund, the state institution responsible for the provision of
pensions, have for a number of years been entered into people's individual
accounts. From 2004, this money will be allowed to roll over. Returns from
the process will be accumulated and later paid as supplements to pensions.
All future pensioners will get notices from the Pension Fund on
their individual accounts. Within three months they will be asked to
decide which managing company they want to trust their pension savings
The thrust of the pension reform, in its 8th year now, is to move
away from a distributive system to an accumulating (funded) scheme.
The need for the reform is due, as is the case in many other
countries, to demographic problems. The birth rate in this country is
falling, while the numbers of pensioners are growing, and in a few years'
time will match the level of the working population throughout the
country. The distributive, or pay-as-you-go, pension system, with working
generations supporting the retirees, would then collapse.
Throughout the 90s one of the main social issues facing the state
was rapidly dwindling pensions because of inflation and a budget squeeze
on the Pension Fund. On top of this, the small pensions earned in Soviet
times were regularly paid late , which added to social tension and public
Over the past two to three years the Pension Fund has been
experiencing no shortage of money, because the Russian economy is booming,
but the problem of securing and increasing pensions which are barely
enough for a hand-to-mouth existence is still on the agenda.
At one time, specialists raised the question of increasing the
retirement age in Russia - today it is 60 years for men and 55 for women.
This is not an unusual practice, as in the 90s the retirement age was
raised in some European countries and today the same thing is happening
in, for example, France. But in Russia these plans met with stiff public
opposition . The average male life expectancy in Russia is 59 years; men
simply do not live to see their pensions. What sense then is there in
raising their pensionable age, wondered sociologists. In the end the issue
The government expected that pension savings, once placed on the
financial market, would contribute to the Russian economy, badly in need
of "long money" or long-range credits. In 2004, the pension
money is expected by specialists to reach 1-2 billion dollars. In three
years' time, it will be between 6 to 7 billion dollars. Besides, the
government hopes that the new pension scheme will bring to light the money
circulating in the so-called "shadow" economy.
It is no secret that some workers in Russia get part of their wages
in cash that no accountants keep track of. These are sums on which the
company pays no taxes, or pension contributions, thereby leaving the state
in a losing position . As the result of the pension reform, ordinary
people will find it profitable to declare all their earnings, because
their old-age savings will show substantial growth.
The investment scheme is difficult to understand and involves no
small personal effort on the part of the ordinary Russian who is used to
the state shouldering all the responsibility. The worker concerned must
choose his managing company with which he will entrust his pension
savings. The managing company may be state-run - for example,
Vneshekonombank - or a non-state administered firm. All non-state
companies will be issued with licences to handle pension money, licences
governed by very strict criteria. The Pension Fund will conclude contracts
with the selected companies to service pension funds.
The law also defines the financial instruments which can be used to
invest pension money -- these are securities, shares, bonds, deposits made
by lenders, and foreign currency. The liability of the managing company
will be ensured and the law also sets very tight criteria for choosing
insurance companies working with pension money. Additional guarantees that
pension savings are kept intact will be a special depositary selected in a
contest, a special government representative and a special public board,
all of which will control the managing companies.
Public polls show that only 7 per cent of Russians are prepared to
trust their pension savings to non-state managing companies. However,
specialists explain this by the insufficient information available to
people about pension reform, and believe that a wide publicity and
information campaign may be helpful.
reckon that initial yields from pension money will not be high. And first
payments from the accumulated (funded) part of pensions will not begin in
Russia until 2013. The system will be working in full by the end of the
first quarter of the century. All in all, the pension reform looks mainly
to the future and - this has to be accepted - will benefit only future
generations. On the other hand, there is certainty that this conservative
approach will succeed, as distinct from plenty of instant-success plans
which have been considered and rejected in recent years.