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Facing a Pension Fund deficit of more than $50 billion this year, Russia's Prime Minister Vladimir Putin has proposed bending the rules to invest pension savings in long-term construction projects. Taking such an extraordinary step would prevent retirement payments from "evaporating" and bring in guaranteed yield, Putin told senior Ministry of Economic Development officials on Monday. One of the key issues with the country's ballooning Pension Fund deficit, Putin said, is lack of sufficient financial instruments for investing pension savings.
file photo

Russia's pension savings will reach four trillion rubles ($135.4 billion) this year, Putin said. But while the State Pension Fund controls huge assets, it is restricted to investing them mostly in government bonds, whose yields, at below seven percent, fall short of inflation. Last year, only 31 of the several dozen management companies had a positive balance and only two of those recorded yields at 1.5 percent above inflation, according to the State Pension Fund. Pension savings under the government's direct control did not perform any better. Yield on the pension investment fund was a mere 5.47 percent in 2011, compared to an average of 7.52 percent over the past three years, the fund said.

The solution, the prime minister said, is making effective use of the funds, which is near impossible under current pension regulations. He said the funds are better invested "in completely reliable long-term infrastructure projects," such as rail, road and pipeline construction projects. Money invested in such projects cannot go missing and will deliver timely returns. "Money doesn't get burned up there," Putin said before ordering the Ministries of Finance and Economic Development and state-owned VneshEconomBank to find ways to invest pension savings into such projects.

Since 2002, Russia has been operating a "three-pillar" pension system, under which people born after 1967 would be entitled to a basic pension and also contribute to insurance-and savings-based schemes. However, a deep distrust of the authorities and poor publicity have discouraged many of those entitled from transferring their savings to specialized asset management companies. As a result, their contributions are being funneled into the state Pension Fund, managed by VneshEconomBank. However, shortfalls in contributions, plus Russia's snowballing demographical problems, have punched a big hole in the fund, putting the government in a dead end.

Russia's pension fund deficit has been growing at an alarming rate in recent years and politicians have aggravated the problem by making wild campaign promises. The Pension Fund's deficit in 2012 will reach 1.75 trillion rubles ($59.3 billion) or three percent of the GDP, ITAR-TASS reported. Without pension reforms, the government could hardly meet its target of achieving a non-budget deficit in 2015, Economic Development Minister Elvira Nabiullina told colleagues on Monday. The Pension Fund deficit may soon reach three to four percent of the gross domestic product (GDP), Nabiullina said.

Nabiullina hopes the government can resist the temptation to raise taxes to fill the hole, saying that an as extra tax burden could drive the economy underground. When the government increased the company payroll tax from 26 percent, or 14 percent for small businesses, to 34 percent last year, the share of hidden salaries and wages spiraled up to 56.1 percent of the payroll fund, a level last seen in 2006, she said. She added that raising taxes could wipe out all the gains made in the fight against the underground economy over the past years.

One way out is to "optimize the pension system," Nabiullina said. The government could do this by taking a raft of measures, including changing the system of early withdrawals from pension plans and imposing a tougher requirement on the length of employment necessary to qualify for a pension. Russians should also be motivated to keep on working well after state pension age while voluntary pension savings should be encouraged, she said. According to the State Statistics Service (Rosstat), the share of the population past the retirement age is 22 percent, and could reach 25 percent by 2020. About 13.5 million retirees out of the country's 40 million pensioners continue to work beyond the official retirement age, Rosstat said.

While proposing sweeping reforms, the Economy Ministry has carefully avoided the controversial issue of raising the retirement age, which is currently 55 for women and 60 for men. In recent months, various organizations, including the World Bank and the Organization for Economic Cooperation and Development have all urged the authorities to raise Russia's retirement age. Last month, Former Finance Minister Alexei Kudrin called for raising the pension age for men from 60 to as high as 63 and for women from 55 years to as much as 62 years by 2025 to 2030, RIA-Novosti reported. But such calls have been falling on deaf ears since Putin declared during his presidential campaign that, if elected, he would not raise the retirement age. The president-elect has nonetheless signaled that he would back some sort of pension reform."This year the number of pensioners has increased, it is now above 40 million people," Putin said in a meeting with Pension Fund Head Anton Drozdov. "This means that we need to continue to modernize the pension system and, it goes without saying, fulfill all social obligations toward this category of citizens," he added.

Keywords: Russia, Economy, Retirees, Pensions - Russian News - Russia

 

Facing a Pension Fund deficit of more than $50 billion this year, Russia's Prime Minister Vladimir Putin has proposed bending the rules to invest pension savings in long-term construction projects. Taking such an extraordinary step would prevent retirement payments from "evaporating" and bring in guaranteed yield, Putin told senior Ministry of Economic Development officials on Monday. One of the key issues with the country's ballooning Pension Fund deficit, Putin said, is lack of sufficient financial instruments for investing pension savings.
file photo

Russia's pension savings will reach four trillion rubles ($135.4 billion) this year, Putin said. But while the State Pension Fund controls huge assets, it is restricted to investing them mostly in government bonds, whose yields, at below seven percent, fall short of inflation. Last year, only 31 of the several dozen management companies had a positive balance and only two of those recorded yields at 1.5 percent above inflation, according to the State Pension Fund. Pension savings under the government's direct control did not perform any better. Yield on the pension investment fund was a mere 5.47 percent in 2011, compared to an average of 7.52 percent over the past three years, the fund said.

The solution, the prime minister said, is making effective use of the funds, which is near impossible under current pension regulations. He said the funds are better invested "in completely reliable long-term infrastructure projects," such as rail, road and pipeline construction projects. Money invested in such projects cannot go missing and will deliver timely returns. "Money doesn't get burned up there," Putin said before ordering the Ministries of Finance and Economic Development and state-owned VneshEconomBank to find ways to invest pension savings into such projects.

Since 2002, Russia has been operating a "three-pillar" pension system, under which people born after 1967 would be entitled to a basic pension and also contribute to insurance-and savings-based schemes. However, a deep distrust of the authorities and poor publicity have discouraged many of those entitled from transferring their savings to specialized asset management companies. As a result, their contributions are being funneled into the state Pension Fund, managed by VneshEconomBank. However, shortfalls in contributions, plus Russia's snowballing demographical problems, have punched a big hole in the fund, putting the government in a dead end.

Russia's pension fund deficit has been growing at an alarming rate in recent years and politicians have aggravated the problem by making wild campaign promises. The Pension Fund's deficit in 2012 will reach 1.75 trillion rubles ($59.3 billion) or three percent of the GDP, ITAR-TASS reported. Without pension reforms, the government could hardly meet its target of achieving a non-budget deficit in 2015, Economic Development Minister Elvira Nabiullina told colleagues on Monday. The Pension Fund deficit may soon reach three to four percent of the gross domestic product (GDP), Nabiullina said.

Nabiullina hopes the government can resist the temptation to raise taxes to fill the hole, saying that an as extra tax burden could drive the economy underground. When the government increased the company payroll tax from 26 percent, or 14 percent for small businesses, to 34 percent last year, the share of hidden salaries and wages spiraled up to 56.1 percent of the payroll fund, a level last seen in 2006, she said. She added that raising taxes could wipe out all the gains made in the fight against the underground economy over the past years.

One way out is to "optimize the pension system," Nabiullina said. The government could do this by taking a raft of measures, including changing the system of early withdrawals from pension plans and imposing a tougher requirement on the length of employment necessary to qualify for a pension. Russians should also be motivated to keep on working well after state pension age while voluntary pension savings should be encouraged, she said. According to the State Statistics Service (Rosstat), the share of the population past the retirement age is 22 percent, and could reach 25 percent by 2020. About 13.5 million retirees out of the country's 40 million pensioners continue to work beyond the official retirement age, Rosstat said.

While proposing sweeping reforms, the Economy Ministry has carefully avoided the controversial issue of raising the retirement age, which is currently 55 for women and 60 for men. In recent months, various organizations, including the World Bank and the Organization for Economic Cooperation and Development have all urged the authorities to raise Russia's retirement age. Last month, Former Finance Minister Alexei Kudrin called for raising the pension age for men from 60 to as high as 63 and for women from 55 years to as much as 62 years by 2025 to 2030, RIA-Novosti reported. But such calls have been falling on deaf ears since Putin declared during his presidential campaign that, if elected, he would not raise the retirement age. The president-elect has nonetheless signaled that he would back some sort of pension reform."This year the number of pensioners has increased, it is now above 40 million people," Putin said in a meeting with Pension Fund Head Anton Drozdov. "This means that we need to continue to modernize the pension system and, it goes without saying, fulfill all social obligations toward this category of citizens," he added.

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