Russian Pension Reform



Nikolai Roussanov

Economics 2470: Reform of the Welfare State

Final Paper

Russian Pension Reform

This paper attempts to meet three goals. First, we explain why Russia needs a pension reform. Secondly, we present the Russian Government’s (still evolving) approach to reform and concrete proposals considered by the policymakers. Thirdly, we analyze the Government’s approach using the set of principles and objectives, on which, we believe, a sound pension system should be based.

Why Reform?

Ten years have passed since the collapse of the Soviet Union and the beginning of Russian economic reforms, but the idea of a systemic reform of the country’s pension system has only appeared in the economic policy discourse. Arguably, the pension system is the most entrenched and unshaken artifact of the socialist economic system, even compared to the other sectors of the welfare state. Although the pension system has been undergoing a nominal “transformation” throughout the past decade (the Pension Law setting the new principles of national social security was passed as early as 1990), in reality it operates essentially the same way it did under communism, at least from the viewpoint of the workers and the pensioners[1].

The latter, however, are greatly dissatisfied with the output they get from the system, i.e. their pensions, since the amounts they receive do not let them maintain the consumption level they enjoyed under socialism, especially compared to the rest of the society. The workers are worried about the lack of financial security awaiting them in the future, and feel that their pension fund contributions are being wasted by the government. The employers are discontent because the rates of payroll contributions to the Pension Fund are too high, while there is no positive incentive to contribute, part from the threat of punishment. So for the employers this is just another tax, and a highly punitive one, since it produces disincentives for the creation of new jobs and increase in workers’ wages. Finally, the government is dissatisfied since it has to deal with all these discontent groups – hungry pensioners who fuel the engines of political instability, labor unions who press for special retirement privileges for their workers, and businessmen who try to do their best at evading the payments.

Under the socialist system, every worker was entitled to a state pension starting at a certain age. (For a while, though, certain groups of the population were excluded, for example members of the collective farms [kolkhoz] did not receive any state pensions until the 1970’s and had to rely on their own gardens and livestock for subsistence, as well as some help from the kolhoz). The size of benefits was determined by the number of years of labor and the wage at the moment the person was retiring. Certain “privileged” groups of the population had the right of early retirement and/or higher benefits. By manipulating these privileges, the state created incentives for people to take certain jobs (such as miners) or move to underpopulated areas (in particular, the northern territories). However, within each group, the distribution of benefits was fairly uniform. The party officials along with some other “important” people (such as distinguished scientists and artists) were entitled to the so-called “personal pensions.” Along with greater benefits (the size of which was determined on, indeed, a much more “personal” basis), these individuals received a bundle of other, non-monetary privileges, such as access to special stores, higher quality health care, etc.

This system was an integral part of the command economy under a totalitarian government, so as soon as the latter fell apart, it was believed that a new pension system needs to be established, one compatible with the market economy. The idea that was laid down as the ground for the new system was that of social insurance, which was the basis of most of the world’s social security schemes. The State Pension Law of 1990 set up the general framework, consisting of the following basic principles:

• pension insurance is administered through the autonomous off-budget Pension Fund of the Russian Federation (PFR)

• every employee must be “insured,” regardless of his/her or the employer’s willingness to make the mandatory payments to the Fund

• benefits and their distribution are set up by the law and cannot be changed arbitrarily by the government or by an agreement between employer, employee and the Pension Fund

• the size of the benefits must depend on the size of the contributions made on behalf of a particular worker, although indirectly – the benefit formula was based on the number of years the person has been insured, and the person’s wages over used to calculate the size of the contributions over that period.

• the funds of the PFR cannot be used for any purpose other than paying out the benefits (even the administrative costs incurred by the Fund must be financed by the government from the general revenue).

In reality, however, the insurance ideas were never implemented, and the above principles, soon after being legislated, were bent by the government and the parliament due to political and lobbyist pressure. In particular, the Pension Fund became strongly dependent on the government, and its finances (the contributions collected from the workers and the employers) used for other purposes besides paying out insurance-based pension benefits. Due to the irregular funding by the government, the Pension Fund was forced to use its insurance funds for paying the non-insurance pensions (e.g., the war invalids’ benefits, etc.), financing its daily operations, as well as various other ad hoc expenditures (such as sponsoring the celebration of the World War II Victory, etc.).

Even more importantly, the size of the benefits was still disconnected from the amount of personal contributions. Most of the pension privileges that existed in the Soviet system (early retirement and higher benefits for miners, northern workers, etc.), except for the “personal” pensions, remained intact. The number of privileged categories even increased substantially, subject to the political pressure from the respective interest groups[2]. As a result, the Soviet-style leveling was largely preserved, with existing differentiation between pensions being independent on the insurance contributions – in certain instances, individuals who contribute smaller amounts over a smaller number of years, retire earlier and receive higher benefits than others, who contribute more and retired later.

In addition, due to inflation the real value of pension benefits dropped significantly a number [3]of times over the past ten years, the adjustments (often insufficient) being made with a delay of up to six months or even more. Governments’ fiscal problems, such as irresponsibly drafted budgets and difficulties in collecting taxes and payroll contributions to the Pension Fund, lead to arrears in paying off the benefits, particularly severe (up to several months) in 1996-1998 (FIPER 2000).

The demographic trends pose a more distant, but very serious fiscal threat, common for most of the pay-as-you-go (PAYG) pension system. Increased life expectancy leads to a shrinking ratio of the number of workers contributing to the system to the number of benefit-collecting pensioners. Currently there are 60 pensioners per 100 contributing workers, but by the year 2015 this number is projected to grow to 70, 2023 – to 80, 2033 – to 90 , and 2053 – to 108 pensioners per 100 contributors (FIPER, 2000). Without a dramatic increase in the real wages (which is not expected) the PAYG scheme is clearly unsustainable – even though the Pension Fund is currently running a slim surplus, it will soon face an increasing deficit. In order to maintain the current level of pension benefits of at least 35% average wage, in the year 2056 the Pension Fund would need to spend 10.3% GDP (vs. 5.0% GDP in 1995). If the share of wages in the GDP stays at the same level of 17.8%, the existing pension mechanism is clearly

unsustainable (FIPER, 2000).

The set of possible solutions consists of raising the retirement age, reducing benefits, and/or raising the rate of mandatory contributions to the Pension Fund (or other taxes, if it is decided to finance the deficit from the general revenue). Raising the rate of payroll contributions to the Pension Fund above its current level of 30% (29% paid by the employer and 1% withheld from the employee’s wage) does not seem viable and would most likely effect economic growth quite adversely. Such a solution is also contrary to the general macroeconomic policy of the current government that takes great pride in reducing the payroll tax to the flat rate of 13%. The effect of this tax cut would be clearly offset by an increase in the social tax[4]. Reducing the size of benefits is clearly not an option simply because they are already incredibly low. The only remaining option is to raise the retirement age to at least that of the developed countries (currently the retirement age in Russia is 60 for men and 55 for women). There has been indeed some debate over such a proposal. But even if it were implemented, the positive effects of such an ad hoc solution would be short-lived and partial. The purely fiscal problems can be fixed temporarily, but more general adverse economic effects cannot. Among these, as it has been pointed out, is the fact that “poorly-designed public pension systems can distort life-cycle savings and work decisions, leading to dead-weight losses, lower output level, and a lower growth path of output” (Holzmann, 1999). Given the overall state of disarray and imbalance in the Russian pension system, a more systematic approach to reforming it seems to be necessary.

Government’s Approach to Reform

Most of the problems with the existing pension system were evident to the government economists since the early 1990’s. However, there was no political support for any moves towards the real reform of the pension sector. The Conception of the Pension Reform based on the World Bank’s multi-pillar approach[5] was first drafted by the Russian government in 1995. Certain measures required for implementing this plan were introduced, such as the creation of personal pension data registries that would allow keeping track of workers’ contributions. However, the core principles that needed to be legislated as a law could not gain enough political support at the moment. These principles included the creation of three “pillars”:

• basic pension, a uniformly fixed size of benefits that every citizen would be entitled to upon reaching the retirement age;

• labor pension, whose size would depend on the number of years in the workforce and the wages (and thus, indirectly, on the amount contributed to the system);

• additional non-state administered pension (presumably - private managed pension plans).

By 1997 the basic conception of the pension reform was refined, in particular, the idea of partial funding was articulated more explicitly. In the newer version, which engendered quite a bit of controversy and debate in the policy circles, the modified “pillars” were:

• social pension, unlike the basic pension in the earlier version, is provided only to the most needy, those who where not able to accumulate enough contributions to the system (i.e., whose benefits otherwise would not reach the poverty line); financed from the general revenue;

• mandatory fully-funded pension insurance, the main component of the pension system, providing all retiring workers with benefits; dependent on the amount of their contributions and the accrued capital gain;

• additional pension insurance, privately managed retirement plans, voluntary for all workers and mandatory for some categories of employers (in order to replace the special sector privileges of the current system).

The transition to the fully funded system, as planned in this proposal, would be slightly more rapid than in the pension-reform pioneer Chile. This is meant in a sense that all the workers under the age of 30 would be required to switch to the funded system, although not fully – only 11% of their wages would be contributed to the funded system. (In the Chilean system only new workers were required to participate in the new system, current workers independent of their age were given a choice). This more radical proposal was never approved by the Government, which resulted in creation of still another modified version of the program, taking in account the need for a smooth and gradual transition from PAYG to the fully-funded via combination of PAYG with partial funding. In fact, this program, approved by the Government, followed the World Bank approach most closely.

The major changes concern the main, second “pillar” of the system – the “mandatory pension insurance.” It would consist of a PAYG component and a funded component, with a gradual increase in the share of funding (from 1% payroll contribution in 2000 to 8% in 2010). The first partially funded pension benefits were expected to be disbursed in the year 2005.The target share of funding by the end of the reform period would match the PAYG component.

The funded part of the mandatory pension insurance would be implemented in the form of Defined Contribution (DC) accounts, and the unfunded part as Notional Defined Contribution (NDC) accounts. In fact, for each employee this could be a single, “semi-notional” account, whose value at any point in time represent the amount that would be accumulated if all of the person’s contributions were invested. It was originally intended that upon reaching the retirement age the total amount accumulated on the personal pension account (both DC and NDC) would be converted into an annuity providing the pensioners with monthly benefits. Presumably, the benefits would be financed from the person’s DC savings and PAYG revenues of the PFR proportionally. However, alternative proposals included measures allowing pensioners to pass the remainder of their DC savings to the successors after their death. On the one hand, it would provide workers with greater incentive to contribute to their pension insurance (especially if the DC component were matching the PAYG part), on the other, it would probably substantially complicate annuitization and reduce the benefits.

Among other features of the reform there was an approach to dealing with the threatening demographic trend. Instead of countering the problem of population aging by directly increasing the retirement age, it is based on providing incentive for reducing disparity between the men’s and women’s retirement age. This would be accomplished via gradual corrections to the actuarial factor (life expectancy after retirement) for women who retire at the earliest age allowed. Then the higher rate of replacement would encourage later retirement for women.

The third, private “pillar” of the proposed system would allow employees (or employers on behalf of their employees) to purchase additional pension insurance, and thus to adjust their quality of life over time according to their own preferences. In order to encourage this, some tax relief is being proposed. Also, for some categories of employers, especially in dangerous occupations and other sectors, which justifiably receive special privileges under the current system, providing their workers with additional pension insurance would be mandatory. For example, for some categories of workers who enjoy the early retirement privilege, their employers would be mandated to provide pension plans financing their retirement until the general retirement age. The framework for such a system was developed under the general title of Professional Pension Schemes (PPS).

It was thought that specially regulated private pension funds and insurance companies would provide the private pension insurance. It was also presumed that employees would have an option of transferring the DC part of their mandatory contributions to the “authorized” pension funds (i.e. the funds that a special governmental agency approves as reliable enough). This assumes the existence of a developed infrastructure of private pension fund management.

In fact, the private pension funds have been developing in Russia since the period of mass privatization of 1992-1994. They emerged shortly after the first mutual funds – the privatization “voucher” funds were established, and relied on the growing expertise of the asset management companies (created originally in particular to serve the needs of voucher privatization). The private pension funds have a slightly better record than the voucher funds, because they were funded with real assets rather than the privatization vouchers. By the year 1998 there were 275 private pension funds operating around the country, with total assets of 7.3 billion rubles (about $1 billion) and enrollment of over 2 million people. In the year 1997, 187 thousand people were already collecting benefits from their private pension plans, averaging 106 rubles monthly, with some pensions being as high as 1000 rubles (about $18 and $160 respectively) (FIPER 2000). Most of the largest funds were affiliated with the major financial and industrial groups that used them to provide their workers with additional incentives through pension benefits.

The financial crisis of august 1998 greatly endangered the sustainability of the private pension funds. About 40% of the private pension fund assets were invested in (primarily short-term) government bonds, most of which ended up being either defaulted on or restructured into longer-term debt. Another 40% were invested in the Russian stock market, whose capitalization plunged to nearly 10% of its value in the beginning of the year (FIPER 2000). This clearly jeopardized the funds ability to pay off the benefits (most of the existing private pension funds operate on the Defined Benefit (DB) basis) fully, with even the strongest of them having to rely on financial support of their founders (large banks and industrial corporations).

However, by mid-1999 the adverse affects of the crisis were mostly overcome, at least in purely financial terms (obviously, the population’s confidence in their reliability has been hurt severely). Due to the sharp devaluation of the ruble (and therefore of the pension benefits) on the one hand, and the resulting wave of economic growth (further spurred by the high oil prices) on the other, almost all of the funds were able to recover some assets and resume payments. By the end of 1999 the private pension fund infrastructure was fiscally reliable and, arguably, invigorated (FIPER 2000).

The 1998 crisis had a similar effect on the public pension system, of course, on a much greater scale, thus throwing off the prospects of a speedy reform. Pension arrears started building up in the weeks preceding the August 1998 crash, due to the declined tax collection and recently increased benefits. In the following months the tax collections and pension fund contribution fell even further, causing the pension arrears reach the level of over 30 billion rubles (two months worth of pension outlays). Pensioners were among the groups who were hardest hit by the crisis. As a result of inflation and the devaluation of ruble, the average real pension fell by more than half, and even lower in dollar terms (Moscow Financial Weekly, 2000).

Such a disastrous state of affairs produced very grim prospects for the Russian pension system, at least in the short run. The real contributions to the Pension Fund were expected to fall by 30% in the year 1999 compared to 1998, resulting in the real pension dropping to as low as 88% of the pensioner’s subsistence level (Dmitriev, et. al., 1999). Given the fiscal situation of the Pension Fund and the Federal Budget in general, further promotion of the pension reform seemed absolutely unrealistic. However, by the end of 1999 the circumstances changed.

Starting in the second half of 1999, the real pensions rose gradually via a series of increases in the nominal level, eventually reaching the level of about 70% pre-crisis value. This was possible due to the improvement in the Pension Fund’s finances, since monetization and the growing economy improved the payroll tax collection. The favorable increase in the world oil prices contributed significantly to the general improvement of government’s finances. Also, in 2000 the Pension Fund received about 14 billion rubles in food assistance programs from the US Government and the European Union. Currently the Pension Fund is running a substantial surplus (of about 71 billion rubles), which is expected to increase slightly in 2001 (Moscow Financial Weekly, 2000).

This significant improvement in the fiscal state of the pension system renewed interest to the reform proposals, especially after the presidential elections of March, 2000. The apparent (at the moment) commitment of the new President Vladimir Putin to pro-market reforms which was greeted with optimism by pension reform advocates worldwide (e.g., Piñera 2000). The program of pension reform makes up a substantial portion of the long-term socioeconomic development plan produced by the team of German Gref, who was appointed by President Putin the Minister of Economic Development in April 2000. This proposal is largely based on the 1998 Program, with some clarifications and corrections.

In the recently approved proposal (Ministry of Labor, 2000), one of the most important questions concerning the funded portion of the state pension insurance was addressed. The question is how the contributions are to be invested. The Chile-stile DC system remained the basic framework, with the provision that the pension assets are to be invested by the specially approved management companies. It remains unclear, however, whether individual participants have any say in the choice of the asset manager. The rules for the government-administered tender selection are also to be determined. Most importantly, it is still undecided, whether the pension reserves would be allowed to be invested internationally, or in domestic markets only. The Labor Minister Pochinok recently spoke in favor of opening the access to proposal is expected to face harsh resistance of the domestic business lobby and protectionist factions in the government and legislature (it has been already dubbed “legalized capital flight” by national newspapers).

Discussion

Since the government’s reform plans were announced, they have been subject to harsh criticism from various sides, by economists, politicians, and the media. However, most of the criticism has either obviously populist political motivation, or various economic considerations and concerns of predominantly ad hoc and unsystematic nature. What is missing in these debates is an open discussion of the underlying principles of the pension system. In fact, it seems that not only the society is lacking a clear understanding of what these principles should be, but even the government can’t define them very precisely. A significant part of the Russian society still believes it is a state’s responsibility to provide all citizens with pensions as they retire. It is also assumed that these pensions should be “fair,” that is, large enough to let the retirees maintain the quality of life comparable to one they enjoyed prior to retirement. However, the growing market sentiment is gradually shifting the very concept of this “fairness” away from the uniformity of the socialist welfare state. In fact, it seems that the system under which pension benefits are proportional to the individual contributions would conform to an average citizen’s idea of justice, as far as pensions are concerned.

The objectives of the pension reform set by the government are “to improve the pension provisions for the citizens and establish a fiscally sustainable pension system.” Clearly, the vague character of the first objective mirrors the lack of consensus in the society about what these pension provisions should be. However, from the government’s general program of socioeconomic development one can infer that the guiding principle in designing the pensions reform is - moving away from the universal redistribution towards the targeted aid for the most needy. This objective – we will call it poverty relief - is already much better defined. However, as one of the functions of a full pension system, this constitutes only a small part. In general, pensions provide three different types of “services,” which together are responsible for old-age financial security. These are poverty relief, consumption smoothing and actual insurance – e.g. against longevity risks, uncertainty, etc. (Barr 2000). While the poverty relief function per se can be accomplished by direct subsidies to the poorest retirees (those who did not save enough to provide for at least the subsistence level) from the federal budget, without any need for a public pension system, the other two functions cannot. The question, whether such a public system performing these functions is needed, and if so, how it should be organized, depends on the political consensus about other principles besides that of minimal solidarity.

Here we will try to establish a set of principles that would allow these questions to be addressed. However, it might be not the most politically viable one. This list is formed loosely along the lines of Kornai (1999), although its length and are limited by the scope and size of this paper. Thus, the proposed general principles are as follows:

• economic freedom (which includes maximizing individual choice and minimizing government’s intervention in the economy)

• social solidarity (public support to the most needy and disadvantaged)

• sustainability

• efficiency

Now, returning to the three objectives for the pension system, we first establish the first objective (poverty relief) on the basis of the second principle (solidarity). However, a question arises, whether we need a mandatory public pension system at all, or we just let private institutions take care of the demand for consumption smoothing and insurance. However, even with the first principle in mind (maximizing individual choice), we argue that some compulsory pension insurance is necessary. Otherwise, the existence of the poverty relief provision creates a moral hazard problem by providing an incentive to rely on it and not buy any insurance, which is especially relevant for those parts of population on the lower end of income distribution. This would impose greater costs on the society, and thus limit economic freedom (via higher taxes). Thus a public pension system, providing for minimal (above subsistence level, though) consumption smoothing and insurance is needed. Individuals desiring greater security and choosing more consumption than the public system can provide will save and purchase additional insurance privately.

As far as the design of such a public pension system is concern, the major issues usually debated can be gathered in this (definitely not all-inclusive) list:

• PAYG vs. funding

• defined contribution vs. defined benefit

• public or private management (for funded systems)

• yes or no to investing abroad (for funded systems)

The literature covering all of these issues (containing argument for all sides) is very extensive and it would be overly ambitious and ultimately futile to attempt an in-depth analysis of them here. Instead, we will outline the major concerns raised by economists, related to the proposal considered by the Russian government, and try to address them on the basis of our four principles.

On the first issue, the government choice is funding, or, more precisely, mixed PAYG and funded system, as we described earlier. Barr (2000) criticizes the misguided approach to funding as a panacea for all the pension system troubles. He argues that the central determinant for sustainability of any pension system, funded or unfunded, is output, and, if designed correctly, PAYG and funded schemes can do equally well. However, funded schemes face additional risks, which PAYG does not have[6]. Furthermore, assuming all variables being equal (i.e., so that PAYG and the funded scheme perform equally well), transition from PAYG to funding does not make sense, since the costs of transition, whether placed on the pensioners or taxpayers, reduce welfare. However, applying the first of our principles above, we argue that this cost is comparable and will probably be outweighed by the benefit from expanding dramatically the domain of economic freedom. (This, of course, holds only if in the funded system government has either no or very limited power over asset managers).

On the second issue, Russian government apparently decided to stick to the DC system. The major problems with DC (versus DB) systems are[7]:

1. DC provides no intergenerational risk sharing; all of the portfolio risk is concentrated on the pensioners (their individual portfolios). Thus objective 3 (insurance) is met at a suboptimal level.

2. DC systems have been shown to have much higher administrative costs, in particular due to the expensive annuitization mechanism, which in case of Russia can be expected even more of a problem due to highly illiquid and incomplete markets. Thus our principle 4 (efficiency) is violated.

3. Annuitization of a portfolio at the time of retirement makes Problem 1 even more severe, by adding to the market fluctuation risk the annuities risk of insurance companies.

Problem 3 can be resolved partly through rolling annuitization, but this would be more expensive and thus would severe the Problem 2 even further. It is also important to consider the fact that there is much more experience accumulated by the Russian pension fund managers in working with DB schemes rather than DC schemes. Also, given the very low level of “financial market literacy” of the population, DB seems a much safer option.

The question of asset management has not been fully settled in the government’s proposal. The traditional DC approach presumes that individuals get to choose their portfolio manager out of the companies authorized by the government to operate with pension assets. Diamond (2001) points out, however, that having management companies compete for the individuals’ accounts introduces unnecessarily high costs (of advertising and marketing). On the other hand, managerial risk introduces “artificial” inequity in the distribution of pensions, while individuals usually are not informed well enough to make an intelligent choice of portfolio manager and thus have to base it on advertisements, etc. Of course, this is not an argument against competition in private asset management, but for the purposes of mandatory public pension system, where the government is held responsible by the society (even unofficially), forcing ill-informed people into making risky choices seems to be a dangerous policy. On the other hand, letting the government choose the asset managers seems to be as dangerous, especially in Russia with its notorious corruption and generally “complicated” relations between business and government. From the viewpoint of Principle 1 (economic freedom) letting the government influence the asset management directly (through appointing the managers) or indirectly (though overregulation) would offset the benefits of pre-funding (versus PAYG).

The World Bank’s “standard” approach does not allow for international investing, mostly in order to boost domestic growth. Kotlikoff (1999), however, argues that this is not a sensible approach, since it subjects the pension system to the goal of promoting growth, while its primary purpose is “insuring and ensuring the retirement income of the nation’s workers” (Kotlikoff, 1999, p. 25). In fact, given the state of the Russian capital markets, which are very risky and incomplete, the most natural way to ensure maximum diversification of pension assets is to allow investing in the world financial markets. Forcing the citizens to invest domestically in high-risk securities with high transaction costs would be a violation of our Principle 1. Such an arrangement would also fall short of meeting the insurance objective.

Returning to the discussion of PAYG versus pre-funding, we observe that international diversification actually would allow to relax the link between pensions and output, and even allow to hedge against some macroeconomic risks, as well as some of the risks connected to adverse demographics. Thus, out of all the risks shared (or not shared) by PAYG and funded systems, we have not yet discussed only one – political risk. In fact, this is the only type of risk, against which there is no possible a priori hedge. In PAYG, government can arbitrarily vary the rates of contributions and size of benefits, but it can be kept in check to some extent by the interest groups and the electorate in general. In the funded system, even if the government follows a maximally hands-off policy (does not overregulate and does not attempt to influence the managers), the whole system still depends on how effective the government institutions are. Without full protection of property rights, well-functioning courts, prudential oversight and necessary financial market regulation, even the most well designed pre-funded system will be a disaster.

And this is the most important lesson Russian pension reformers need to learn. There is a variety of possible designs of a pension system, these choices should be made given the political and fiscal feasibility. But whatever the chosen design is, its success will depend critically on the presence of effective and efficient government. Whether such a thing is possible in Russia is yet to be determined.

References

1. Barr, Nicholas, 2000, “Reforming Pensions: Myths, Truths, and Policy Choices.” IMF Working Paper, (Washington: IMF).

2. Diamond, Peter, 2001, “Issues in Social Security Reform,” to appear in The Future of the Safety Net: Social Insurance and Employee Benefits in the Next Century, ed. By S. Friedman and D. Jacobs, IRRA 2001 Research Volume.

3. Dmitriev, Mikhail, Dmitiry Pomazkin, Andrei Stolayrov, Oxana Sinyavskaya, 1999, “Financial Condition and Prospects of Reform of the Pension System in Russian Federation,” Institute for the Economy in Transition Working Paper, (in Russian, Михаил Дмитриев, Дмитрий Помазкин, Андрей Столяров, Оксана Синявская; “Финансовое состояние и перспективы реформирования пеинсионной системы в Российской Федерации,” Москва, Институт Экономических Проблем Переходного Периода, 1999). Available on-line at iet.ru

4. Holzmann, Robert, 1999, “The World Bank Aproach to Pension Reform,” Social Protection Discussion Paper, (Washington: World Bank).

5. FIPER Foundation, 2000, Russia’s Socioeconomic Problems – a Reference, (in Russian, “Социально-Экономические проблемы России. Справочник,” (Москва: ФИПЭР). Available on-line at fiper.ru

6. Kotlikoff, Lawrence, 1999, “The World Bank’s Approach and the Right Approach to Pension Reform,” working paper.

7. Kornai, János, 1999, Welfare after Communism, Centre for Post-Collectivist Studies paper no. 9, (London: The Social Market Foundation).

8. Ministry of Labor of the Russian Federation, 2000, Notes on the draft of the Program of Pension Reform, Moscow. (Министерство Труда Российской Федерации, А.Починок, Письмо Пенсионному Фонду Российской Федерации от 14.12.2000, за № 398-АП.

9. Moscow Financial Weekly, October 27, 2000. Treasury Attache's office, US Embassy Moscow.

10. Piñera, José, 2000, Russia Unbound. Report on Current Russian Situation, June 26, 2000. International Center for Pension Reform, available on-line .

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[1] Unavoidably, much of this paper is based on personal observation, as well as literature sources. However, we will attempt to make as few claims unsupported by written documents as possible.

[2] The adverse economic effects of such special sector privileges have been known: “For some sectors, a lower retirement age for strenuous work may have some distributive justification. Pure cross-financing by means of a common contribution rate, however, provides no incentive to employers to change the production technology, nor do the employers’ prices reflect social costs” (Holzmann, 1999).

[3] Even though the life expectancy in Russia is much lower than in most of the developed countries, the pensioner-per-worker ratio is much higher. This is due to the lower retirement age, more lenient early retirement policy, and the right of workers reaching the retirement age to collect the benefits without actually retiring from their jobs. Another important factor is the “gray economy” effect – the vast numbers of self-employed individuals and those employed unofficially are neither contributing to the Pension Fund themselves, nor have employers contributing on their behalf.

[4] Along with the reduction in the personal income tax in the October 2000, there was introduced a new social tax that would replace the contributions to the Pension Fund and other off-budget funds, in order to make collection more effective and efficient. It is presumed that the tax authorities will collect the tax and then transfer the appropriate amounts to the off-budget funds, instead of having each fund collect the contributions separately. The sensibility of this new tax can be argued in a broader context of social insurance (rather than mere fiscal convenience), but this is beyond the scope of the present paper.

[5] For a detailed discussion see (Holzmann, 1999).

[6] The issue of risks and uncertainty merits consideration here, and we will return to it later.

[7] Discussed in a great detailed in Diamond 2001.

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