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Russia's pension system is shaping up to be a classic Ponzi scheme, according to former Finance Minister Alexei Kudrin. The explosive mix of a recent increase in life expectancy in Russia with a slow but steady reduction in the number of working age people is sure to drive Russia's economy into the ditch, Kudrin warned in an article on Tuesday. By opting to raise taxes or use budget funds to resolve pension problems ­ rather than raising the retirement age ­ Prime Minister Vladimir Putin's government may be building what resembles an unsustainable pyramid scheme, said the ex-deputy prime minister.

Coming from Kudrin, a longtime bureaucratic infighter, such warnings are hardly new. Before being forced to resign over a disagreement with President Dmitry Medvedev in September last year, the former finance minister warned that Russia would have to reform pensions to put them on a sustainable footing, adding that the government may be forced to raise the retirement age to cope with the crisis. However, with Putin opposed to increasing the retirement age while insisting on increasing pensions, Kudrin's warning may add a whole new level of urgency to the discussion about where Russia is headed during Putin's third term.

In the article he co-authored with Yevsei Gurvich, the head of the Economic Expert Group, Kudrin argued that the way Russia's pension is being propped up at the moment is nothing short of a classic Ponzi scheme. Rising life expectancy of current Russian pensioners is compensated for by raising taxes on the next generation of pensioners. As a result, each generation pays more than the previous one, while current pensioners get more than they contributed, Kudrin and Gurvich wrote in the article, which was cited by Vedomosti on Tuesday.

Budget transfers to the Pension Fund increased from 1.5 percent in 2007 to 5.5 percent of the gross domestic product in 2010, while rates of pension contribution rose from 20 percent to 26 percent over the same period, the authors said. Following that logic, they said, either the rates of pension contribution will climb up 70 percent by 2050, or budget transfers to the Pension Fund will spiral to ten percent of the GDP ­ both of which are unlikely scenarios. Doing neither is also a recipe for a deep economic crisis, as higher taxes will discourage economic activity while deep cuts in pensions are unacceptable to pensioners, who remain the most active part of the electorate, they said. Making matter worse is that by 2050, the proportion of pensioners in the electorate will increase from one third to 50 percent. The only logical option, the authors conclude, is to gradually increase the pension age while leaving the rates of pension contribution intact.

That would be a hard pill for Putin to swallow, whose constituency is comprised mainly of pensioners. In an article published in Komsomolskaya Pravda last month, Putin acknowledged that the state "pension-saving policy is the biggest social problem facing modern Russia." However, he opposed increasing the retirement age and instead called for inflation-proof increases in pension. In terms of strengthening the working population, Putin called on Russians to pay more attention to personal health and to adopt a healthy lifestyle. The government should plan to increase Russia's population to 154 million in the next 40 years, he said. He also said part of that increase should come from encouraging ethnic Russians abroad to return home, adding that Russia needed 300,000 Russian-speaking skilled migrants annually. Putin also hopes to tap into the pool of foreign students wanting to study at Russian colleges by offering them Russian permanent residency and passports after graduation. But the cornerstone of his population-boosting policy is a program meant to support families with many children. He proposed an extra allowance of 7,000 rubles ($230) monthly to families with three or more children.

But the Russian population is aging, and Russia remains in the throes of a catastrophic demographic collapse despite the Kremlin's decision to throw money at the problem. The population posted 14 years of decline before rising by 23,300 to 141.9 million in 2009. However, it is expected to fall to 139 million by 2031 and could shrink 34 percent to 107 million by 2050, Putin said. Standard & Poor's warned in a research note last year that Russia's debt may surge to 585 percent of GDP by 2050 as the population declines and the government ramps up spending, pushing the credit rating below investment grade. The shrinking population could force the government's age-related expenditures to rise to 25.5 percent of GDP from 13 percent in 2010 in the rating agency's "base-case scenario."

The pension age is now 60 for men and 55 for women. The country may have 112 working people for 100 pensioners in two years and reach parity by 2030, compared with the current ratio of 128 to 100, according to Kudrin. The average life expectancy for men is about 61.8 years and 74.2 years for women. "Russia's aging population will likely place substantial pressure on economic growth performance and public finances," Standard & Poor's analysts wrote. "By 2035 we expect that Russia's fiscal indicators will have weakened so that they would be more in line with sovereigns currently rated in the speculative-grade category, because, in our view, the projected improvement in GDP per capita would not be able to offset the potential fiscal deterioration."

Keywords: Russia, Government, Politics - Russia, Population Disaster, Demographics - Russia, Economy - Russia News - Russia

 

Russia's pension system is shaping up to be a classic Ponzi scheme, according to former Finance Minister Alexei Kudrin. The explosive mix of a recent increase in life expectancy in Russia with a slow but steady reduction in the number of working age people is sure to drive Russia's economy into the ditch, Kudrin warned in an article on Tuesday. By opting to raise taxes or use budget funds to resolve pension problems ­ rather than raising the retirement age ­ Prime Minister Vladimir Putin's government may be building what resembles an unsustainable pyramid scheme, said the ex-deputy prime minister.

Coming from Kudrin, a longtime bureaucratic infighter, such warnings are hardly new. Before being forced to resign over a disagreement with President Dmitry Medvedev in September last year, the former finance minister warned that Russia would have to reform pensions to put them on a sustainable footing, adding that the government may be forced to raise the retirement age to cope with the crisis. However, with Putin opposed to increasing the retirement age while insisting on increasing pensions, Kudrin's warning may add a whole new level of urgency to the discussion about where Russia is headed during Putin's third term.

In the article he co-authored with Yevsei Gurvich, the head of the Economic Expert Group, Kudrin argued that the way Russia's pension is being propped up at the moment is nothing short of a classic Ponzi scheme. Rising life expectancy of current Russian pensioners is compensated for by raising taxes on the next generation of pensioners. As a result, each generation pays more than the previous one, while current pensioners get more than they contributed, Kudrin and Gurvich wrote in the article, which was cited by Vedomosti on Tuesday.

Budget transfers to the Pension Fund increased from 1.5 percent in 2007 to 5.5 percent of the gross domestic product in 2010, while rates of pension contribution rose from 20 percent to 26 percent over the same period, the authors said. Following that logic, they said, either the rates of pension contribution will climb up 70 percent by 2050, or budget transfers to the Pension Fund will spiral to ten percent of the GDP ­ both of which are unlikely scenarios. Doing neither is also a recipe for a deep economic crisis, as higher taxes will discourage economic activity while deep cuts in pensions are unacceptable to pensioners, who remain the most active part of the electorate, they said. Making matter worse is that by 2050, the proportion of pensioners in the electorate will increase from one third to 50 percent. The only logical option, the authors conclude, is to gradually increase the pension age while leaving the rates of pension contribution intact.

That would be a hard pill for Putin to swallow, whose constituency is comprised mainly of pensioners. In an article published in Komsomolskaya Pravda last month, Putin acknowledged that the state "pension-saving policy is the biggest social problem facing modern Russia." However, he opposed increasing the retirement age and instead called for inflation-proof increases in pension. In terms of strengthening the working population, Putin called on Russians to pay more attention to personal health and to adopt a healthy lifestyle. The government should plan to increase Russia's population to 154 million in the next 40 years, he said. He also said part of that increase should come from encouraging ethnic Russians abroad to return home, adding that Russia needed 300,000 Russian-speaking skilled migrants annually. Putin also hopes to tap into the pool of foreign students wanting to study at Russian colleges by offering them Russian permanent residency and passports after graduation. But the cornerstone of his population-boosting policy is a program meant to support families with many children. He proposed an extra allowance of 7,000 rubles ($230) monthly to families with three or more children.

But the Russian population is aging, and Russia remains in the throes of a catastrophic demographic collapse despite the Kremlin's decision to throw money at the problem. The population posted 14 years of decline before rising by 23,300 to 141.9 million in 2009. However, it is expected to fall to 139 million by 2031 and could shrink 34 percent to 107 million by 2050, Putin said. Standard & Poor's warned in a research note last year that Russia's debt may surge to 585 percent of GDP by 2050 as the population declines and the government ramps up spending, pushing the credit rating below investment grade. The shrinking population could force the government's age-related expenditures to rise to 25.5 percent of GDP from 13 percent in 2010 in the rating agency's "base-case scenario."

The pension age is now 60 for men and 55 for women. The country may have 112 working people for 100 pensioners in two years and reach parity by 2030, compared with the current ratio of 128 to 100, according to Kudrin. The average life expectancy for men is about 61.8 years and 74.2 years for women. "Russia's aging population will likely place substantial pressure on economic growth performance and public finances," Standard & Poor's analysts wrote. "By 2035 we expect that Russia's fiscal indicators will have weakened so that they would be more in line with sovereigns currently rated in the speculative-grade category, because, in our view, the projected improvement in GDP per capita would not be able to offset the potential fiscal deterioration."