Earlier this month, the Russian government seized its citizens’ pension contributions. Normally, 6 percent of Russians’ salaries is invested in financial markets, earmarked for their retirement. This year that $8 billion in contributions will finance Russian spending instead. Russia is not the first country to confiscate pension assets to pay its bills, and it probably won’t be the last. Argentina, Hungary, Poland, Portugal, and Bulgaria have all done the same in the last six years.
This is not only a setback for Russians’ retirement accounts; it also harms Russia’s financial markets, which count on a steady flow of pension assets each year. The move is expected to further weaken the already fragile Russian economy. Former Finance Minister Alexei Kudrin spoke out against the move, saying “today we are getting a government policy that lowers economic growth, plus a ‘shrinking’ of the economy’s possibilities and increasing uncertainty.”
The stealing of pension assets is relatively new. It used to be unnecessary: Governments already had them in their possession. Developed countries financed most people’s retirement with pay-as-you-go defined benefit plans, like Social Security in America. But as people lived longer and populations aged, relying entirely on unfunded promises appeared unsustainable. Starting in the 1980s, it became popular to supplement or even replace government pensions with individual saving accounts invested in financial markets. Latin American countries, notably Chile, led the charge, and in the 1990s and 2000s Eastern Europe followed. Some richer countries such as Australia, the United Kingdom, the Netherlands, and the U.S. all adopted some variant of personal pension accounts.
But for governments facing financial pressure, billions of dollars of pension assets proved too tempting to resist. In 2008, Argentina “nationalized” $30 billion of pension assets. Since the European debt crisis, Hungary, Poland, Portugal, and Bulgaria, to varying degrees, have done the same.
Critics of personal pension accounts usually worry that most people can’t cope with the risks involved in investing in financial markets. But if you live in a country with a profligate government and a loose definition of property rights, losing your account to the government is potentially a bigger risk.
In most countries, it’s extremely unlikely that the government will outright seize pensions. In America, it’s nearly impossible to change Social Security or Medicare benefits, and the idea of the U.S. government confiscating everyone’s 401(k) is unimaginable to all but the most ardent conspiracy theorists. However, it’s not unrealistic to think that the American government could take a bigger bite out of individuals’ 401(k) assets with higher tax rates: Income taxes are at historic lows, and if the American government needs to raise revenue in the future, taxes on 401(k) withdrawals may be higher (along with taxes on everything else). But at least the account’s assets will still belong to you.